Stafford v. Rite Aid Corporation
Filing
134
ORDER Denying Defendant Rite Aid Corporation's Motion to Compel Arbitration (Doc. No. 78 ). Signed by Judge Anthony J. Battaglia on 2/24/2020. (jrm)
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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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BRYON STAFFORD, Individually and
on Behalf of All Others Similarly
Situated,
Plaintiff,
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v.
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RITE AID CORPORATION,
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Case No.: 17-cv-1340-AJB-JLB
ORDER DENYING DEFENDANT
RITE AID CORPORATION’S
MOTION TO COMPEL
ARBITRATION (Doc. No. 78)
Defendant.
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Presently before the Court is Defendant Rite Aid Corporation’s (“Rite Aid”) motion
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to compel arbitration. (Doc. No. 78.) Plaintiff Bryon Stafford (“Plaintiff”) opposed the
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motion, (Doc. No. 86), and Defendant replied, (Doc. No. 88.) For the reasons set forth
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below, the Court DENIES Rite Aid’s motion to compel arbitration.
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I.
BACKGROUND
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Plaintiff brings a putative class action against Rite Aid for an alleged deceptive and
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unfair pricing scheme involving Rite Aid’s Rx Savings Program. (Second Amended
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Complaint (“SAC”), Doc. No. 30.)
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As general background, the overwhelming majority of Rite Aid’s clients are enrolled
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in either a private or public health care plan that covers some or all medical and
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pharmaceutical expenses. (Id. ¶ 5.) In almost every one of these plans, the cost of
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prescription drugs is shared between the third-party payor (i.e., the health insurance plan)
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and the actual user of the drug (i.e., the plan participant). (Id.) When a plan participant fills
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a prescription at a pharmacy under a third-party health care plan, the plan pays a portion of
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the cost, and the plan participant pays the remaining portion of the cost directly to the
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pharmacy as a copayment. (Id. ¶ 6.) Because of the cost savings associated with generic
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drugs as opposed to brand name, third-party payors incentivize plan participants to
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purchase generic drugs by offering a lower price, which in turn, results in a lower
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copayment. (Id.) By law, Rite Aid cannot charge a copayment that exceeds its “usual and
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customary” price, which is generally defined within the pharmaceuticals industry. (Id. ¶ 7.)
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The process by which financial responsibility between third-party payors and plan
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participants is determined is called “adjudication.” Rite Aid contracts with pharmacy
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benefit managers (“PBMs”) and third-party payors (“TPPs”) to “adjudicate” the claims of
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customers for prescription drug coverage. (Doc. No. 78-1 at 7.) The contracts specify Rite
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Aid’s obligations to the TPP or PBM when submitting claims for prescription coverage at
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the point of sale, as well as the amount Rite Aid will receive as payment when filling
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prescriptions. (Id. at 8.) Generally, the TPP or PBM determines the amount of
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reimbursement according to those contracts as well as the copayment or deductible amount.
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(Id.) The TPP or PBM then transmits the information back to Rite Aid, instructing Rite Aid
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on the amount to collect from the customer. (Id.)
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Plaintiff alleges Rite Aid overcharges customers for generic prescription drugs by
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submitting to TPP/PBMs claims for payment at prices that Rite Aid has inflated above its
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“usual and customary” prices. (SAC ¶ 8.) As a result, Plaintiff claims customers who
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purchase generic prescription drugs through third-party plans pay copayments that are
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significantly higher than Rite Aid’s “usual and customary” prices for those same drugs.
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(Id.) Central to this scheme, according to Plaintiff, is the Rx Savings Program. (Id. ¶ 9.)
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The Rx Savings Program allows cash-paying customers (customers who pay for
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prescription drugs without using insurance) to buy the most commonly prescribed generic
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drugs at significantly discounted prices. (Id.) The Rx Savings Program prices, as contended
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by Plaintiff, are often significantly lower than the prices Rite Aid reports to health
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insurance companies as Rite Aid’s “usual and customary” prices. (Id.) Plaintiff claims Rite
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Aid was required by law to report to the TPP/PBMs the Rx Savings Program prices as Rite
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Aid’s “usual and customary” prices for the prescription generic drugs. (Id. ¶ 11.) The
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failure to do so distorted the overall prescription calculations, resulting in higher copays to
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customers. (Id.) Based on this alleged scheme, Plaintiff brings claims against Rite Aid for:
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(1) negligent misrepresentation, (2) unjust enrichment, (3) violation of the Consumer Legal
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Remedies Act (“CLRA”), (4) and violation of the California Unfair Competition Law
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(“UCL”).
