Electrostim Medical Services, Inc. v. Health Care Service Corporation

Filing 47

MEMORANDUM AND OPINION entered DENYING 23 MOTION to Compel Arbitration. (Signed by Judge Lee H Rosenthal) Parties notified.(leddins, )

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
ELECTROSTIM MEDICAL
SERVICES, INC.,
Plaintiff,
v.
HEALTH CARE SERVICE CORP.,
Defendant.

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CIVIL ACTION NO. H-11-2745

MEMORANDUM AND OPINION
This is a breach-of-contract suit. The plaintiff, Electrostim Medical Services, Inc., provides
electrical-stimulation devices for pain management. Electrostim alleges that the defendant, Health
Care Service Corp., an insurance company, failed to pay claims for covered treatment Electrostim
provided patients. The motion addressed in this Memorandum and Opinion seeks to compel
Electrostim to arbitrate the parties’ dispute. The specific issue is whether Health Care’s delay in
moving to enforce a contractual arbitration clause, and the extensive litigation activities before filing
the motion, waived the contractual right to arbitrate. Based on the pleadings, the motions and
responses, the arguments of counsel, and the relevant law, this court finds waiver and denies Health
Care’s motion to compel arbitration. The reasons are set out below.
I.

Background
Electrostim sued Health Care in Texas state court in August 2010, asserting a failure to pay

covered claims submitted for medical supplies and services provided to patients. (Docket Entry No.
1, Ex. 2, Original Pet.). In June 2011, Electrostim filed its first amended petition in Texas state
court, asserting causes of action for breach of contract; unjust enrichment; breach of implied

contract; breach as to a third-party beneficiary; quantum meruit; suit on an account; a violation of
Texas prompt-payment statutes; a violation of the Employment Retirement Income Security Act
(“ERISA”), 29 U.S.C. §1132(a); breach of fiduciary duty under ERISA; and declaratory judgment
on both the non-ERISA and ERISA claims. (Docket Entry No. 1, Ex. 5, 1st Am. Pet.).
Electrostim’s allegations spanned periods during which the parties operated under a contract
known as the Participating Provider Agreement (“Agreement”) and periods in which the Agreement
was no longer in effect. The parties entered into the Agreement in January 2007. Health Care
notified Electrostim in April 2010 that it was terminating the Agreement effective August 2010.
(Id., ¶¶ 7, 8, 12).
The Agreement included the following provision on alternative dispute resolution (“ADR”):
In order to avoid the cost and time consuming nature of litigation,
any dispute between [Health Care] and [Electrostim] arising out of,
relating to, involving the interpretation of, or in any other way
pertaining to this Agreement or any prior Agreement between [Health
Care] and [Electrostim] shall be resolved using alternative dispute
resolution mechanisms instead of litigation. [Health Care] and
[Electrostim] agree and acknowledge that it is their mutual intention
that this provision be construed broadly so as to provide for
mediation and/or arbitration of all disputes arising out of their
relationship as third-party Payer and Ancillary Provider. The parties
further agree that resolution of any dispute pursuant to this
Agreement shall be in accordance with the procedures detailed
below.
(Docket Entry No. 23, Ex. 1, Agreement, pt. X.H). The Agreement stated that the parties are to try
resolving disputes first through an initial meeting or mediation. “In the event mediation is not
successful in resolving the dispute, either [Health Care] or [Electrostim] may submit the dispute to
final and binding arbitration under the commercial rules and regulations of the American Arbitration

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Association . . . .” (Id.) Electrostim attached the Agreement to its original petition. (Docket Entry
No. 1, Ex. 2).
The relevant timetable of litigation events is set out below.
•

On July 26, 2011, Health Care filed its original answer in state court, (Docket Entry
No. 1, Ex. 7, Original Answer), and its notice of removal to federal court, (Docket
Entry No. 1).

•

The parties conferred under Rule 26(f) of the Federal Rules of Civil Procedure and
filed their joint discovery/case management plan with the court. Health Care filed
the plan on November 4, 2011. (Docket Entry No. 8). On December 7, 2011, this
court entered its scheduling and docket-control order. That order included a
discovery cut-off, a pretrial motion deadline, and a date for docket call. (Docket
Entry No. 10).

•

On December 15, 2011, Health Care filed an agreed motion for a protective order
covering confidential information exchanged in discovery. (Docket Entry No. 11).

