ARTHUR D. SPATT, District Judge.
This multi-party antitrust action is brought by the Plaintiff HM Compounding Services, LLC ("HMC") and three individuals, Victor Paduano ("Paduano"), Frank Scala ("Scala"), and Nick Canner ("Canner")(collectively the "Individual Plaintiffs"), on behalf of themselves and all others similarly situated, who desire to purchase compound medications from HMC.
According to the complaint, the Individual Plaintiffs purchase compound medications from HMC, which operates one of the largest compounding pharmacies in the Eastern United States. HMC provides custom-made medications, i.e., compounded medicines, to numerous patients, including pediatric patients who cannot take pill versions of particular drugs; patients that cannot tolerate one or more ingredients in manufactured drugs; drugs that are no longer manufactured but are still determined to be safe and effective; and compounds for particular types of treatment, including pain management, dermatological specialties, biologically identical hormone replacement, sexual dysfunction and enhancement; compounds for autism; compounds for weight management; and compounds for veterinary use.
The named defendants — Defendants Express Scripts, Inc. ("ESI"), CVS Caremark Corporation, now known as "CVS Health Corporation"("Caremark"), Optum Rx, Inc. ("Optum"), and Prime Therapeutics, LLC ("Prime")(collectively the "Defendants") — are or are affiliated with prescription benefit managers ("PBMs"). PBMs administer the prescription pharmaceutical portion of healthcare benefit programs, which are typically purchased by a plan sponsor. As part of their functions, PBMs provide bundled services related to the administration of pharmaceutical benefits, including claims adjudication, formulary design, management and negotiation of branded drug rebates; management and negotiation of networks of retail pharmacies; review of drug utilization; processing claims from pharmacies for payment; and the operation of specialty and home-delivery pharmacies such as mail order pharmacies used to dispense medications directly to patients. Some chain pharmacies, such as CVS, have merged with PBMs.
Collectively, the Defendants dominate the PBM market in the United States with a market share of more than 80%. The Defendant ESI is the largest PBM and the Defendant Caremark is the second largest PBM.
In short, the Plaintiffs allege that the Defendants have engaged in a concerted and coordinated effort to eliminate HMC, and other independent compounding pharmacies, as competitors in the prescription benefit drug market by placing unwarranted and illegal restrictions on patient access to compounded medications.
Although not emphasized by the complaint, the relationships between HMC and the respective defendant-PBMs are each governed by a Pharmacy Network Agreement. The HMC agreement with Caremark (the "Caremark Provider Agreement"), the HMC agreement with Optum (the "Optum Provider Agreement"), and the HMC agreement with Prime (the "Prime Provider Agreement") each contain or incorporate an arbitration provision for resolving disputes arising therefrom. The HMC agreement with ESI (the "ESI Provider Agreement") contains a forum selection clause for resolving disputes arising therefrom.
Presently pending before the Court are a number of motions, including separate motions by Caremark, Optum, and Prime to sever HMC's claims against them and to refer those claims to arbitration. Also pending before the Court is a motion by ESI to sever HMC's claims against it and transfer those claims to the contractually-designated forum in Missouri.
The Court first recounts the termination of the contractual relationships between HMC and each of the Defendants, save for Prime, which has not terminated its contractual relationship with HMC. Unless stated otherwise, the following facts are drawn from the complaint.
By letter dated June 30, 2014, Caremark informed HMC of an "ongoing audit" of its pharmacy "covering the period of April 2013 through September 30, 2013." (Compl., at ¶ 55.) That "ongoing audit" had not been previously disclosed to HMC. In that letter, Caremark informed HMC that "CVS Caremark is placing your pharmacy under payment and adjudication suspension" effective immediately based upon purported "compliance issues" identified in the ongoing audit. (
By letter dated July 16, 2014, HMC addressed its stated audit concerns, and requested that Caremark reinstate HMC. By letter dated July 28, 2014, Caremark denied HMC's request to reconsider the payment and adjudication suspension placed upon HMC. In that letter, Caremark admitted that it had instituted a policy of rejecting compounded prescriptions and requiring prior authorizations "based upon plan edits." (Id. at ¶ 56.) No information about the "plan edits" was provided in that letter, nor were those "plan edits" disclosed to HMC prior to the termination letter. (
On or about August 15, 2013, a pharmacy services administrative organization, Wholesale Alliance TPS LLC DBA Third Party Station ("TPS") entered into the Optum Provider Agreement with Optum. TPS entered into the Agreement "on behalf of itself and each of the Pharmacies" in TPS's network, including HMC. (Doc No. 39, Ex. A, at 1.)
By Termination Letter dated March 3, 2014, Optum informed Third Party Station ("TPS"), a Third Party Administrator in Optum's prescription benefit program, that HMC was being terminated as a network provider because the Pharmacy Network Agreement "prohibits delivering, shipping, mailing and/or dispensing Covered Prescription Services to members" and demanded that HMC cease and desist from engaging in such activity. (
By letter dated March 17, 2014, attorneys for HMC responded to that termination letter, explaining that the contract provision cited by Optum did not prohibit "delivering, shipping" and or "dispensing" prescription services to members, nor could it if it were to comply with governing legal and ethical requirements for these services under New York law.
By letter dated May 29, 2014, Optum responded to that letter by asserting that HMC's contract was being terminated immediately "for cause" on the basis that the "that mailing, shipping and or delivering of Covered Prescription Services is not allowed under the retail contract with [Optum]." (
Subsequently, by letters dated June 25, 2014, Optum informed HMC that it was terminating "for cause" the Optum Provider Agreement due to alleged "Fraud, Waste and Abuse" for purportedly engaging in "prescription splitting to obtain multiple dispensing fees, etc." (
By letter dated July 16, 2014, HMC explained that it was not "splitting" prescriptions and receiving multiple dispensing fees and requested that the contract be reinstated until an appeal hearing on the issue was held. Optum denied that request, allegedly causing HMC money damages.
By letter dated July 22, 2014, HMC informed ESI that it had become aware that ESI was directly notifying providers that they were not to continue prescribing compounded medications even if it was in the patient's best interest to receive compounded medicine.
