The H onor abl e St ef an R
. U nder hi l l of

t he U ni t ed St at es D i s t r i ct C our t f or t he D i s t r i ct of

C onne ct i cut , s i t t i ng * by des i gn at i on. 1 10- 889- cv L o u isia n a S ta d iu m & E x p o sitio n D istr ic t, e t a l. v . M e r r ill L y n c h , P ie r c e , F e n n e r & S m ith In c ., e t a l. UN ITED STA

TES CO URT OF AP P EALS F OR TH E S ECO N D CI RCU IT Aug us t T er m, 201 0 (A rgue d: No vem ber

4, 2 010 Dec id ed: No vem ber 22, 201 0 ) Do cket No . 10 -8 89- cv L O UI S I ANA S T A DI UM & E X P OS I T I ON D I S TRI CT and S TATE O F L OUI S I A NA ,

Plainti ffs-Appella nts,
v. M ERRI LL L

YN CH , P I ERCE , F EN NE R & S MI T H I NC OR P OR A T ED and M ERRI LL L YNCH & C O ., I NC ., Defenda nts-App ellees
. B ef or e: C AB RA N E S and C H IN , Circuit Jud ges , and U ND ERHI LL , District Judge
. * Appea l from a February 8, 2010 order of the United States District Court for the Southern Di s tr ict of New Yor k ( Lo r et ta A . P r es ka, Chi

ef Judge ) denying pla intiffs ’ motion to compel arbitration. Affirmed. J AM E S R. S WA NS ON (L ance C. M cCar dl e, Al ys s onL. Mill s , on the brief

), Fi s hm an H aygo odPh elp s Walm s ley Willi s & Sw ans on , L .L .P ., N ew Or lean s , L A, for Plaintiffs-App ellants
. S CO TT D. M USO FF (J ay B . Kas ner , on the brief ), Ska dd en, Arps , Sl ate , M eagh er & F lo m L

LP , N ew Yo r k, N Y, for Defendants-Ap pellees.2

J OS É A. C AB R ANES , Circuit Jud ge : Plaintiffs -appella nts L ouisiana Stadi um & Exposition Distr ict and the Sta te of Louis iana (collec tively, “ LSED”) appea l from an order of the United States District Court f or the Southern Di s tr ict of New Yor k ( Lo r et ta A . P r es ka, Chi

ef Judge ), denyin g thei r

mo ti onto com pel

ar bi tr ati onin th eir di s pu te with d ef

end ant s -a pp ell ees M er r

ill Ly nch , P ier ce, F enn er

& Smith I nco r po r ate d (“ M LP FS ”) andM er r

ill Ly nch& Co ., I nc. (j oi nt

ly, “de fe nd ant s ”) . As s um in g f or th e argum ent

th at LSED poss essed a right to arbitr ation, the District Court held that LSED had wa ived that right by exp r es s in g it s in te nt

to r es ol ve the dis pu te th r ough l

it igat io n. In re Me rrill Lynch Auction Rate Secs. Litig. , 09 MD 2030 (LAP), 2010 U.S. Dist. LEXIS 12764 (S.D.N.Y. Feb. 8 , 2010). W e affirm.

BAC KGROUND LSED owns the Superdome in New Orlea ns, Louis iana . In early 2005 LSE D solicited the services of an underwriter and broker- deale r to help restructure its existing bond debt. MLPF S submitt ed a proposal in response under cover of a letter fr om Stephen C laiborn. In the letter, Cla iborn
was id ent if iedas a M anag

in g D ir ect or

of M er r ill Ly nchGl ob al M ar ket s & I nv es tm ent B ank in g. A s LSED would la ter verify, Cla iborn was technica lly employ ed by MLPFS, a wholly-owne d subs idiary of M er r ill Ly nch
. LSED acc epted C laiborn’s propos al. Shortly therea fter, in August 2005, the Superdome