•

Health Care filed its initial disclosures under Rule 26 on December 30, 2011.
(Docket Entry No. 13).

•

Health Care filed an unopposed motion for leave to file an amended answer on
January 13, 2012. (Docket Entry No. 14). On January 17, 2012, Health Care filed
its first amended answer. (Docket Entry No. 16). That answer listed a number of
affirmative defenses, including failure to state a claim; lack of jurisdiction over the
claims; lack of standing; preemption by the Federal Employee Health Benefits Act
(“FEHBA”), 5 U.S.C. § 8901 et seq., and 5 C.F.R. § 890.105 et seq.; failure to assert

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claims against the correct party under 5 C.F.R. § 890.107 and chapter 1551 of the
Texas Insurance Code; failure to exhaust administrative remedies; and federal
sovereign immunity. (Id., ¶¶ 54–60).
•

On January 27, 2012, Health Care filed a motion to dismiss under Federal Rule of
Civil Procedure 12(b)(1) and (6). (Docket Entry No. 17). Health Care argued that
“the amount of the claims is a bit of a moving target” because Electrostim had
insufficiently “identified the claims in dispute.” (Id., ¶ 2). “In its Amended Petition,
[Electrostim] alleged the claims totaled just under $8.3 million. However, in the
Joint Discovery/Case Management Plan, that amount is listed as ‘in excess of $12
million.’” (Id. (quoting Docket Entry No. 8, at 2)). Health Care sought dismissal
because “the total amount of claims includes claims for services and/or supplies
rendered to members of plans for federal government employees and retirees, as well
as Texas state government employees and retirees,” and these claims could not be
included in this suit. (Id., ¶ 3). Instead, under FEHBA, Electrostim had to bring its
claims for federal-employee patients before the United States Office of Personnel
Management. Health Care also sought dismissal on the basis that Electrostim’s
ERISA-based causes of action were statutorily barred and that claims for services to
FEHBA-plan patients were barred by sovereign immunity. (Id., ¶¶ 4–23). As to the
claims arising under state-employee benefit plans, Health Care alleged that
Electrostim’s suit necessarily raised claims for persons covered by the Employees
Retirement System of Texas (“ERS”) and the Teacher Retirement System of Texas
(“TRS”) and that Texas law required administrative-review procedures for disputed

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claims. Because Electrostim did not pursue these administrative remedies, Health
Care argued that any such claims included in Electrostim’s suit should be dismissed.
(Id., ¶¶ 24–33).
•

Between April and June 2012, Health Care served Electrostim with discovery
requests. On April 5, 2012, Health Care served its first set of interrogatories and first
request for production and asked for depositions under Federal Rule of Civil
Procedure 30(b)(6). (Docket Entry No. 24, ¶ 6).

•

On April 16, 2012, the parties filed a joint status report on mediation. (Docket Entry
No. 21). That report stated that “[a]t this stage, the parties do not feel that mediation
or any other form of ADR would be helpful. The parties are continuing to gather
information from each other, and are unable at this time to fully formulate their
settlement positions.” (Id., ¶ 1). The report continued: “The parties anticipate that
once they have exchanged information, and conducted sufficient discovery, they will
be able to engage in meaningful settlement discussions. If those discussions do not
prove fruitful, the parties are in agreement that mediation would be the most
appropriate form of ADR.” (Id., ¶ 2).

•

Health Care propounded additional discovery in May 2012, including a second
request for production of documents, a second set of interrogatories, and a first
request for admissions. (See Docket Entry No. 24, ¶ 7; Docket Entry No. 31, ¶ 5).
The parties conferred in June and July over Electrostim’s responses. (Docket Entry
No. 24, ¶ 8).

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•

On July 10, 2012, Health Care filed two motions. The first was a motion to compel
arbitration under the Agreement. (Docket Entry No. 23). The motion was filed 23
months after the case was first filed in state court and almost a year after Health Care
removed to federal court. The second motion was a motion to compel discovery
responses from Electrostim. (Docket Entry No. 24). Health Care filed this motion
“subject to its previously-filed Motion to Compel Arbitration.” (Id. at 1).