On July 31, 2014, ESI sent HMC a "notice of immediate termination" of the ESI Provider Agreement. In its letter, ESI alleged that HMC had purportedly made material misrepresentations to ESI regarding collecting patients' co-payments and, as a result, was terminating HMC's contract immediately.
By letter dated August 1, 2014, ESI responded to HMC's July 22, 2014 letter. In that letter, ESI did not deny making such statements to prescribing physicians; rather, it took the position that ESI "has a legal right to communicate with providers regarding benefit coverage issues." (
On September 10, 2014, the Individual Plaintiffs, on behalf of themselves and all others similarly situated, and HMC commenced this action in the Supreme Court of the State of New York, County of Nassau. The complaint asserts causes of action for (1) fraud and misrepresentation; (2) deceptive trade practices in violation of New York General Business Law ("NYGBL") § 349; (3) antitrust law violations under NYGBL § 340 (the "Donnelly Act"); and (4) unfair insurance practices based on alleged violations of state statutes, including New York State Insurance Law § 2401, et seq. The complaint also seeks permanent injunctive relief.
On September 10, 2014, the Plaintiffs brought an order to show cause seeking the issuance of a temporary restraining order. Following a hearing beginning on September 10, 2014 and continued on September 11, 2014, the Hon. Stephen A. Bucario issued an order enjoining the Defendants from, among other things, (1) denying compound prescription drug-ingredient insurance coverage and (2) denying prescription drug benefit coverage to a putative nationwide class of individuals filling prescriptions for compound drugs at HMC and other pharmacies.
On September 12, 2014, based on traditional diversity jurisdiction, the Class Action Fairness Act ("CAFA"), Pub. L. No. 109-2, 119 Stat. 4 (2005),
On September 15, 2014, ESI filed a motion by order to show cause to sever HMC's claims against ESI and to transfer those claims, pursuant to 28 U.S.C. 1404(a) and a forum selection clause in the ESI Provider Agreement, to the United States District Court for the Eastern District of Missouri.
Also, on September 15, 2014, ESI moved by order to show cause to vacate the temporary restraining order ("TRO") issued on September 11, 2014.
On September 22, 2014, the Plaintiffs moved by order show cause to hold the Defendants in contempt for their alleged failure to abide by the September 11, 2014 TRO.
On September 23, 2014, Caremark moved, pursuant to Section 1 of the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (the "FAA"), by order to show cause to sever HMC's claims against it and to compel arbitration of those claims against based on an arbitration provision incorporated in the Caremark Provider Agreement.
Also, on September 23, 2014, Caremark moved by order to show cause to vacate the September 11, 2014 TRO.
On September 24, 2014, Optum moved by order to show cause, pursuant to Section 1 of the FAA and Fed. R. Civ. P. 21, to sever HMC's claims against it and to compel arbitration of those claims in Los Angeles, California.
In addition, on September 24, 2014, Optum filed an emergency motion by order to show cause to vacate the September 11, 2014 TRO.
On September 25, 2014, the Plaintiffs filed an emergency motion for an order to extend the September 11, 2014 TRO and to schedule a hearing.
On September 26, 2014, Prime moved to join the pending motions to vacate the September 11, 2014 TRO.
On September 29, 2014, with each party represented, the Court held oral argument on the pending motions. At the conclusion of that hearing, the Court extended the September 11, 2014 TRO for fourteen days, but allowed the parties to submit proposed modifications. The Court referred the pending motions for contempt and for a preliminary injunction to United States Magistrate Judge Arlene R. Lindsay.
Later that afternoon, the parties appeared before Judge Lindsay, who directed the parties to submit a proposed expedited briefing schedule to this Court in connection with the motions to transfer venue and compel arbitration. Judge Lindsay stayed a determination of the motions for contempt and for a preliminary injunction pending a determination of the motions not referred by this Court.
On October 1, 2014, Prime moved pursuant to Fed. R. Civ. 12(b)(6) to dismiss the complaint as against it, or, in the alternative, to compel arbitration of HMC's claims against it in Minnesota and to stay this matter until that dispute was resolved, or, in the alternative, to sever Prime from this case pursuant to Fed. R. Civ. P. 21.
Also, on October 1, 2014, ESI moved pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b) to dismiss the complaint as against it for failure to state a claim upon which relief can be granted.
On October 3, 2014, the Court, upon review of the proposed and modified TROs submitted by the parties, (1) vacated the September 11, 2014 TRO and (2) ordered that, pending further order of this Court, the Defendants were stayed and enjoined from (a) denying prescription drug benefit coverage to the Individual Plaintiffs for compounded medications prescribed to them on or after September 11, 2014, or for the refill of an existing refillable prescription after September 11, 2014, by their licensed physicians, which had heretofore been covered by their insurance; (b) from refusing to process and/or pay claims submitted by HMC for the payment of prescriptions dated on or after September 11, 2014, or for the refill of an existing refillable prescription after September 11, 2014, for compounded medications prescribed by licensed physicians for their patients, which had heretofore been covered by their insurance; (c) from retaliating in any way against any licensed physician who writes a prescription for a compounded medication and/or provides materials or information required by a defendant for prior approval of compounded medications for a patient; (d) from prohibiting HMC from using the United States Postal Service or other delivery service to deliver to patients the compounded medications prescribed by their licensed physicians.
The Court also directed that, within five days of the date of the order, the Plaintiffs must post a bond in the sum of One Hundred Thousand ($100,000.00) Dollars to be deposited with the Court in an interest bearing account as a condition of the October 3, 2014 TRO. Finally, the Court directed that the October 3, 2014 TRO remain in full force and effect until a hearing on the preliminary injunction.
Also, on October 3, 2014, HMC filed a letter motion requesting that the Court issue an order holding in abeyance ESI's and Prime's motions to dismiss pending a decision on the motions to sever/arbitrate/transfer.
On October 8, 2014, the Court granted HMC's motion for a stay to the extent it indicated that HMC would have until 14 days after the Court rendered a decision on the respective motions to sever/arbitrate/transfer to respond to the motions to dismiss brought by ESI and Prime.