s us tai neds ignif

ican t d amag e as a r es ul t o f H ur r ican e Katr

in a, an d L SED tu r nedto M LP FS fo r adv ice
onho w be s t t o f

in ance th e ne ces s ary r epai r s . Act in g onth e adv

ice o f MLP FS , L SED is s ued$24 0 milli onof mu ni cip al b on ds s tructur ed as auct io n r ate s ecu r

it ies (“ ARS” ) i n 2 006 . L SED clai ms th at M LP FS kn owi ngl

y mi s ledit abo ut th e t r ue d ema ndfo r

th es e s ecu r

it ies , le adi ng t o the f

ail ur e of LS ED’ sF in a n c ia l G u a r a n ty In su r a n c e C o m p a n y is n o t a p a r ty to th is a p p e a l. 2 3 auct io ns in200 8. LS ED i ni ti ate d the u nd erlyi ng a ct io n o n J anu ary 22 , 20 09, whe n i t f ile d s ui t i n the U ni te d S tat es Distr ict Court for the Eastern Dis trict of L ouisiana a gainst Financia l Guaranty Insurance Compa ny, its bo ndin s ur er . Day s lat er , L SED ame nd ed i ts com pl ain t t o ad d cl aim s agai ns t thr ee s epar ate M er r ill 2 Ly nchent it ies : M er r ill Ly nch& Co ., I nc. ; M er r

ill Ly nchCapi tal

Ser vic es , I nc. ; an d MLP FS . L SED named the three different Merrill Lynch entities as defendants because it could not de termine which of th em e mp lo yedth e in di

vid ual s who pr ov

id ed L SED with alleg edly un s ou ndfi nan cial adv ice. OnJ anu ary 29 , 20 09, a day af te r ame ndin g it s com pl ain t t o i nclud e the thr ee M er r ill Ly nch entities, LSED filed an e ss entially identica l action in Louisiana state court. Defendants r emoved the

s tat e- cou r t ac ti onto fe der al co ur t an d f ile d a m ot io n b ef or e the J udici al P anel

onM ul ti di s tr

ict Li tigat io n ( “M DL

Pa nel ”) to cen tr ali ze inon e di s tr ict LS ED’ s cas e andth r ee o th er ARS ca s es th en pen di ng again s t d ef

end ant s inother

di s tr ict s . D es pi te op po s it

io n f r om LS ED, th e M DL

Pa nel gr ant ed def end ant s ’ m ot

io n t o h ave thes e cas es tr ans fe r r ed t o the S ou th er n D is tr ict of New Yor k. In re Me rr ill Lynch & Co., Auction R

ate Sec. (ARS) Mktg. Litig. , 62 6 F . Su pp . 2d133 1, 1 332 (J .P .M .L . 20 09)
. Defendants responded by sending LSED—pursuant to a s tipulation and order by the District Court—a long letter detail ing the perce ived defic iencie s of it s complaint. Though technica lly not a motion to dismis s, defendants’ letter ass erted that LSED could not obtain relie f based on the factual a llega tions made in its complai nt. On Decembe r 9, 2009—one da y before LSED’s third amended compla int was due to be filed—LSED sent a letter to defendants suggesting that the parties jointly submit a motion to arbitr ate their dispute. T he following da y LSED filed its third amended compla int (which wa s, at least in part, an effort to r ectify defic iencie s pr eviously identified by defendants). By this time, LSED had retai ned aP u rsu a n t t o 9 U
. S
. C
. § 1 6 (a)(1 )(C ), “A n ap p e a l m a y b e tak e n fro m an o rd e r d e n y ing an ap p li c a ti o n . . . to 3 c o m p e l a rb it ra ti o n . ” 9 U
. S
. C
. § 1 6 (a)(1 )(C ).

