In Crawford Professional Drugs v. CVS Caremark Corporation, No. 12-60922 (5th Cir. Apr. 4, 2014) (click here for a copy of the decision), the Fifth Circuit issued a very thoughtful, well-written opinion overruling prior precedent regarding non-signatories and the enforcement of arbitration agreements under the FAA. The Fifth Circuit had previously applied federal common law to address the issue of non-signatories. However, in this CVS case, the Fifth Circuit held that state law should instead control the analysis of non-signatories under the FAA, and thus, its prior decisions relying on federal common law have been “modified,” i.e., overruled.
The litigation began when twenty-three small, local drug stores in Mississippi sued the pharmacy giant CVS and three related entities for various state law violations. Following a large merger in 2007, CVS has two main business operations: a) CVS operates the country’s second largest chain of drug stores; and b) as a result of the merger, CVS also operates the country’s largest pharmacy-benefit-management (PBM) network, which helps insurance companies administer the payment of insurance claims for drug benefits. (I am wondering how did this merger get antitrust clearance from the government?)
The plaintiff small drug stores alleged that the CVS defendants, through their PBM claims administration business, collected proprietary patient information from the plaintiffs, and the CVS defendants then used this information for the financial benefit of CVS’s competing drug store business.
The plaintiffs signed provider agreements with different CVS-related entities, and these provider agreements incorporated other documents containing arbitration clauses. However, the four CVS-related entities who were named as defendants in the case were, for the most part, non-signatories to any of these provider agreements. Relying on a theory of equitable estoppel, the non-signatory defendants successfully moved the lower court to enforce the arbitration agreements, and the Fifth Circuit affirmed.
Turning to state law (Arizona law in this case because of a choice-of-law clause in the provider agreement), the Fifth Circuit found that a court can compel a plaintiff signatory to arbitrate claims against a non-signatory defendant if the plaintiff’s claims rely on the terms of an agreement containing an arbitration clause. In other words, it is unfair for a plaintiff to rely on an agreement to assert its claims, and yet disregard an arbitration clause contained in the same agreement. The Fifth Circuit found that the plaintiff’s claims at issue would be inextricably bound with the terms of the provider agreements. For example, whether the non-signatory defendants inappropriately acquired and used patient information would depend on the terms of the provider agreement. The Fifth Circuit also rejected the plaintiffs’ arguments regarding procedural and substantive unconscionability. The arbitration clause required the Mississippi plaintiffs to arbitrate in Arizona, but the plaintiffs had failed to submit specific evidence to show the cost of arbitrating in Arizona. When opposing the enforcement of an arbitration clause, it is important to include any evidence of unconscionability in the record.