Overruling prior precedent, the Fifth Circuit holds that state
law, rather than federal common law, controls who may be bound by
an arbitration clause under the Federal Arbitration Act
(FAA). Crawford Professional Drugs, Inc. v. CVS Caremark
Corp., Cause No. 12–60922, 2014 U.S. App. LEXIS 6282,
(5th Cir., April 4, 2014).
In Arthur Andersen, LLP v. Carlisle, 556 U.S. 624 (2009),
the Supreme Court held that under the FAA, traditional principles
of state law may allow an arbitration contract to be enforced by or
against nonsignatories through a number of
state–contract–law theories, including equitable
estoppel. In Crawford, the Fifth Circuit modified
prior decisions applying federal common law, rather than state
contract law, to conform with Arthur Andersen.
Twenty–three locally owned drug stores in Mississippi sued
four Caremark and CVS Caremark entities in state court in
Mississippi for unlawfully taking patient and prescription
information confidentially disclosed by the Plaintiffs and using it
to persuade patients to have prescriptions filled by pharmacies
owned by Defendants and excluding Plaintiffs from certain
Defendant–administered
pharmacy–benefit–management (PBM) networks in violation
of a Mississippi statute which protected a patient's right to
use a pharmacy of its choosing.
After removing Plaintiffs' suit to federal court, Defendants
moved to compel Plaintiffs to arbitrate their claims pursuant to
arbitration contracts to which most of the Defendants were not
signatories. The district court ordered Plaintiffs to submit
their claims to arbitration. The Fifth Circuit affirmed.
Initially, the court considered what law
applied––federal or state, Arizona or
Mississippi. In conformity to Arthur Andersen, the
court first held that whether a contract to arbitrate a particular
dispute is enforceable by a non–signatory must be resolved by
reference to relevant state law.
Next, the court determined that Arizona, rather than Mississippi
law, would control because the provider agreement which contained
the arbitration clause had a choice of law provision designating
Arizona law. The court held that Mississippi follows the
Restatement (Second) of Conflicts of Law, and under the
Restatement, the law chosen by the parties would govern their
contractual rights if (1) the chosen state had a substantial
relationship to the parties or transaction and (2) application of
the law of the chosen state would not be contrary to a fundamental
policy of the forum. Because Defendants' operations were
located in Arizona and the contract required claims to be adjusted
and appealed in Caremark's Arizona office, there was an
adequate nexus to Arizona. The application of Arizona law was
not contrary to a fundamental policy of Mississippi because both
states permitted a non–signatory to an agreement containing
an arbitration clause to compel a signatory to that agreement to
arbitrate his claims under an equitable estoppel theory.
Plaintiffs argued that their claims were outside the scope of the
arbitration clause and therefore not subject to
arbitration. Acknowledging that ordinarily whether a claim is
subject to arbitration is a question for a court, the court applied
the exception that if the parties have clearly and unmistakably
agreed to arbitrate arbitrability, then whether a particular claim
is subject to arbitration is a question for the arbitrator and not
a court.
Plaintiffs next contended that the arbitration clause was
procedurally and substantively unconscionable. The Fifth
Circuit rejected those claims as well.
Plaintiffs relied on three theories of procedural
unconscionability. First, Plaintiffs said that the agreement
to arbitrate was a contract of adhesion offered on a "take it
or leave it" basis. But under Arizona law, that a
contract is one of adhesion is not of itself determinative of its
enforceability. Plaintiffs' failure to present any
evidence that they were prevented from contracting with another PBM
or could not have abstained from contracting with Defendants,
doomed their claim of procedural unconscionability.
Second, Plaintiffs argued that the arbitration clause was
inconspicuously buried in a manual of over 200 pages. But the
court found the arbitration provision was clearly marked both in
the table of contents and via boldface heading and appeared in the
same font and size as other sections of the agreement.
Third, Plaintiffs contended that they should not reasonably have
anticipated that the PBM with which they had contracted 16 years
ago would someday be acquired by a competitor, which would also be
the largest chain of retail pharmacies in the country. But the
Fifth Circuit failed to see why that required their claims to be
heard in a judicial forum rather than an arbitrable one.
Finally, Plaintiffs argued that the arbitration provision was
substantively unconscionable because it restricted any award of
damages and the costs of traveling from Mississippi to Arizona were
so excessive as to deny them an opportunity to vindicate their
rights. The court gave short shrift to this argument because
Plaintiffs failed to present any specific individualized evidence
of the costs to arbitrate, their inability to bear those costs, and
whether the arbitration agreement permitted them to waive or reduce
the costs.
Accordingly, the Fifth Circuit affirmed the judgment of the
district court, granting Defendants' motion to compel
arbitration and dismissing Plaintiffs' action with
prejudice.
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