Becaus e we con cl ude t hat LS ED ha s wai ved an y r i gh t i t ha d t o a r bi t r at e t hi s di s put e wi t h def endant s , we need 4 not deci de w het her LS ED ’ s cl ai m s ar e i n f act ar bi t r abl e. 4 con s ul tan t who was abl e t o v er if y that th e in di vid ual s r es po ns ib le f

or th e all eged ly u ns ou ndfi nan cial advic e all worked for MLPFS. Accordingly, LSED’s third amended complai nt alleg ed direct cla ims aga inst MLPF S only, a nd control-pers on clai ms against Merr ill Lynch & C o., Inc., MLPF S’s parent. Def end ant s di d n ot

r es po ndto LS ED’ s invit ati onto ar bi tr ate th eir di ff er enc es , b ut

it di d f ile an an s wer to the third amended compla int on Decembe r 11, 2009. On Dece mber 21 LSED filed a motion to compel a rbitr ation ag ainst MLPFS on the grounds that MLP FS is a member of the Financial Industry Regulat or y Au th or it y ( “F I NRA”), andis th us ob lig ed t o ar bi tr ate cus to mer di s pu te s ina F I NRA arbitration. The District Court denied the motion, and this appe al followe d.

DISCUSSI ON We hav e ju r

is di ct io n t o h ear

this in te rlo cut or

y app eal o f a n o r der

denyin g a m ot

io n t o co mp el
ar bi tr ati onpu r s uan t t o 9 U.S .C. § 16(a). “We r evi ew de novo a di s tr ict cou r t’ s dec is io n r egar di ng w aiv er 3 of a party’s right to arbitr ate, but we review the fa ctual findings on whic h the distr ict court relied for clea r er r or .” Thyssen, Inc. v. Cal ypso Shippin

g Corp., S.A. , 310 F.3d 102, 10 4 (2d Cir. 2002). 4 In determining whether a pa rty has waived i ts r ight to arbitration by expressing its intent to litigate the dispute in question, we consider the following three fac tors : “(1) the time ela psed fr om whe n l it igat io n was com men cedun til the r equ es t f or ar bi tr ati on ; (

2) th e am ou nt

of lit igat io n t o d ate , in clu di ng m ot

io n p r act ice a nddi s cov ery; an d ( 3) pr oo f o f p r eju di ce.” Lo uis Dr ey fus Ne go ce S. A. v. B lyst

ad Shipp ing & Tradin

g Inc. , 25 2 F .3d218 , 22 9 (

2dCir . 20 01) (c it

in g Lead ertex, Inc. v . Morg anton Dyeing & Fi nis hing Co rp. , 67 F.3d 20, 25 (2d C ir. 1995)). There is no r igid formula or bright- line rule for identifying w hen a pa rty has waived i ts r ight to arbitration; rather, the above fac tors must be applied to5

th e s pec if ic co nt ext of eachpar ti cul ar

cas e. T hat

s aid , “[ t] he k ey t o a waive r

analys is is pr eju di ce. ‘Wai ver of th e r igh t t o co mp el arbi tr ati ondu e t o p ar ti cip ati oninlit igat io n m ay be fo un d o nly wh en pr eju di ce t o the o th er

par ty is dem on s tr ate d. ’” Thyssen , 31 0 F .3dat 1 05 (qu ot in g Rushv. Oppen heimer & Co. , 77 9 F .2d885 , 88 7 (

2dCir . 19 85) ). We hav e r eco gni zedtw o t ype s of pr eju di ce: s ub s tan ti

ve pr eju di ce an d p r eju di ce d ue t o ex ces s ive cos t an d t im e de lay. Id

.; see also PP G Indus. v. W

ebster Auto Parts, Inc. , 12 8 F .3d103 , 10 7 (

2dCir . 19 97) (“ I ncu r r

in g le gal e xp ens es in her ent inlit igat io n, witho ut

mo r e, i s in s uf fi cien t e vid enc e of

pr eju di ce t o j us ti fy

a f in di ng o f w aiv er .” ( cit

in g Lead ertex , 67 F.3d at 26)). Both fo r ms of pr eju di ce ar e pr es ent

inthis cas e. Elev en months elapsed betwee n LSED’s initial filings in state and federal c ourt and its m otion
to com pel ar bi tr ati onwith MLP FS . N o dis cov ery t oo k p lace du r in g that ti me, bu t the l

it igat io n was hardly dormant. In thos e ele ven months, defendants (1) f iled a motion to remove the state court action
to fe der al co ur t i n L ouis ian a, ( 2) fileda mo ti onto tr ans fe r th e cas e t o the S ou th er n D is tr ict of New Yor k, ( 3) mo vedto s tay

th e pr oce edi ngs inth e Eas te r n D is tr ict of Lo ui s ian a pen di ng the MDL Pa nel ’s dec is io n, (4