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II.
PROCEDURAL HISTORY
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Plaintiff’s complaint was first filed in June 30, 2017. (Doc. No. 1.) A First Amended
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Complaint was filed on July 28, 2017, (Doc. No. 18), and Rite Aid moved to dismiss for
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failure to state a claim on Plaintiff’s four claims for relief. (Doc. No. 19.) In that motion,
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Rite Aid also argued that Plaintiff’s claims were time-barred. (Id. at 31.) The Court granted
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Rite Aid’s motion to dismiss without prejudice, holding that Plaintiff’s claims were time-
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barred by their respective statutes of limitations. (Doc. No. 29.) The Court granted Plaintiff
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leave to amend to provide further factual allegations to demonstrate that equitable tolling
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applied to Plaintiff’s four causes of action. (Id.) Plaintiff filed a Second Amended
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Complaint on January 9, 2018. (Doc. No. 30.) On January 23, 2018, Rite Aid moved to
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dismiss the Second Amended Complaint for failure to state a claim. (Doc. No. 32-1.) On
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September 28, 2018, the Court denied Rite Aid’s motion to dismiss, holding that Plaintiff
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plausibly stated a claim on all four causes of action. (Id.) On June 17, 2019, Ride Aid filed
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a motion to compel arbitration. (Doc. No. 78.) Plaintiff opposed, (Doc. No. 86), and Rite
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Aid replied, (Doc. No. 88). This order follows.
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III.
LEGAL STANDARD
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The Federal Arbitration Act (“FAA”) governs the enforcement of arbitration
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agreements involving interstate commerce. See 9 U.S.C. § 2. Pursuant to § 2 of the FAA,
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an arbitration agreement is “valid, irrevocable, and enforceable, save upon such grounds
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as exist at law or in equity for the revocation of any contract.” Id. The FAA permits “[a]
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party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a
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written agreement for arbitration [to] petition any United States district court . . . for an
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order directing that such arbitration proceed in the manner provided for in [the]
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agreement.” Id. § 4.
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Given the liberal federal policy favoring arbitration, the FAA “mandates that district
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courts shall direct parties to proceed to arbitration on issues as to which an arbitration
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agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985).
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Thus, in a motion to compel arbitration, the district court’s role is limited to determining
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“(1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement
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encompasses the dispute at issue.” Kilgore v. KeyBank Nat’l Ass’n, 673 F.3d 947, 955–56
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(9th Cir. 2012) (citing Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130
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(9th Cir. 2000)). If these factors are met, the court must enforce the arbitration agreement
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in accordance with its precise terms. Id.
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While generally applicable defenses to contract enforcement, such as fraud, duress,
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or unconscionability, may invalidate arbitration agreements, the FAA preempts state law
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defenses that apply only to arbitration or that derive their meaning from the fact that an
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agreement to arbitrate is at issue. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339
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(2011). There is generally a strong policy favoring arbitration, which requires any doubts
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to be resolved in favor of the party moving to compel arbitration. Moses H. Cone Mem.
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Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983). However, where a party
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challenges the existence of an arbitration agreement, “the presumption in favor of
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arbitrability does not apply.” Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733, 742
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(9th Cir. 2014).
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IV.
DISCUSSION
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Despite the absence of an arbitration agreement between Rite Aid and Plaintiff, Rite
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Aid urges the Court compel arbitration of Plaintiff’s claims against Rite Aid based on the
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doctrine of equitable estoppel. (Doc. No. 78-1.) In opposition, Plaintiff argues equitable
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estoppel does not apply because his claims are not intimately intertwined with any contract.