On October 10, 2014, Caremark moved to strike in its entirety the declaration of Stanley A. Camhi, Esq., submitted in support of HMC's opposition to Caremark's motion to sever HMC's claims against it and to compel arbitration of those claims. According to Caremark, Camhi's declaration is (1) non-compliant with 28 U.S.C. § 1746 as it was not expressly made "under penalty of perjury"; (2) is not based upon personal knowledge; and (3) contains legal arguments.
On October 14, 2014, HMC submitted a supplemental declaration from Camhi made "under penalty of perjury." As this supplemental declaration was submitted after the date agreed upon by HMC and Caremark for HMC to submit its opposition papers (
Also, October 14, 2014, HMC, dissatisfied with what it perceived as the Defendants' non-compliance with the October 3, 2014 TRO, moved by letter motion for a hearing to clarify the scope of that order or for the Court to set a schedule for a contemplated formal contempt motion. Caremark, Optum, and ESI filed letters in opposition to this request, disputing HMC's interpretation of the October 3, 2014 TRO.
As explained later, at this juncture, the Court declines to revisit or interpret the terms of the October 3, 2014 TRO. HMC can address its concerns to the appropriate arbitrators or, with respect to ESI, the federal district court in Missouri. The October 14, 2014 letter motion is, thus, denied without prejudice.
The FAA embodies a "federal policy favoring arbitration."
With these standards in mind, the Court addresses the motions to sever/arbitrate/transfer.
As noted above, the relationship between Caremark and HMC is governed by the Caremark Provider Agreement. That agreement was entered into between HMC and Caremark's subsidiaries, CaremarkPCS, L.L.C. and Caremark, L.L.C., the entities that perform the prescription benefit management services discussed in the complaint.
Of relevance here, paragraph 11 of the Caremark Provider Agreement provides: "The [Provider] Agreement, the Provider Manual, and all other Caremark Documents constitute the entire agreement between [HMC] and [Caremark], all of which are incorporated by this reference as if fully set forth herein" (Doc No. 34, Exh. A, at ¶ 11.) The "Provider Manual" is distributed to all pharmacy providers in Caremark's networks. The Provider Manual has been revised from time to time, and each new version is sent to HMC.
In addition, the Provider Manual contained a provision authorizing Caremark to unilaterally amend the Caremark Provider Agreement and Provider Manual:
(
Caremark sent the 2014 version of the Provider Manual to HMC and it was signed for by HMC in November 2013. Like its predecessors, the 2014 Provider Manual includes an arbitration provision, which provides:
(
As noted above, Caremark has terminated the Caremark Provider Agreement. HMC now brings this litigation against Caremark, and other PBMs, raising a number of claims, not including breach of contract of the Caremark Provider Agreement or Provider Manual. Caremark has moved to sever HMC's claims against it and to arbitrate those claims. HMC seeks to avoid enforcement of the above-cited arbitration provisions on a number of grounds.
HMC first argues that public policy considerations militate against arbitration of its New York State antitrust claims. In this regard, however, HMC's reliance on
First, those cases involved the Sherman Act, 15 U.S.C. § 1, et seq., a federal antitrust statute. Second, nothing in
To be sure, "New York courts have forbidden arbitration of suits involving . . . enforcement of state antitrust laws."
In
Here, however, the Court finds that the FAA policy favoring arbitration of disputes displaces the public policy in New York favoring a judicial forum for resolution of New York State antitrust claims.
HMC also argues that, even if public policy does not militate against arbitration of its state antitrust claims against Caremark, these and its other claims fall outside the scope of the arbitration provision incorporated in the Caremark Provider Agreement. HMC highlights the fact that it does not bring any breach of contract claims, but, instead, seeks redress for damages it has allegedly sustained as a result of the "concerted and joint effort of [Caremark] and the other defendants to eliminate the market for compounded medications through anticompetitive activities and the deception of consumers." (Doc No. 76, at 21.)
Ordinarily, whether a claim is subject to arbitration is a question for a court. However, if the parties have "clearly and unmistakably" agreed to arbitrate "arbitrability," certain threshold questions — such as whether a particular claim is subject to arbitration — are for the arbitrator, and not a court, to decide.
"When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary state law principles that govern the formation of contracts."
Courts applying Arizona law have determined that incorporation of the American Arbitration Association's (AAA) arbitration rules constitutes "clear and unmistakable" evidence that the parties agreed to arbitrate "arbitrability."
In accordance with this case law, the Court finds that, by incorporating the AAA rules into the arbitration provision, HMC and Caremark agreed that the arbitrator, rather than the court, would determine the "arbitrability" of a dispute — that is, because the AAA Rules provide: "The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement."
HMC also argues that the Caremark Provider Agreement itself is a contract of adhesion, while the arbitration clause contained therein is procedurally and/or substantively unconscionable. Caremark correctly asserts that the issue of whether the Caremark Provider Agreement — as opposed to the arbitration clause alone — is a contract of adhesion is an "arbitrable" matter not properly considered by a court.
As an initial matter, the Court first considers which jurisdiction's law of unconsionability applies. A federal court exercising diversity jurisdiction generally must apply the choice-of-law rules of the state in which the court sits.
The Provider Agreement here contains a choice-of-law provision which provides for the application of Arizona law, and both parties cite Arizona case law.
Under Arizona law, "[a]n unconscionable contract is unenforceable."
In addition, "[a] finding of
Importantly, the Plaintiff bears the burden of proving an unconscionability-related defense to arbitration,
Here, HMC argues that the arbitration provision, assuming it applies to the instant claims, is procedurally unconscionable because (1) it defies HMC's "reasonable expectations" and (2) can be amended unilaterally by Caremark.
With respect to whether the arbitration provision incorporated in the Caremark Provider Agreement was within HMC's "reasonable expectations," Arizona law provides that a contract term is beyond the range of reasonable expectation if one party to the contract has reason to believe that the other party would not have accepted the agreement if that party had known that the agreement contained the particular term at issue.