) s ub mi tt ed t o L SED a ni net een -p age, s in gle -s pace d l et te r id ent if yin g the d ef

ici enc ies in LS ED’ s s eco ndame nd ed c om pl ain t, (5 ) f ile d anans wer

to LS ED’ s thir d am end ed c om pl ain t, and(6 ) bega n work on a motion for judgment on the pleading s. T he District Court f ound that defendants “ex pen deds ignif

ican t r es ou r ces ” inun der tak in g thes e en deav or s . In re Me rrill Lynch Auction Rate Secs. Litig. , 20 10 U .S. Di s t. LE XI S 12 764 , at *13
. Furthermore, LSED only sought to purs ue arbitration after defendants submit ted their nineteen-pag e letter detail ing percei ved defici encie s in LSED’s s econd
ame nd ed c om pl ain t, andaf te r LS ED u ns ucc es s fully

att emp te d t o d ef

eat def end ant s ’ m ot

io n t o tr ans fe r the case from the Eastern Distr ict of Louisiana to the Southern District of New York. Those facts dem on s tr ate th at the p ar ti es s pen t a s ignif ican t am ou nt

of ti me a ndexp ens e li tigat

in g be fo r e L SED
s ought ar bi tr ati onagai ns t MLP FS . T hey als o s ho w that

M LP FS wouldbe p r oce du r ally pr eju di cedif it
wer e co mp ell ed t o ar bi tr ate near ly a y ear in to th e li tigat

io n wi thLS ED, andaf

te r win ni ng s ever al k ey6

pr oce du r al v

ict or ies , in clu di ng the c on s ol

id ati onof LS ED’ s cas e with o th er

ARS ac ti on s ina s in gle M DL pr oce edi ng. M LP FS wouldals o b e s ub s tan ti vely pr eju di cedif

it wer e co mp ell ed t o ar bi tr ate . I f L SED
suc ce ed s in co mp el li ng

a rbi tra ti on , i t w ou ld be a bl e t o p re em pt c on sid er a ti on of t he de fe nd a nts’ in evi tab le m ot

io n f or ju dgm ent onth e pl eadi ngs whi ch w as pl ain ly f or es had owe d b y the d et ail ed deficienc y letter sent the defendants had sent to LSED; indeed, de fendants filed such a motion with the Distr ict Court on the same day

that LSED’s motion to compel arbitration was denied. By pursuing litigation for as long as it did, LSED wa s able to obtain the bene fit of the ana lysis contained in the deficienc y letter, while in an a rbitr ation proceedi ng MLPF S is likely to ha ve much grea ter difficulty successf ully pursuing a motion to dismis s because such motions are discouraged under the releva nt FI NRA rul es . See FINRA R. 125 04(a)(1) (“Motions to dismis s a claim prior to the conclusion of a party’s case in chie f are discouraged in a rbitr ation.”). Moreover, the District Court determined that MLP FS would be further pr ejudice d by the disrupt ion of the MDL

Panel’s transf

er and ce ntralization of the ca ses. We agree . A court’s ass essment of the second type of prejudice ma y include “other sur rounding circumstances” beyond the burdens andexp ens es th at w ouldr es ul t f r om a gr ant

of ar bi tr ati on . K

rame r v . H ammo nd , 94 3 F .2d176 , 17 9 (

2d Cir . 19 91) . T he MDL

Pa nel or der ed c entr ali zat

io n o f thi s act

io n t o “e limin ate du pl

icat ive di s cov ery, prevent inconsistent pr etrial rulings, and conserve the resources of the parties, their counsel and the ju di ciar y.” In re Me rrill Lynch &