•

This court heard Health Care’s discovery issue in a premotion conference on August
2, 2012, at which the parties also argued the motion to dismiss. (Docket Entry No.
29). The gist of Health Care’s dismissal argument was again that Electrostim’s
breach-of-contract claim insufficiently identified the insurance claims that were
allegedly unpaid or underpaid. Health Care also reurged its argument that some of
the claims Electrostim had made fell under various federal and state insurance
programs and were barred either by preemption or by sovereign immunity. Health
Care sought to dismiss some claims under Rule 12(b)(6) based on preemption and
similar theories and other claims under Rule 12(b)(1) based on sovereign immunity.
Health Care provided an affidavit from a manager of its Provider Access & Servicing
Strategy Department, stating that 99 of the disputed claims were claims for payment
from Electrostim between January 2008 and July 2010 for participants in a federal
insurance plan. (See Docket Entry No. 20, Ex. A, Oswalt Aff., ¶ 3). This court
granted the motion to dismiss without prejudice and allowed Electrostim to file an
amended complaint. The court also ordered the parties to exchange additional
information about the insurance claims.

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•

Electrostim filed its response to the motion to compel arbitration on August 10, 2012,
arguing that Health Care had waived its right to compel arbitration. (Docket Entry
No. 31).

•

Electrostim filed its second amended complaint on August 16, 2012. (Docket Entry
No. 32). This complaint limited the breach of contract claim, as follows:
As a result of [Health Care]’s breach, [Electrostim] has been
damaged. Specifically, due to [Health Care]’s breach by
failure to follow the terms of the Agreement, all of the goods
and services that were provided to [Health Care’s Blue Cross
Blue Shield of Texas] plan participants and/or participants of
other Blue Cross /Blue Shield plans fall within
[Electrostim]’s damages for breach of contract to the extent
they are not precluded by another applicable law. All
non-precluded claims fall within the scope of the breach of
contract because [Health Care] is obligated to pay for said
services or would have been obligated to pay for said services
had [Health Care] not violated the agreement and improperly
terminated the Agreement.
(Id., ¶ 15).

•

On August 29, 2012, the court heard additional oral argument on discovery and on
the motion to compel arbitration. (Docket Entry No. 35). The parties agreed that
because the Agreement ended in August 2010, disputes based on services provided
after that date were nonarbitrable. The court ruled that nonarbitrable claims would
be litigated and all arbitrable claims would be arbitrated unless the court found that
Health Care had waived its contractual arbitration right. The court deferred ruling
on waiver.

•

Since that hearing, Health Care has moved to dismiss Electrostim’s second amended
complaint based solely on Rule 12(b)(6). (Docket Entry No. 36). Health Care filed

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this motion “subject to its and without waiving its previously filed Motion to Compel
Arbitration.” (Id. at 1). The motion argued that “[b]ecause ERISA pre-empts all
Plaintiff’s state law claims, Plaintiff does not have standing under ERISA, and any
surviving state law claims are insufficiently pleaded, all such claims must be
dismissed. The only claim that can survive dismissal is Plaintiff’s breach of contract
claim pertaining to benefit claims submitted during the term of the Agreement.” (Id.
at 2). Health Care reserved its right to move to dismiss this claim as well after
Electrostim finished compiling information about the claims it alleged were
wrongfully processed. (Id. at 3).
Electrostim concedes that the Agreement contains a valid arbitration clause. Electrostim has
argued that the clause is unenforceable for two reasons: (1) only some of the claims in this case
would be subject to arbitration and it would be inequitable and prejudicial to have to arbitrate some
claims and litigate others; and (2) Health Care waived its right to compel arbitration by failing
timely to request arbitration and by extensively engaging in litigation, to Electrostim’s detriment.
This court previously ruled that the first ground did not present a persuasive basis for denying
arbitration. This court now finds that the second ground is persuasive: Health Care has waived its
right to compel arbitration.
II.