Here, the Court finds that HMC has not made the required showing on any of the
However, "the arbitration clause was no less conspicuous than any other provision of the Provider Manual and thus, as required by Arizona law, neither illegible nor hidden from view. Moreover, Arizona case law expressly disclaims any duty on the part of the Defendants to draw the Plaintiffs' attention to all that they were agreeing to. [HMC]'s failure to familiarize [itself] with what [it] signed does not render the Provider Manual's arbitration clause unconscionable or unenforceable."
As noted above, HMC also argues that the arbitration clause is procedurally unconscionable because Caremark reserved the right to unilaterally modify any provision of the Caremark Provider Agreement, including the incorporated arbitration provision. This argument is unpersuasive.
"[A] party's challenge to another provision of the contract, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate."
The Court takes note of
Applying California law but noting that "the test for unconscionability is the same under either California or Arizona law,"
Accordingly, the Court finds that HMC has failed to establish that the arbitration provision incorporated in the Caremark Provider Agreement is procedurally unconscionable under Arizona law.
Turning to substantive unconscionability, the Court notes that, under Arizona law, this doctrine "concerns the actual terms of the contract and examines the relative fairness of the obligations assumed."
In this case, HMC argues that the arbitration provision's limitations on discovery prevent it from effectively vindicating its rights, thereby rendering that provision substantively unconscionable. The Court agrees.
Of relevance here, the arbitration provision states that "the right to discovery and the right to appeal are limited or eliminated by arbitration. All of these rights are waived and disputes must be resolved through arbitration." (Doc No. 34, Exh. B.)(emphasis omitted). The Court cannot conceive of a more restrictive limitation.
Here, by contrast, the relevant language "eliminate[s]" discovery, while making clear that any rights to discovery are "waived." As Caremark notes, the fact that an arbitrator retains authority to permit discovery pursuant to the AAA Commercial Rules is of little, if any, moment because nothing requires him or her to exercise that authority, even to the slightest degree. For this reason, the Court finds this term substantively unconscionable.
To be clear, the Court is not crediting HMC's argument that the discovery provision is substantively unconscionable on the basis that "Caremark is the party likely to be in control of the documents and witnesses that are relevant to HMC's antitrust and deceptive practice claims, the discovery limitations are not nearly as unfair to it as they are to HMC." (Doc No. 76, at 16.) On this contention, however, it is not clear under Arizona law that, assuming an arbitration provision applies to a cause of action, the substantive unconscionability of a term of that provision turns on the type of cause of action brought in a lawsuit between the contracting parties.
The Court next addresses whether any part of the limitation on damages contained in the arbitration provision is substantively unconscionable under Arizona law.
That provision states: "In no event may the arbitrator(s) award indirect, consequential or special damages of any nature (even if informed of their possibility), lost profits or savings, punitive damages, injury to reputation, or loss of customers or business, except as required by law." (Doc No. 34, Exh. B.) This ambiguous clause, while broad, does not, in the Court's view, rise to the level of substantive unconscionability.
Initially, the Court pauses to note that its review is limited to whether the arbitration clause itself is unconscionable, and therefore, unenforceable. Whether and how this limitation on remedies would apply to HMC's claims against Caremark, which do not purport to be based on the contract, is a question for the arbitrator, rather than the Court, to resolve.
To clarify, as explained later, were the arbitrator to find that HMC's claims against Caremark were "arbitrable" — that is, that they are brought "in connection with [or] arise[] out of the" the Caremark Provider Agreement (Doc No. 34, Exh. B.); render a decision on the merits; and reach the question of remedies, the arbitrator would be compelled to interpret the limiting phrase "except as required by law" in the remedies clause. (
However, the Court will wade into the interpretation of the arbitration provision to the extent it distinguishes two Arizona cases, namely
Moreover, even if the Court were to find some or all of the limitations on remedies to be substantively unconscionable, the Court would, as explained later, sever the unconscionable terms and refer those claims to arbitration on the remaining terms pursuant to the severability clause of the Caremark Provider Agreement.
Finally, the Court addresses HMC's argument that the cost of arbitrating its extra-contractual claims against the various Defendants renders the agreement to arbitrate substantively unconscionable. This argument is unpersuasive.
"An arbitration agreement may be substantively unconscionable if the fees and costs to arbitrate are so excessive as to `deny a potential litigant the opportunity to vindicate his or her rights.'"
In this case, while HMC provides the approximate percentage of HMC's revenue derived from each Defendant, it offers no evidence of its total income or assets, nor how much of its gross or net revenue it receives annually. In fact, HMC has "failed to present any specific, individualized evidence that they were likely to face prohibitive costs if forced to arbitrate their underlying claims."
It is true that HMC avers that it may cost over $1 million to prosecute its claims in arbitration against each defendant. However, first, it is not clear whether the proper inquiry, in considering costs to arbitrate under a contractual provision, should include the cost of having to litigate or arbitrate against a third party not bound by the subject arbitration clause, even if the underlying claims sound in antitrust.
Second, the Court notes that HMC seeks approximately $14 million in damages (Camhi Decl., at ¶ 13.), the recovery of which would dwarf any costs associated with arbitration. Accordingly, the Court concludes that the potential costs of arbitration do not render the arbitration clause incorporated in the Caremark Provider Agreement substantively unconscionable under Arizona law.
Although the Court has found to be with merit HMC argument that the arbitration clause's limitation on discovery is substantively unconscionable, it does not follow that HMC can avoid arbitration as against Caremark. The Caremark Provider Manual, incorporated in the Caremark Provider Agreement, contains a severability clause, entitled "Enforceability," which provides that: "In the event that any provision or term set forth in the Provider Agreement is determined to be invalid or unenforceable, such invalidity and unenforceability will not affect the validity or enforceability of any other provision or term set forth in the Provider Agreement." (Doc No. 34, Exh. B.)
Further, Arizona's statutory provision on unconscionability provides, in pertinent part:
A.R.S. § 47-2302. However, the Court "cannot create a new agreement for the parties to uphold the contract."
In the Court's view, the arbitration agreement incorporated in the Caremark Provider agreement does not contain an "insidious pattern" that provides one party with "undue advantages."
As a final matter, the Court renders no determination on whether HMC violated that part of the arbitration provision prohibiting class actions.