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(Doc. No. 86.) Both parties also raise the issue of waiver of the right to arbitration. The
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Court will first address whether the right to arbitrate exists. Afterwards, the Court will turn
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to whether Rite Aid has waived its right to arbitrate, if any.
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A.
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The Court’s first task in determining whether this action should proceed to
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arbitration is whether a valid agreement to arbitrate exists. Kilgore, 673 F.3d at 955–56.
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Here, it is undisputed that there is no agreement to arbitrate between Plaintiff and Rite Aid.
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However, Rite Aid points to the contracts between Rite Aid and the TPP/PBMs—which
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do contain arbitration provisions—and argues that those arbitration agreements may be
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enforced against Plaintiff, even as a nonsignatory, under the equitable estoppel doctrine.
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(Doc. No. 78-1 at 16.)
Whether a Valid Agreement to Arbitrate Exists
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“Equitable estoppel precludes a party from claiming the benefits of a contract while
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simultaneously attempting to avoid the burdens that contract imposes.” Mundi v. Union
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Sec. Life Ins. Co., 555 F.3d 1042, 1045 (9th Cir. 2009) (internal quotations and citations
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omitted). Courts must apply state law in determining whether equitable estoppel applies to
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compel arbitration of a dispute.1 Dylag v. W. Las Vegas Surgery Ctr., LLC, 719 F. App’x
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568, 570 (9th Cir. 2017). Under equitable estoppel, as applied in “both federal and
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California decisional authority, a nonsignatory defendant may invoke an arbitration clause
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to compel a signatory plaintiff to arbitrate its claims when the causes of action against the
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nonsignatory are ‘intimately founded in and intertwined’ with the underlying contract
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obligations.” JSM Tuscany, LLC v. Superior Court, 193 Cal. App. 4th 1222, 1237 (2011)
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(internal citations and quotations omitted). In JSM Tuscany, LLC, the California appellate
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court additionally addressed the question of “whether the nonsignatory plaintiffs [] can also
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be required to arbitrate their claims which are dependent upon, or inextricably intertwined
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with, the obligations imposed by the [contracts].” Id. at 1239 (emphasis added). The court
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Here, neither party disputes that California law should apply.
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concluded “there is no reason why [the equitable estoppel] doctrine should not be equally
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applicable to a nonsignatory plaintiff.” Id. “When that plaintiff is suing on a contract—on
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the basis that, even though the plaintiff was not a party to the contract, the plaintiff is
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nonetheless entitled to recover for its breach, the plaintiff should be equitably estopped
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from repudiating the contract’s arbitration clause.” Id. However, the equitable estoppel
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doctrine does not apply where a plaintiff “would have a claim independent of the existence
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of the” agreement containing the arbitration provision. Yang v. Majestic Blue Fisheries,
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LLC, 876 F.3d 996, 1002 (9th Cir. 2017).
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Rite Aid has not adequately shown that equitable estoppel should apply. First,
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Plaintiff’s claims are not “dependent upon, or inextricably intertwined” with the contract
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between Rite Aid and the TPP/PBMs. JSM Tuscany, LLC, 193 Cal. App. 4th at 1237. Rite
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Aid characterizes Plaintiff’s claims as turning on Rite Aid’s contractual obligations to the
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TPP/PBMs to report a “usual and customary price.” (Doc. No. 78-1 at 18.) As a result of
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Rite Aid allegedly reporting an inflated “usual and customary” price to the TPP/PBMs,
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Plaintiff claims he paid a higher copayment than he otherwise should have paid. (Id.) There
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is no doubt that there is some relation between Plaintiff’s claims and the contracts between
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Rite Aid and the TPP/PBMs. But the pertinent question is whether Plaintiff’s claims are
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“dependent upon, or inextricably intertwined” with Rite Aid’s contractual obligations to
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the TPP/PBMs. And as the Court previously held in its order denying Rite Aid’s motion to
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dismiss the SAC, the answer to that question is no. Plaintiff’s claims do not necessarily
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depend upon the contracts between Rite Aid and the TPP/PBMs. (Doc. No. 41 at 8.) Rather,
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as the Court has already stated, Plaintiff’s claim is dependent on the theory that Rite Aid
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“orchestrated a fraudulent scheme that violated industry standards” and created the Rx
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Savings Program—“[t]he lynchpin of the scheme”—to report “falsely inflated ‘usual and
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customary’ prices for the drugs to third-party payors. . . .” (SAC ¶¶ 9, 11.) That this
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litigation might involve reference to the contracts between Rite Aid and the TPP/PBMs is
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not enough to find dependence or inextricable intertwinement with the contracts.