The Applicable Legal Standard
The Federal Arbitration Act (“FAA”) requires district courts to direct parties to arbitrate

issues covered by a valid arbitration agreement. 9 U.S.C. §§ 3, 4; see also Dean Witter Reynolds,
Inc. v. Byrd, 470 U.S. 213, 218 (1985). Federal policy strongly favors enforcing arbitration
agreements. Dean Witter Reynolds, 470 U.S. at 217; Moses H. Cone Mem. Hosp. v. Mercury

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Constr. Corp., 460 U.S. 1, 24 (1983). When a party moves to compel arbitration, the FAA requires
district courts to order arbitration of arbitrable claims. Sedco, Inc. v. Petroleos Mexicanos Mexican
Nat’l Oil Co. (In re Sedco, Inc.), 767 F.2d 1140, 1147 (5th Cir. 1985). Arbitration agreements, like
other contracts, may be invalidated by contract defenses like fraud, duress, unconscionability, or
waiver. See Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996); see also Miller Brewing
Co. v. Fort Worth Distrib. Co., Inc., 781 F.2d 494, 497 (5th Cir. 1986) (“‘The right to arbitration,
like any other contractual right, can be waived.’” (quoting Cornell & Co. v. Barber & Ross Co., 360
F.2d 512, 513 (D.C. Cir. 1966) (per curiam))). Because of the strong presumption in favor of
arbitration, “a party seeking to invalidate an arbitration agreement bears the burden of establishing
its invalidity.” Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294, 297 (5th Cir. 2004).
Courts generally hesitate to find waiver in all but the clearest cases due to the strong
presumption of enforceability. See, e.g., MC Asset Recovery LLC v. Castex Energy, Inc. (In re
Mirant Corp.), 613 F.3d 584, 588 (5th Cir. 2010); Republic Ins. Co. v. PAICO Receivables, LLC,
383 F.3d 341, 344 (5th Cir. 2004); Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th
Cir. 1999). “‘Waiver will be found when the party seeking arbitration substantially invokes the
judicial process to the detriment or prejudice of the other party.’” In re Mirant, 613 F.3d at 588
(quoting Walker v. J.C. Bradford & Co., 938 F.2d 575, 577 (5th Cir. 1991)). “A party generally
invokes the judicial process by initially pursuing litigation of claims then reversing course and
attempting to arbitrate those claims.” Nicholas v. KBR, Inc., 565 F.3d 904, 907 (5th Cir. 2009). “To
invoke the judicial process, a ‘party must, at the very least, engage in some overt act in court that
evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration.’” In re
Mirant, 613 F.3d at 589 (quoting Subway Equip., 169 F.3d at 329). The question of whether a party

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has waived its right to arbitration “‘depends on the facts of each case.’” Id. (quoting Tenneco
Resins, Inc. v. Davy Int’l, AG, 770 F.2d 416, 420 (5th Cir. 1985)).
Electrostim argues that Health Care waived its contractual arbitration right by substantially
invoking the judicial process, including moving to dismiss, engaging in discovery, and filing other
litigation documents. Electrostim also argues that compelling arbitration at this stage would be
prejudicial; because Health Care waited so long to assert its arbitration right and engaged in such
extensive litigation activities, Electrostim has spent significant time and expense and has responded
to discovery that is generally not required in arbitration.
Both elements — invoking the judicial process and prejudice — are addressed below.
III.

Analysis
A.

Substantially Invoking the Judicial Process

A lapse in time — even a lengthy one — between when litigation starts and a party seeks to
compel arbitration is not dispositive. What matters more is how extensively the parties have
engaged the litigation process during that time. See, e.g., In re Apple iPhone 3G & 3GS MMS Mktg.
& Sales Practices Litig., — F. Supp. 2d —, —, 2012 WL 1069169, at *5 (E.D. La. 2012) (finding
no waiver in part because “despite the fact that this case is over two years old, this litigation is still
in its early stages”). A key inquiry is whether finding no waiver would effectively give a litigant
“a second bite at the apple through arbitration.” Petrol. Pipe Ams. Corp. v. Jindal Saw, Ltd., 575
F.3d 476, 482 (5th Cir. 2009); see also In re Apple iPhone, 2012 WL 1069169, at *5 (“The
defendant in In re Mirant was found to have substantially invoked the judicial process, because
holding otherwise would have allowed it to ascertain how the case was proceeding in court before
seeking arbitration.” (citing 613 F.3d at 589–90)).