As noted above, the relationship between Optum and HMC is governed by the Optum Provider Agreement. Of relevance here, Section 10.3 of the Optum Provider Agreement states that all "Disputes" "shall . . . be submitted to binding arbitration before a panel of three arbitrators in accordance with the Commercial Dispute Procedures of the American Arbitration Association, as they may be amended from time to time" and that such arbitration shall take place in either Los Angeles County or Orange County, California. (Doc No. 39, Exh A., at ¶ 10.3-.4) "Disputes" are broadly defined as "any and all issues and/or disputes between" the parties "including, but not limited to all questions of arbitrability, the existence, validity, scope, interpretation, or termination of the [Optum Provider] Agreement. ..."
In addition, the arbitration provision "limit[s]" fact discovery to an exchange of "statements setting forth the fact(s) supporting the claim(s) and all defenses to be raised at the arbitration, and a list of exhibits and witnesses" unless a party requests an oral hearing, in which case the parties must also exchange a summary of the testimony of each witness expected to testify and copies of the documents to be introduced at the hearing.
As previously mentioned, Optum has terminated the Optum Provider Agreement. HMC now brings this litigation against Optum, and other PBMs, raising a number of claims, not including breach of contract of the Optum Provider Agreement. Optum has moved to sever HMC's claims against it and to arbitrate those claims. HMC seeks to avoid enforcement of the above-cited arbitration provisions on a number of grounds.
HMC advances the same public policy arguments against arbitration of its New York State antitrust claims against Optum that it did unsuccessfully against Caremark. For the reasons explained above, the Court declines to hold that public policy militates against arbitration of HMC's Donnelly Act claims against Optum.
HMC also argues that its claims against Optum fall outside the scope of the arbitration provision contained in the Optum Provider Agreement and are, therefore, not "arbitrable."
However, as noted above, the Supreme Court has recognized that "parties can agree to arbitrate `gateway' questions of `arbitrability,' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy."
California courts often look to federal law in deciding arbitration issues and "California law is consistent with federal law on the question of who decides disputes over arbitrability."
To make the determination whether "arbitrability" is decided by the court or arbitrator, courts applying California law conduct a "facial and limited" review of the contract in order to decide whether the parties "have in fact clearly and unmistakably agreed to commit the question of arbitrability to [an] arbitrator."
"[W]here the parties' agreement to arbitrate includes an agreement to follow a particular set of arbitration rules — such as the AAA Rules — that provide for the arbitrator to decide questions of arbitrability, the presumption that courts decide arbitrability falls away, and the issue is decided by the arbitrator."
If the court finds that the assertion of arbitrability is not "wholly groundless," then it should stay the trial of the action pending a ruling on "arbitrability" by an arbitrator.
Here, Section 10.3 of the Optum Provider Agreement provides, in pertinent part, that that "Disputes" "shall . . . be submitted to binding arbitration . . . in accordance with the Commercial Dispute Procedures of the American Arbitration Association, as they may be amended from time to time. ..." (Doc No. 39, Exh A., § 10.3) The applicable AAA Rules state that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or the arbitrability of any claim or counterclaim." See AAA Commercial Arbitration Rule R-7, available at
Thus, the arbitration agreement evinces a clear intent to delegate the issue of "arbitrability" to an arbitrator. "Indeed, when an arbitration agreement explicitly incorporates the AAA Rules, numerous courts have held that the parties clearly and unmistakably agreed that the issue of arbitrability would be submitted to arbitration for resolution."
For its part, HMC does not challenge the validity of the delegation clause. "As such, the Court must treat it as valid under § 2 of the FAA, and enforce it under § 3 and § 4 of the FAA, leaving any challenge to the validity of the agreement as a whole for the arbitrator. In other words, because [HMC]'s procedural and substantive unconscionability challenges are not specific to the delegation provision, the Court will not consider them."
The Court has found that the parties "clearly and unmistakably" intended to delegate the power to decide arbitrability to an arbitrator. Therefore, the remaining issue is whether Optum's assertion of arbitrability is "wholly groundless."
466 F.3d at 1374.
Here, the arbitration provision is broad. It provides that all "Disputes" "shall . . . be submitted to binding arbitration . . . in accordance with the Commercial Dispute Procedures of the American Arbitration Association, as they may be amended from time to time. ..." and broadly defines "Disputes" to include "all questions of arbitrability." Therefore, the Court finds that Optum's contention that HMC's claims against it fall within the scope of the arbitration provision is not "wholly groundless."
Accordingly, the question of "arbitrability" of HMC's claims against Optum has been reserved by those two entities for the arbitrator. For this reason, the Court does not address whether HMC's claims against Optum fall outside the scope of the arbitration clause.
Finally, HMC argues that the Optum Provider Agreement is a contract of adhesion and that the arbitration agreement contained in the Optum Provider Agreement is substantively and procedurally unconscionable and, therefore, unenforceable. In accordance with
With regard to whether the arbitration provision is unconscionable, again the Court first considers which jurisdiction's law of unconsionability applies. A district court exercising diversity jurisdiction must apply the law of the state in which it sits when determining the validity of an arbitration clause. However, where, as here, an arbitration agreement contains a choice-of-law clause, a district court must determine whether to enforce the law chosen by the parties based on the conflict-of-laws rules of the forum state.
In California, "the core concern of [the] unconscionability doctrine is the absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party."
Here, HMC argues that the arbitration provision, assuming it applies to the instant claims, is procedurally unconscionable because (1) it defies HMC's "reasonable expectations" in that (a) it requires all disputes to be submitted to a panel of three arbitrators but does not disclose the costs of that requirement; (b) fails to annex a copy of the Commercial Arbitration Rules of the AAA under which it applies (2) may be unilaterally amended by Optum. As with HMC's procedural unconscionability arguments with respect to the arbitration provision incorporated into the Caremark Provider Agreement, these arguments are unpersuasive.
With regard to the fact that the arbitration agreement requires all "Disputes" to be submitted to a panel of three arbitrators, HMC's reliance on
176 Cal. App. at 1581. The court, noting that "requiring three arbitrators to resolve a dispute is not always unwarranted, and parties might have good reason to arbitrate before three arbitrators instead of one," found the claims in that case "so complex as to require the joint expertise of three arbitrators."