Co. , 626 F. Supp. 2d a t 1332. Whi le conc ern for judicial ec onomy alone is no t a b as is fo r

fi ndin g wai

ver of a r igh t t o ar bi tr ati on , see K

ramer , 94 3 F .2dat 1 79, th e Di s tr ict Cou r t’ s expande d anal ysis accounting for the underlying MDL litigation—in addi tion to the unnecessary expense a nd delay

defendants incurred in this litigation thus f ar—justified a finding of waive r. La s tly, i t i s s ignif

ican t that LS ED i s a pl ain ti ff

, r ath er th an a d ef

end ant , m ov

in g f or ar bi tr ati on . Although we recognize that a pla intiff’s initiation of a lawsuit does not, by its elf, result in a waiv er of7

ar bi tr ati on , se e Lo uis

Dr ey fus , 25 2 F .3dat 2 29, we al s o n ot e that by f ili ng i ts laws ui t an d l

it igat in g it at len gth, LS ED “ act ed i nco ns is te nt ly wi thit s con tr actual

r igh t t o ar bi tr ati on .” PPG Indus. , 12 8 F .3dat 109. LSED suggests that its delay in seeking a rbitr ation should be exc used because it did not lea rn for

ce rta in tha t a ll of i ts re le va nt f in a nc ia l a dv

iso rs w er e e mp lo ye d b y M LPFS un ti l N ov em be r 20 09 —j ust
on e mo nth b ef

or e L SED fo r mally m ov ed t o co mp el arbi tr ati on . We ar e un s ymp ath et ic t o thi s
argum ent . L SED nam ed MLP FS as a def end ant inJ anu ary 20 09, s o i t c lear ly h ad r eas onto bel

iev e at that point (if not s ooner) that it had a dispute with that particula r entity. If L SED had sufficient information to hale MLPF S into federal court, it should also have bee n awa re that it could arbitrate its clai ms agai ns t MLP FS . L SED as s er ts th at i ts ef fo r ts inun cov er

in g MLP FS ’s invo lve men t i n thi s dispute were unduly ha mpered by opposing counsel’s refus al to cla rify the relevant corporate structur e of M er r ill Ly nch . B ut LS ED’ s fi r s t r equ es t f

or s uchin fo r mat

io n was no t m ade u nt

il A ugu s t 2 6, 2 009 , seve n month s after this litigation commenced. Moreover, LSED concede s that it was able to confirm MLP FS’s r ole in the unde rlying dispute once it retaine d an outside consultant to research the iss ue, but do es no t e xp lai n wh y it

was un abl e t o co nd uct

this app ar ent

ly v it al r es ear ch p r

io r to No vem ber

200 9.

CONCLUSI ON I t i s true that

“wai ver of ar bi tr ati onis no t t o b e light ly i nf er r ed, ” PPG Indus. , 12 8 F .3dat 1 07 (quo tat io n m ar ks om it te d) . B ut

a li tigan t i s no t e nt

it ledto us e ar bi tr ati onas a me ans of abo r ti ng as ui t th at didno t p r oce ed as pl ann ed i n the D is tr ict Cou r t. See Welborn Clin ic v. MedQuist, Inc. , 30 1 F .3d634 , 637 (7 thCir . 20 02) (“ [W] e do no t w ant par ti es to fo r um s ho p, tak in g a cas e t o the c ou r ts andth en, if things go poorly there, abandoning their suit in f

avor of arbitration.”). Because of the delay and expense inc urred between LSED’s commenc ement of its lawsuit and its mot ion to compel a rbitr ation, and bec ause of the procedural and substantive prejudice MLP FS would face if it were forced to
ar bi tr ate LS ED’ s clai ms , we h ol d that LS ED w aiv ed i ts ar bi tr ati onr igh ts .8

Acco r di ngl

y, the o r der

of th e Di s tr ict Cou r t d eny

in g L SED ’s mo ti onto com pel ar bi tr ati onis AF F IRME D a nd the ca se i s REMA NDED to the Distr

ict Court for f

urther pr ocee dings consist ent with thi s op inio n.