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One commonly analyzed factor is the extent to which the party seeking arbitration filed
pleadings or motions indicating a desire to have the court rather than an arbitrator resolve the
dispute. “A party waives arbitration by seeking a decision on the merits before attempting to
arbitrate.” Petrol. Pipe, 575 F.3d at 480; In re Mirant, 613 F.3d at 589. Although the Fifth Circuit
has declined to adopt a bright-line rule that filing any motion to dismiss substantially invokes the
judicial process and waives arbitration, In re Mirant, 613 F.3d at 589, the court distinguished
between “‘perfunctory motion[s] to dismiss’” that will not waive the right to compel arbitration, id.
(quoting Williams v. Cigna Fin. Advisors, Inc., 56 F.3d 656, 661 (5th Cir. 1995)), and motions to
dismiss that “invoke[] the judicial process to a greater degree,” and may result in waiver, id.
In this second category of motions to dismiss, the In re Mirant court placed motions raising
affirmative defenses, which “‘admit the initial sufficiency and completeness of the claim while
asserting other grounds for avoiding the normal consequences of that concession.’” Id. (quoting Pan
E. Exploration Co. v. Hufo Oils, 855 F.2d 1106, 1125–26 (5th Cir. 1988)). The court also included
motions seeking dismissal with prejudice for failure to state a claim. Id. (citing Mahone v. Addicks
Util. Dist., 836 F.2d 921, 940 (5th Cir. 1988)). Finally, the court included motions to dismiss that
do not include a motion to compel arbitration in the alternative. Id. at 589–90. But cf. Keytrade
USA, Inc. v. Ain Temouchent M/V, 404 F.3d 891, 897–98 (5th Cir. 2005) (finding no waiver when
a defendant concurrently filed a motion to compel arbitration with a motion for summary judgment
and then appealed the denial of the motion to compel arbitration); Steel Warehouse Co. v. Abalone
Shipping Ltd. of Nicosai, 141 F.3d 234, 236–38 (5th Cir. 1998) (finding no waiver when a defendant
filed a motion to dismiss with a motion to compel arbitration and appealed the denial of the motion
to compel).

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In this case, Health Care moved to dismiss many of Electrostim’s claims, on preemption,
immunity, or failure-to-exhaust grounds, before seeking arbitration. As in In re Mirant, Health
Care’s motion to dismiss was not presented as an alternative to a motion to compel arbitration. See
613 F.3d at 589–90; see also Keytrade, 404 F.3d at 897–98; Steel Warehouse, 141 F.3d at 236–38.
Nor was it accompanied by a reservation of arbitration rights. Instead, Health Care asserted its
arbitration right long after it first moved to dismiss and after the parties filed extensive briefs on that
motion. Health Care’s motion to dismiss is in the category that the In re Mirant court described as
substantially invoking the judicial process.
In some cases, filing a motion to dismiss is consistent with a pursuing a right to arbitration.
For example,
[In a] case involv[ing] several claims that were non-arbitrable . . . , “a
motion to dismiss may not be inconsistent with a right to arbitrate; it
might be necessary for the defendant to file the motion both to sort
out the claims before it can intelligently decide whether to arbitrate
and to protect its rights in court if the arguably non-arbitrable claims
do turn out to be non-arbitrable.”
In re Mirant, 613 F.3d at 591–92 (quoting St. Mary’s Med. Ctr. of Evansville, Inc. v. Disco
Aluminum Prods. Co., 969 F.2d 585, 589 (7th Cir. 1992) (citing Sweater Bee by Banff, Ltd. v.
Manhattan Indus., Inc., 754 F.2d 457, 461–66 (2d. Cir. 1985))); see also Sweater Bee, 754 F.2d at
463 (“Plainly, the portions of the motion [to dismiss] addressed to nonarbitrable claims do not
constitute a waiver. And where, as here, a plaintiff files an intricate complaint, setting forth
numerous claims outside the scope of, though partially related to, the arbitrable claims, he should
not be altogether surprised that a defendant takes the protective step of filing a motion to
dismiss . . . .” (citation omitted)).