Here, by contrast, not only is HMC a sophisticated business entity, but its opposition papers assert that "the issues are quite complex" and that HMC anticipates "a minimum of ten hearing days . . . for each arbitration." (Camhi Decl, at ¶ 17.)
Similarly unavailing is HMC's argument that the failure to attach a copy of the AAA rules renders the arbitration provision procedurally unconscionable. "There could be no surprise, as the arbitration rules referenced in the agreement were easily accessible to the parties — the AAA rules are available on the Internet."
In
Finally, the fact that Optum may unilaterally modify the terms of the Optum Provider Agreement, including the arbitration provision, does not, without more, render the arbitration provision procedurally unconscionable. First, as noted above, Section 11.2 governing amendments is found outside of the arbitration provision, and, as such, has no bearing on HMC and Optum's otherwise valid agreement to arbitrate.
"Because [HMC] has not shown that the arbitration clause is procedurally unconscionable to any degree, the court need not inquire into whether the agreement is substantively unconscionable, as both procedural and substantive unconscionability must be established for an unconscionability challenge to succeed."
For the foregoing reasons, Optum's motion to sever HMC's claims against it and to refer those claims to arbitration of those claims is granted.
As a final matter, the Court renders no determination on whether HMC violated Section 10.9 of the arbitration provision prohibiting class actions.
(Doc No. 61, at Exh 1.).
As previously mentioned, unlike Caremark and Optum, Prime has not terminated the Prime Provider Agreement. Nonetheless, HMC brings this litigation against Prime, and other PBMs, raising a number of claims, not including breach of contract of the Prime Provider Agreement. Prime has moved to sever HMC's claims against it and to arbitrate those claims. HMC seeks to avoid enforcement of the above-cited arbitration provision on a number of grounds.
HMC advances the same public policy arguments against arbitration of its New York State antitrust claims against Prime that it did unsuccessfully against Caremark and Optum. For the reasons explained above, the Court declines to hold that public policy militates against arbitration of HMC's Donnelly Act claims against Prime.
HMC also argues that its claims against Prime fall outside the scope of the arbitration provision contained in the Prime Provider Agreement and are, therefore, not "arbitrable." Prime counters, and HMC fails to refute, that by incorporating the AAA Commercial Rules into the arbitration provision, Prime and HMC delegated questions of "arbitrability" to the arbitrator.
Although both the Eight Circuit and district courts in Minnesota have held that incorporation of the AAA Rules into a contract requiring arbitration is a "clear and unmistakable" indication that the parties intended for the arbitrator to decide threshold questions of "arbitrability,"
In this situation, the court must act as a New York state court would in predicting how Minnesota courts would rule as to whether the incorporation of the AAA Rules suffices to indicate that an arbitrator should decide questions of "arbitrability."
The Second Circuit has noted that "New York law [] follows the same standard as federal law with respect to who determines arbitrability: generally, it is a question for the court unless there is "a `clear and unmistakable' agreement to arbitrate arbitrability."
In accordance with this case law, the Court finds that, by incorporating the AAA Commercial Rules into the arbitration provision, Prime and HMC evinced an intent to delegate questions of "arbitrability" to the arbitrator. For this reason, the Court does not address whether HMC's claims against Prime fall outside the scope of the arbitration clause.
HMC also argues that the Prime Provider Agreement is a contract of adhesion and that the arbitration agreement contained in the Prime Provider Agreement is substantively and procedurally unconscionable and, therefore, unenforceable. In accordance with
With regard whether the arbitration provision is unconscionable, again the Court first considers which jurisdiction's law of unconsionability applies. A district court exercising diversity jurisdiction must apply the law of the state in which it sits when determining the validity of an arbitration clause. However, where, as here, an arbitration agreement contains a choice-of-law clause, a district court must determine whether to enforce the law chosen by the parties based on the conflict-of-laws rules of the forum state.
The case law concerning unconscionability of contracts under Minnesota law is sparse at best. Yet, "[i]n Minnesota, an unconscionable contract is one which "`no man in his senses and not under delusion would make on the one hand, and . . . no honest and fair man would accept on the other.'"
These cases suggest that Minnesota courts blend the concepts of procedural and substantive unconscionability. In any event, with regard to HMC's argument challenging the arbitration clause as procedurally unconscionable, HMC's arguments are in essence directed at the Prime Provider Agreement as a whole, the validity of which
However, HMC does make many of the same arguments regarding substantive unconscionability against the Prime Provider Agreement that it did in opposing Caremark and Optum's respective motions to compel arbitration — namely that subjecting it to arbitration of its claims against Prime would (1) unduly limit its rights to discovery and remedies and (2) be cost prohibitive.
Turning to the question of discovery, unlike with respect to the Caremark Provider Agreement, HMC points to no specific language eliminating, let alone, limiting discovery in arbitration. Rather, HMC essentially mounts a facial challenge to the limited discovery afforded by the AAA Commercial Arbitration Rules. However, the Court declines to credit this wide-reaching challenge, lest all arbitration clauses incorporating the AAA Commercial Arbitration Rules be subject to such scrutiny, at least under Minnesota law. Not only might such a broad holding create uncertainty in the commercial markets, it would run contrary to the well-understood idea that streamlined or limited discovery is a benefit, rather than a drawback, of arbitration.
With regard to remedies, the arbitration provision itself precludes the award of punitive or exemplary damages. In addition, Section 7.4 of the Prime Provider Agreement prohibits the award against Prime of "special, incidental, indirect, exemplary, punitive, or consequential damages, whether based on breach of contract, warranty, tort (including negligence), lost profits or savings, injury to reputation, loss of customers or business, product liability, or otherwise, and whether or not Prime has been advised of the possibility of such damage. The parties acknowledge and agree that the foregoing limitations of liability are a condition and material consideration for their entry into this Agreement." (Doc No. 61, Exh. 1.)
Concededly, this limitation of remedies provision is rather broad. However, as the Court recognized with regard to HMC's claims against Caremark, whether and how this limitation would apply to HMC's claims against Prime, which do not purport to be based on the contract is a question for the arbitrator, rather than the Court, to resolve.