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Second, as the Court has previously concluded, Plaintiff has alleged a claim against
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Rite Aid independent of the existence of the agreements between Rite Aid and the
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TPP/PBMs. Specifically, the Court rejected the contention that Plaintiff’s “claims are
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grounded only in contract law.” (Doc. No. 41 at 14 n.1.) Even more, the face of Plaintiff’s
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SAC demonstrates that Plaintiff’s claim does not sound entirely in contract law. Plaintiff
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alleges in the SAC, “Rite Aid tried to avoid complying with its contractual obligations
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and accepted industry standards (not to mention federal and state law) by implementing
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the RSP, and instead of reporting the lower RSP Prices to third-party payors, knowingly
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and intentionally reported false and inflated ‘usual and customary’ prices.” (SAC ¶ 52
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(emphasis added).) Accordingly, this is not a situation in which Plaintiff is seeking to
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enforce his rights pursuant to a contract while simultaneously hoping to avoid arbitration.
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See Comer v. Micor, Inc., 436 F.3d 1098, 1101–1102 (9th Cir. 2006) (refusing to compel
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a non-signatory to arbitrate his claims when his suit was based on his rights under federal
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law, rather than on the rights of the parties as defined in related investment agreements);
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see also Pullen v. Victory Woodwork, Inc., No. 07-CV-00417-WBS-GGH, 2007 WL
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1847633, at *3 (E.D. Cal. June 27, 2007) (“When a nonsignatory seeks to enforce
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provisions of a contract to which it was not a party, equitable estoppel must prevents that
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entity from avoiding the obligations and burdens that also exist under the contract.”).
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B.
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After determining whether a valid agreement to arbitrate exists, the Court’s next task
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is to decide whether the agreement encompasses the dispute at issue. Kilgore, 673 F.3d at
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955–56. Given that the Court has concluded no valid arbitration agreement exists, and
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equitable estoppel does not apply, the Court need not address this requirement.
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Nevertheless, Rite Aid argues that the issue of arbitrability should be delegated to an
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arbitrator. (Doc. No. 78-1 at 22.) It is well-established that if the existence and making of
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the arbitration agreement is at issue, “the federal court may proceed to adjudicate it.” See
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Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04 (1967). Rite Aid
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also highlights the delegation clause in the arbitration agreements between Rite Aid and
Whether the Agreement Encompasses the Dispute at Issue
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the TPP/PBMs, which Rite Aid contends indicates an agreement for the issue of
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arbitrability to be submitted to an arbitrator. (Doc. No. 78-1 at 22–23.) The issue of
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Plaintiff’s nonsignatory status aside, a delegation clause is only enforceable “when it
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manifests a clear and unmistakable agreement to arbitrate arbitrability, and is not invalid
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as a matter of contract law.” Oliver v. First Century Bank, N.A., No. 17-CV-620-MMA-
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KSC, 2017 WL 5495092, at *2 (S.D. Cal. Nov. 16, 2017). Plaintiff, as an unsophisticated
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consumer, had no opportunity to review or even see any of the agreements between Rite
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Aid and the TPP/PBMs. (Doc. No. 86 at 20.) No “clear and unmistakable agreement to
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arbitrate arbitrability” may be found on these facts. Accordingly, issue of whether this
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dispute is subject to arbitration is for this Court to decide. The decision of the Court is that
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it is not.
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C.
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Even if this Court were to hold that Rite Aid had a right to arbitrate the claims
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brought by Plaintiff, Rite Aid waived any right it might have had. Although arbitration
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agreements are subject to general contract principles such as waiver, a “[w]aiver of a
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contractual right to arbitration is not favored,” and “any party arguing waiver of arbitration
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bears a heavy burden of proof.” Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th
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Cir. 1986) (internal quotation marks omitted). “A party seeking to prove waiver of the right
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to arbitration must show: (1) knowledge of an existing right to compel arbitration; (2) acts
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inconsistent with that existing right; and (3) prejudice to the party opposing arbitration
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from such inconsistent acts.” Samson v. Nama Holdings, LLC, 637 F.3d 915, 934 (9th Cir.