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Health Care argues that its motion to dismiss was to “sort out Plaintiff’s claims, not a request
for adjudication on the merits” and thus not evidence of waiver. (Docket Entry No. 33, at 3 (citing
St. Mary’s, 969 F.2d at 589)). The record does not fully support this contention. Whether the
insurance claims at issue were arbitrable or not depends on whether they arose during the period the
Agreement was effective or after. This case is unlike the situation described in St. Mary’s in that
Health Care, the party seeking arbitration, has not asserted any difficulty in determining which
claims are subject to the arbitration clause and which are not. Cf. 969 F.2d at 589 (“St. Mary’s case
was a simple breach of contract case; Disco does not assert that there was any dispute that St.
Mary’s claim was arbitrable.”).
The fact that Health Care moved to dismiss arbitrable claims as well as nonarbitrable claims
is also significant. The federal courts hold no monopoly on deciding preemption, sovereignimmunity, and administrative-exhaustion issues. An arbitrator would have been able to address and
decide them. Cf., e.g., 14 Penn Plaza LLC v. Pyett, 556 U.S. 247, 268 (2009) (“[T]he Court has
recognized that arbitral tribunals are readily capable of handling the factual and legal complexities
of antitrust claims, notwithstanding the absence of judicial instruction and supervision and . . . there
is no reason to assume at the outset that arbitrators will not follow the law.” (quoting Shearson/Am.
Express Inc. v. McMahon, 482 U.S. 220, 232 (1987) (internal quotation marks omitted))).
Another factor relevant to determining whether the party seeking arbitration has substantially
invoked the judicial process is the extent to which that party has engaged in discovery and other
pretrial activity. See, e.g., Republic, 383 F.3d at 344–45; Price v. Drexel Burnham Lambert, Inc.,
791 F.2d 1156, 1162 (5th Cir. 1986). In Republic, the movant answered counterclaims; conducted
discovery, including taking four depositions; amended its complaint; filed the required pretrial

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materials with the district court; and filed two motions to compel discovery, a motion for summary
judgment, and a motion in limine to limit the evidence its opponent could produce at trial, all before
seeking to enforce arbitration. 383 F.3d at 345. In Price, the party seeking to compel arbitration
initiated extensive discovery, filed two answers, filed motions to dismiss and for summary judgment,
and filed and obtained two extensions of pretrial deadlines. 791 F.2d at 1162. In both cases, the
court found that the party seeking arbitration had indicated its desire to resolve an arbitrable dispute
through litigation and substantially invoked the judicial process to the opponent’s detriment.
Republic, 383 F.3d at 345; Price, 791 F.2d at 1161–62.
Health Care engaged in significant pretrial activity before moving to compel arbitration. It
removed the case to federal court, answered Electrostim’s amended petition, and filed an amended
answer in federal court that raised affirmative defenses asserting grounds later raised in its motion
to dismiss. Health Care also attended a Rule 26(f) conference, filed a joint discovery/case
management plan with the court, filed a joint agreed motion for protective order, submitted its initial
disclosures, filed a joint status report with the court, and filed its unopposed motion for leave to file
an amended answer. Health Care propounded written discovery on Electrostim on the merits of the
claims and defenses, not limited to arbitrability, and, as noted, filed a motion to dismiss that was not
perfunctory because it sought dismissal with prejudice, did not request arbitration in the alternative,
and sought judicial determination of arbitrable as well as nonarbitrable claims.
The discovery and other court filings here were not as extensive as in Republic and in Price.
On the other hand, the discovery Health Care sought was explicitly directed toward the merits. The
discovery was not to determine what made certain claims arbitrable and others not: that was
determined by whether the claim arose during the contract period. This aspect of Health Care’s

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discovery, combined with the volume of pretrial activity in this case, also supports finding that
Health Care substantially invoked the judicial process.
Because Health Care’s motion to dismiss sought judicial review of arbitrable as well as
nonarbitrable claims, and Health Care’s discovery was also significant litigation activity, Health
Care substantially invoked the judicial process.
B.

Prejudice

In a waiver analysis, “‘prejudice’ means ‘the inherent unfairness in terms of delay, expense,
or damage to a party’s legal position that occurs when the party’s opponent forces it to litigate an
issue and later seeks to arbitrate the same issue.’” Petrol. Pipe, 575 F.3d at 480 (quoting Republic,
383 F.3d at 346). The Fifth Circuit has cited three factors as “‘particularly relevant’” to determining
prejudice: “(1) whether discovery occurred relating to arbitrable claims; (2) the time and expense
incurred in defending against a motion for summary judgment; and (3) a party’s failure to timely
assert its right to arbitrate.” Id. (quoting Republic, 383 F.3d at 346).
As noted, the discovery Health Care propounded related to arbitrable claims as well as
nonarbitrable claims. “[W]hile discovery relating to non-arbitrable claims is not prejudicial, where
the pretrial activity was related to all of the parties’ claims, including those that were conceded to
be arbitrable, arbitration would result in prejudice.” Republic, 383 F.3d at 346. The discovery here
favors a finding of prejudice. At several stages, Health Care indicated that its discovery was not
limited to determining which claims were arbitrable. In the joint status report filed months before
moving to compel arbitration, Health Care represented to the court that ongoing discovery was
necessary “to fully formulate [the parties’] settlement positions,” “to engage in meaningful
settlement discussions,” and “[i]f those discussions do not prove fruitful,” to pursue mediation.