Similarly, with regard to the limitation on punitive damages, "because statutory treble-damages provisions [fall] on different points along the spectrum between purely compensatory and strictly punitive awards, it is possible the provisions may not conflict. Second, any potential conflict could be rendered moot because the statutory treble damages are available only if the "defendant willfully or knowingly violated" one of the statutory sections. Because the availability of treble damages is contingent on the arbitrator's factual findings, it is unclear whether a conflict will arise."
Similarly, the Court declines to strike the other portions of the limitation on remedies, including the prohibition on "lost profits." First, HMC is not left without any remedy, admittedly able to recover "actual damages," plus injunctive relief. Second, the provision contained in the arbitration provision applies equally to both parties, who are sophisticated corporate entities, though the Court acknowledges that Section 7.4 is one-sided. Third, HMC fails to cite, and the Court has not uncovered, a case striking a limitation on damages in an arbitration provision as substantively unconscionable under Minnesota law. Under these circumstances, the Court declines to find any terms of the arbitration provision to be substantively unconscionable.
Moreover, even if the Court were to find any of the limitation on remedies to be substantively unconscionable, the Court would sever the unconscionable terms under Minnesota law and refer HMC's claims against Prime to arbitration on the remaining terms.
Finally, for substantially the same reasons the Court rejected HMC's argument that arbitration of its claims against Caremark would be cost prohibitive, the Court rejects HMC's argument that the arbitration of its claims against Prime would be cost prohibitive.
For the foregoing reasons, the Court grants Prime's motion to compel arbitration of HMC's claims against it.
As a final matter, the Court renders no determination on whether HMC violated that part of the arbitration provision prohibiting class actions.
ESI's motion to sever and transfer HMC's claims against it is predicated upon certain language in a forum selection clause contained in the ESI Provider Agreement which provides, in relevant part:
(Doc No. 11, Exh. C, at § 7.12). ESI and HMC also agreed that claims arising out of or related in any way to the interpretation or performance of the ESI Provider Agreement would "not be consolidated or coordinated in any action with the Claim of any other individual or entity."
"For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." 28 U.S.C. § 1404(a). However, "[b]ecause § 1404 authorizes transfer `only of the entire action and not of individual claims,' severance must be found appropriate before a transfer may be considered."
"The decision whether to grant a severa[nce] motion is committed to the sound discretion of the trial court."
In exercising that discretion, courts typically consider the same general factors elucidating the § 1404(a) analysis.
In the "typical case," a district court considering a § 1404(a) motion "must evaluate both the convenience of the parties and various public-interest considerations" to determine whether transfer is warranted.
"The calculus changes, however, when the parties' contract contains a valid forum-selection clause."
Here, relying upon the Supreme Court's decision in
"The United States Court of Appeals for the Second Circuit has held that federal law governs the validity of forum-selection clauses in diversity cases."
Tellingly, although HMC does not style any of its claims against ESI as a "breach of contract," HMC seeks, among other things, reinstatement of the ESI Provider Agreement nunc pro tunc, and, thus, the benefits provided under that agreement. This requested relief, temporarily obtained through the now-vacated September 11, 2014 TRO, would be meaningless but for the existence of the ESI Provider Agreement and ESI's termination thereof.
Further, where, as here, "[w]hen "arising out of," "relating to," or similar language appears in a forum selection clause, "such language is regularly construed to encompass securities, antitrust, and tort claims associated with the underlying contract."
Rather, "[t]o determine if the forum selection clause applies to a particular claim, the Court must examine the claims `shorn of their labels.'"
Applying that standard, a close reading of the complaint indicates that HMC's allegations against ESI are "integrally related" to the ESI Provider Agreement.
In addition to seeking the reinstatement of the ESI Provider Agreement, HMC seeks to enjoin ESI, and the other Defendants, from "[r]efusing to process and pay claims for payment submitted by HMC for compounded medications prescribed by physicians for their patients who have prescription drug benefits administered by a defendant." (Compl. at ¶ 106(b))
HMC further alleges, as part of its Section 349 claim, that ESI terminated the ESI Provider Agreement based on "deceptive" pretenses. (
Similarly unavailing is HMC's argument that the forum clause is permissive, rather than mandatory, on the basis (1) that the word "shall," standing alone, does not make it mandatory and/or because (2) it lacks language indicating an "exclusive" forum.
On the first contention, HMC omits the language "be litigated" after "shall" in the forum selection clause, which, read together, reinforces the mandatory quality of the forum selection clause.
On the second contention, it is true that, in
Consistent with the foregoing cases, the Court finds that the forum selection clause contained in the ESI Provider Agreement is mandatory.
Finally, as noted above, HMC argues that enforcing the forum selection clause against it would be "unreasonable and unjust" because the Plaintiffs are located in New York and a transfer would result in inefficiencies. However, in
In addition, the efficiency and economy achieved by trying interrelated claims in one forum should not trump the forum-selection clauses agreed to by HMC and ESI.
In the Court's view, the report and recommendation in
Here, as in
Based on the foregoing, the Court grants ESI's motion to sever HMC's claims against it pursuant to Fed. R. Civ. P. 21 and transfer those claims to the United States District Court for the Eastern District of Missouri, pursuant to 28 U.S.C. § 1404(a), and the forum selection clause in the ESI Provider Agreement.
As a final matter, the Court renders no determination on whether HMC violated the provision of the forum selection clause prohibiting "consolidat[ing] or coordinat[ing]" claims against ESI "in any action with the [c]laim of any other individual or entity."
The FAA provides that "upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which the suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement [.]" 9 U.S.C. § 3;
Here, Caremark, Optum, and Prime separately move to stay the litigation of the Individual Plaintiff's claims, which are, without dispute, not subject to any arbitration or forum selection clause. The Individual Plaintiffs, represented by the same counsel as HMC, have submitted no response to this request, and the request is otherwise meritorious. Therefore, the Court stays the entire action, including HMC's claims against Caremark, Optum, and Prime, pending arbitration.