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Feb.11, 2011) (internal quotation marks omitted). The Court will address each prong
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below.
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Whether Rite Aid Waived its Right to Arbitration
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Knowledge of An Existing Right to Compel Arbitration
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Rite Aid argues that until recently, it did not have sufficient information to move to
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compel arbitration. (Doc. No. 78-1 at 25.) First, Rite Aid argues it lacked the information
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needed to determine the applicability of an arbitration agreement because it did not have a
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means to confirm Plaintiff’s identify. (Id.) Specifically, Rite Aid claims it only had in its
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possession Plaintiff’s first and last name, and further needed Plaintiff’s full name, address,
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and date of birth. (Id. at 26.) Second, Rite Aid contends it needed to identify through
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discovery the challenged transactions and corresponding contracts to determine whether
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Plaintiff’s claims were inextricably intertwined with the contracts. (Id. at 26–27.) To these
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points, Plaintiff answers Rite Aid only had one “Bryon Stafford” in its records and so, Rite
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Aid’s failure to act to compel arbitration cannot be excused. (Doc. No. 86 at 24.) The Court
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agrees with Plaintiff.
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First, even if it could not confirm the exact identity of Plaintiff, it was incumbent
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upon Rite Aid to demonstrate more diligence earlier in the litigation in seeking information
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regarding Plaintiff’s identity. The circumstances indicate that there was enough
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information for Rite Aid to seriously suspect an arbitration provision. This is true given
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Plaintiff was the only “Bryon Stafford” in Rite Aid’s records, and Rite Aid knew or should
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have known about a possible arbitration provision in its own contract with the TPP/PBMs.
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And Plaintiff points out that in the parties’ joint discovery plan, Rite Aid admitted that
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“each of the PBM and/or third party payor contracts contains similar arbitration
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provisions.” (Doc. No. 45 at 6.) Given this information, Rite Aid should have questioned
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its arbitration rights earlier. Rite Aid replies by analogizing this action to DeVries v.
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Experian Information Solutions, Inc., in which the court held that the defendant was
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justified in seeking discovery to identify purchases and verify if an arbitration agreement
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existed. 2017 WL 733096, at *11 (N.D. Cal. Feb. 24, 2017). In DeVries, the plaintiff filed
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suit on June 2, 2016 and by June 17, 2016, counsel for the defendant requested information
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from the plaintiff to determine whether the plaintiff had entered into an arbitration
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agreement. Id. However, despite repeated requests, counsel for the plaintiff did not provide
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such information until months later. Id. As such, the DeVries court held that a delay in
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seeking arbitration was excusable. Id. That is not the case here. There are no similar
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allegations, and no evidence that Rite Aid’s attempts at gathering information to confirm
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an arbitration agreement was thwarted in any way. Instead, Rite Aid decided to litigate this
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case in other ways in this Court.
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Secondly, Rite Aid’s argument that it needed to determine whether Plaintiff’s claims
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were intertwined with its agreements is also unavailing because the original complaint gave
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Rite Aid adequate notice that the allegations involved contractual obligations. Specifically,
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Plaintiff asserted in its first Complaint, “Rite Aid tried to avoid complying with its
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contractual obligations and accepted industry standards (not to mention federal and state
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law) by implementing the RSP program. . . .” (Complaint, Doc. No. 1, ¶ 47.) There was
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sufficient information in the Complaint to alert Rite Aid that perhaps an inquiry into its
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contracts with the TPP/PBMs would be prudent. Therefore, the Court holds that there is
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enough to charge Rite Aid with knowledge of an existing right to arbitration.
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2.
Acts Inconsistent with Right to Arbitration
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Next, Rite Aid maintains its litigation conduct was not contrary to its right to
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arbitration because the acts were limited to securing information to allow it to move to
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compel arbitration. (Doc. No. 78-1 at 28.) In particular, Rite Aid insists it propounded
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discovery requests only to obtain information needed for its motion to compel arbitration.