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(Docket Entry No. 21, ¶¶ 1–2). During oral argument on its simultaneously filed motions to compel
arbitration and for discovery, Health Care explained that the discovery it sought was to clarify
whether the insurance claims were made under plans governed by ERISA or under some other plan,
such as a federal health-benefits plan, which may have raised preemption or exhaustion defenses.
(Docket Entry No. 29). At the next hearing on discovery disputes and on the arbitration motion —
which occurred after Electrostim amended its complaint to exclude preempted claims — Health Care
explained that it needed discovery to determine which claims — whether arbitrable or not — were
subject to dismissal under Rule 12(b)(6). (Docket Entry No. 35). Health Care identified no problem
distinguishing which claims were to be arbitrated (those arising before August 2010) and which
were to be litigated (those arising after August 2010). Health Care requested discovery largely to
determine whether Electrostim’s claims were subject to dismissal for reasons other than arbitrability.
This factor contributes to a finding of prejudice.
Health Care’s litigation activities required Electrostim to spend significant time and incur
expense beyond what is generally contemplated in arbitration. Electrostim had to respond to Health
Care’s motion to dismiss, and respond to discovery requests. Electrostim asserts that it spent
$130,000.00 on attorneys’ fees before Health Care moved to compel arbitration. (Docket Entry No.
31, ¶ 17). Health Care argues that Electrostim failed to submit documents showing the attorneys’
fees it incurred in litigating, but this does not affect the waiver analysis. It is undisputed that
Electrostim had to respond to motions, file an amended complaint, and respond to discovery
requests, all requiring legal expense. This factor supports a finding of prejudice.
Finally, the delay in asserting the right to arbitrate contributes to finding waiver. When this
suit was removed in July 2011, Health Care knew about the arbitration clause; Electrostim had

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included a copy of it in its original state-court complaint. It was not until July 2012 — a year after
removal — that Health Care moved to compel arbitration. This case is unlike In re Mirant and
similar cases in which the defendant noted and reserved its right to compel arbitration in each of its
filings. And even in In re Mirant, the court ultimately found prejudice because of the delay and the
litigation activities. See 613 F.3d at 591–92. Health Care did not reserve its right to arbitrate in the
motions, pleadings, or filings made before seeking arbitration.
Facts that indicate a nonstrategic delay in asserting a right to compel arbitration may weigh
against waiver. For example, if a party moves to compel arbitration before filing an answer, or
before receiving a ruling on a motion to dismiss, that can weigh against finding waiver. See, e.g.,
In re Apple iPhone, 2012 WL 1069169, at *5 (finding no waiver because Apple’s Rule 12(b)(6)
motions were not submitted for decision and the litigation was “still in its early stages,” in part
because no answer had been filed). When Health Care moved to compel arbitration, this court had
not yet ruled on its motion to dismiss. The present record does not support an inference that Health
Care delayed moving to compel arbitration for strategic reasons. The record does not indicate the
clear gamesmanship of waiting to see if the court dismisses and seeking arbitration after an adverse
result. See In re Mirant, 613 F.3d at 590 (explaining that by moving to compel arbitration only after
the court ruled on its motion to dismiss, “Castex attempted to play ‘heads I win, tails you lose,’
which is the worst possible reason for failing to move for arbitration sooner than it did.” (quoting
Hooper v. Advance Am., Cash Advance Ctrs. of Mo., Inc., 589 F.3d 917, 922 (8th Cir. 2009)
(internal quotation marks omitted))). But the delay and the extensive litigation activities Health
Care engaged in before seeking to compel arbitration prejudiced Electrostim and support a waiver
finding.

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IV.

Conclusion
Because Health Care substantially invoked the judicial process and because its delay and

extensive litigation activities — including moving to dismiss and propounding broad discovery
requests — resulted in prejudice to Electrostim, the motion to compel arbitration, (Docket Entry
No. 23), is denied.
SIGNED on October 30, 2012, at Houston, Texas.

______________________________________
Lee H. Rosenthal
United States District Judge

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