The Court notes that while it is directing that HMC submit its claims against Caremark, Optum, and Prime, it makes no determination as to whether those claims are, in fact, "arbitrable" under the respective arbitration clauses — that is a determination that the parties have respectively delegated to the arbitrator to make. In other words, if one of the arbitrators finds that the claims fall outside the scope of the arbitration clause and/or that the contracts are ones of adhesion, HMC can move to lift the stay as to those clams.
As the claims brought by the Individual Plaintiffs are stayed, so is the October 3, 2014 TRO as to them, which remains in place.
With regard to HMC, as noted above, on October 14, 2014, HMC requested a conference with the Court to seek clarification of the October 3, 2014 TRO as applicable to it, or to set a schedule for a formal contempt motion against the Defendants for their alleged failure to comply with the October 3, 2014 TRO.
The Court denies this motion without prejudice, declining to revisit the terms of the October 3, 2014 TRO as to HMC except to the extent it extends that TRO as explained below. In this regard, the Court notes that HMC's request for injunctive relief against Caremark, Optum, and Prime are "wholly derivative" of the claims asserted in the complaint,
To be sure, it does not follow that the October 3, 2014 TRO as to HMC should be vacated pending arbitration. Rule 65 of the Federal Rules of Civil Procedure authorizes extensions of TROs under certain conditions. Rule 65 provides:
Fed. R. Civ. P. 65(b)(2);
In addition, "a district court may issue interim injunctive relief on arbitrable claims to preserve the status quo pending arbitration."
Here, based on HMC's initial TRO papers and other submissions, the Court concludes that is necessary to protect the status quo. Therefore, the Court extends the TRO as against Caremark, Optum, and Prime until such time as the respective arbitrator hears and determines any application for injunctive relief.
In sum, the Court denies Caremark's motion to strike in its entirety Camhi's declaration submitted in support of HMC's opposition to Caremark's motion to sever HMC's claims against Caremark and to compel arbitration of those claims. (Doc No. 91).
The Court grants in part and denies in part Caremark's motion to sever HMC's claims against it and to compel arbitration of those claims (Doc No. 29). In particular, the Court finds that public policy does not militate against arbitration of HMC's Donnelly Act claims against Caremark. The Court declines to address the "arbitrability" of HMC's claims against Caremark, as HMC and Caremark reserved that question for the arbitrator. Therefore, to be clear, the Court is referring HMC's claims to arbitration rather than "compelling" arbitration of those claims. The Court also finds that HMC has failed to establish that the arbitration provision incorporated into the Caremark Provider Agreement is procedurally unconscionable under Arizona law. However, the Court finds that the limitation on discovery in that arbitration provision is substantially unconscionable under Arizona law and strikes that term. The Court finds HMC's remaining arguments regarding substantive unconscionability to be without merit. For this reason and because the Court finds that the substantively unconscionable discovery provision does not permeate the arbitration provision, the Court directs HMC to submit its clams against Caremark to arbitration in accordance with the remaining terms of the arbitration provision.
The Court grants in part and denies in part Optum's motion to sever HMC's claims against it and to compel arbitration of those claims. (Doc No. 38). In particular, as with HMC's claims against Caremark, the Court finds that public policy does not militate against arbitration of HMC's Donnelly Act claims against Optum. The Court declines to address the "arbitrability" of HMC's claims against Optum, as HMC and Optum reserved that question for the arbitrator. Therefore, the Court is referring HMC's claims to arbitration rather than "compelling" arbitration of those claims. The Court finds that HMC has failed to establish that the arbitration provision in the Optum Provider Agreement is procedurally unconscionable under California law. The Court declines to address whether HMC has established that any of the provisions of that arbitration provision are substantively unconscionable under California law.
The Court also grants in part and denies in part Prime's motion to sever HMC's claims against it and to compel arbitration of those claims. (Doc No. 59.) In particular, as with HMC's claims against Caremark and Optum, the Court finds that public policy does not militate against arbitration of HMC's Donnelly Act claims against Prime. The Court declines to address the "arbitrability" of HMC's claims against Prime, as HMC and Prime reserved that question for the arbitrator. Therefore, the Court is referring HMC's claims to arbitration rather than "compelling" arbitration of those claims. Finally, the Court finds that HMC has failed to establish that the arbitration provision in the Prime Provider Agreement is procedurally or substantively unconscionable under Minnesota law, to the extent that jurisdiction distinguishes between the two forms of unconscionability.
The Court grants ESI's motion to sever HMC's claims against it and transfer those claims to the United States District Court for the Eastern District of Missouri, pursuant to 28 U.S.C. § 1404(a) and the forum selection clause in the ESI Provider Agreement. (Doc No. 11). In particular, the Court finds that (1) the forum selection clause encompasses ESI's extra-contractual claims; (2) the clause is mandatory rather than permissive; and (3) the public interests in avoiding duplicative proceedings and potentially inconsistent results do not significantly outweigh the private interest in litigating a portion of this dispute in Missouri.
The Court stays the entire action, including the claims brought by the Individual Plaintiffs, pursuant to Section 3 of the FAA.
The Court denies HMC's letter motion dated October 14, 2014 (Doc No. 99) without prejudice for the reasons explained in Part II(6) of this Memorandum of Decision and Order.
Finally, that part of the October 3, 2014 TRO applicable to the Individual Plaintiffs will remain in place pending arbitration, and that part of the October 3, 2014 TRO applicable to HMC is extended until such time as the respective arbitrator hears and determines any application for injunctive relief. Any requests to revisit the terms should be directed to the appropriate arbitrator, or, with respect to ESI, the federal district court in Missouri.
The Court recognizes that severing HMC's claims against Caremark, Optum, and Prime and submitting them to arbitration and severing and transferring HMC's claims against ESI to the federal district court in Missouri may lead to inconsistent results. Further, if one or more of the arbitrators deems the relevant Provider Agreement to be contracts of adhesion or finds that HMC's respective claims are not "arbitrable," HMC would only have the opportunity to start at square one in this Court.
"It is always more expeditious to try related claims in one forum rather than several, but allowing efficiency and economy to rule the day would effectively swallow