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(Id.) Rite Aid also states its filing of two motions to dismiss was not inconsistent with the
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right to arbitration because it was not aware of its arbitration rights. (Id. at 28 n.11.) In
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disagreement, Plaintiff points out multiple actions inconsistent with Rite Aid’s right to
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arbitration including: (1) two motions to dismiss for failure to state a claim, (2) negotiating
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and entering into an ESI protocol and protective order, (3) entering into proposed
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scheduling orders, and (4) propounding and responding to substantive merits discovery.
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(Doc. No. 85 at 27.)
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There is no “concrete test to determine whether a party has engaged in acts that are
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inconsistent with its right to arbitrate.” Martin v. Yasuda, 829 F.3d 1118, 1125 (9th Cir.
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2016). However, the Ninth Circuit has stated that a party’s extended silence and delay in
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moving for arbitration may indicate a “conscious decision to continue to seek judicial
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judgment on the merits of [the] arbitrable claims,” which would be inconsistent with a right
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to arbitrate. Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 759 (9th Cir. 1988).
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Here, Plaintiff’s action was originally filed on June 30, 2017. (Doc. No. 1.) Rather
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than expeditiously seeking to assert its arbitration rights, Rite Aid decided to bring two
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motions to dismiss, on the merits, arguing that all four of Plaintiff’s causes of action should
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be dismissed for failure to state a claim. (Doc. Nos. 19, 32.) Rite Aid’s motion to compel
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arbitration was not brought until after its second motion to dismiss was denied by the Court.
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(Doc. No. 41.) And even if Rite Aid was unaware of its arbitration rights, it was Rite Aid’s
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duty to diligently investigate whether its own contract with a third-party contained an
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arbitration provision. But instead, Rite Aid decided to diligently litigate in this Court. See
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Van Ness Townhouses, 862 F.2d at 756, 759 (finding waiver when party answered
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complaints, moved to dismiss the action, and did not claim a right to arbitration in any of
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the pleadings); Kelly v. Pub. Util. Dist. No. 2, 552 Fed. App’x. 663, 664 (9th Cir. 2014)
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(finding this element satisfied when the parties “conducted discovery and litigated motions,
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including a preliminary injunction and a motion to dismiss”). As such, the Court concludes
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Rite Aid acted inconsistently with the right to arbitration. To hold otherwise would allow
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parties to take a “wait and see approach” and feign ignorance of arbitration rights just until
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after an unfavorable court ruling is imposed.
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3.
Prejudice to the Plaintiff
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Lastly, Rite Aid argues there is minimal prejudice to Plaintiff if this action was
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compelled to arbitration because it has served little discovery, and the discovery it did seek
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can be used in an arbitration. (Doc. No. 78-1 at 29.) Naturally, Plaintiff responds by
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asserting that forcing Plaintiff to arbitration after two years of aggressive litigation in this
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Court displays obvious prejudice to Plaintiff. The Court agrees with Plaintiff.
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“When a party has expended considerable time and money due to the opposing
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party’s failure to timely move for arbitration and is then deprived of the benefits for which
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it has paid by a belated motion to compel, the party is indeed prejudiced.” Martin, 829 F.3d
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at 1127. Plaintiff here has expended considerable costs and energy in prosecuting his case.
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As Plaintiff points out, “Rite Aid has engaged Plaintiff in case management discussions,
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including a discovery and class certification schedule, propounded and responded to merits
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discovery, and engaged in discovery motion practice and hearings.” (Doc. No. 86 at 29.)
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Requiring Plaintiff to arbitrate its claims after Rite Aid has actively participated in this
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litigation for two years would certainly be inequitable. Thus, Plaintiff has shown prejudice.
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With all three elements satisfied, the Court concludes that even if Rite Aid had a
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right to arbitrate Plaintiff’s claims, Rite Aid waived those rights.
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V.
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CONCLUSION
In light of the foregoing, the Court DENIES Rite Aid’s motion to compel arbitration.
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IT IS SO ORDERED.
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Dated: February 24, 2020
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