Case: 12-60922 Document: 00512585574 Page: 1 Date Filed: 04/04/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
April 4, 2014
No. 12-60922 Lyle W. Cayce
Clerk
CRAWFORD PROFESSIONAL DRUGS, INCORPORATED; SERVICE
REXALL DRUGS; OKOLONA DRUG COMPANY, INCORPORATED; BSW,
INCORPORATED; BURNHAM-MCKINNEY PHARMACIES,
INCORPORATED; FRENCH’S PHARMACY, INCORPORATED; JOHN W.
FARRIS, doing business as Ridgeland Discount Drugs, Incorporated, also
known as Bo; CONDON’S EAST UNION PHARMACY, INCORPORATED;
MCGUFFEE DRUGS, INCORPORATED; PLAZA PHARMACY,
INCORPORATED; SOUTHERN DISCOUNT DRUGS OF CHARLESTON,
INCORPORATED; MEDICAL PLAZA PHARMACY, INCORPORATED;
ESSCO/SHOOZ TOO!, INCORPORATED; SAVE RITE PHARMACY,
INCORPORATED; ROCKY MCGARITY, doing business as Edwards’s
Discount Drugs; MAGIC MART PHARMACY, INCORPORATED; W. J.
(BILL) MOSBY, doing business as Mosby’s Drug Store; MACON CITY DRUG
STORE, INCORPORATED; ASHLAND DRUGS, INCORPORATED;
BRANDON DISCOUNT DRUGS, INCORPORATED; DUNCAN’S
PHARMACY, INCORPORATED; RICHARD LITTLE, doing business as
Little’s Pharmacy; TYSON DRUGS, INCORPORATED,
Plaintiffs - Appellants
v.
CVS CAREMARK CORPORATION; CVS PHARMACY, INCORPORATED;
CAREMARK RX, L.L.C.; CAREMARK, L.L.C.,
Defendants - Appellees
Appeal from the United States District Court
for the Southern District of Mississippi
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No. 12-60922
Before SMITH, DENNIS, and HIGGINSON, Circuit Judges.
JAMES L. DENNIS, Circuit Judge:
The principal issue in this appeal is whether the district court erred in
ordering the plaintiffs to submit their claims to arbitration. The Plaintiffs,
entities that operate twenty-three locally owned drug stores in Mississippi,
brought suit in Mississippi state court against the Defendants seeking damages
and declarative and injunctive relief. The four Defendants, (1) Caremark, L.L.C.
(“Caremark”), (2) CVS Caremark Corporation (“CVS Caremark”), (3) CVS
Pharmacy, Inc. (“CVS Pharmacy”), and (4) Caremark Rx, L.L.C. (“Caremark
Rx”), own and operate the second-largest chain of pharmacies and the largest
pharmacy-benefit-management (“PBM”) network1 in the United States. In their
suit, the Plaintiffs assert two claims: first, that the Defendants committed
common-law trade-secret misappropriation and intentional interference with
business relations by unlawfully taking patient and prescription information
confidentially disclosed by the Plaintiffs and by using that data to persuade
patients and consumers to have prescriptions filled by pharmacies owned and
operated by the Defendants, rather than by the Plaintiffs’ drug stores; and,
second, that the Defendants, by excluding the Plaintiffs from certain Defendant-
administered PBM networks have violated Mississippi’s Any Willing Provider
Law, which protects a patient’s right to use any pharmacy of his choosing.
It is undisputed that two Plaintiffs entered into an agreement with
Caremark (“the Provider Agreement”), which incorporates by reference another
1
PBMs “act as an intermediary between the payor”—often insurance companies—“and
everyone else in the health-care system.” Thomas Gryta, What Is a ‘Pharmacy Benefit
Manager?,’ WALL S T. J., July 21, 2011, http://online.wsj.com/news/articles/
SB10001424053111903554904576460322664055328. PBMs “generally make money through
service fees from large customer contracts for processing prescriptions.” Id. Therefore, and
as relevant in this case, PBMs process and pay pharmacies, such as the Plaintiffs, for filling
prescriptions for patients and consumers insured under health-insurance plans that the PBMs
manage.
2
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document (“the Provider Manual”), which contains an arbitration clause. It is
also undisputed that all other Plaintiffs entered into a Provider Agreement,
which incorporates by reference the Provider Manual, with CaremarkPCS,
which is not one of the four Defendants named in this suit. The remaining three
Defendants—CVS Caremark, CVS Pharmacy, and Caremark Rx (“the non-
signatory Defendants”)—are non-signatories to any iteration of the Provider
Agreement. After removing the Plaintiffs’ suit to federal court, all four
Defendants moved to compel the Plaintiffs to arbitrate their claims pursuant to
the arbitration contracts to which all or most the Defendants were not
signatories under the Federal Arbitration Act (“FAA”), see 9 U.S.C. §§ 3-4. The
Plaintiffs opposed the motion to compel arbitration, arguing that: (1) they may
not be compelled to arbitrate their claims against the non-signatory Defendants
because they had never entered into an agreement to arbitrate with those
entities; (2) their claims are not subject to the Provider Agreement’s arbitration
clause; and (3) the Provider Agreement and the Provider Manual’s arbitration
clause are procedurally and substantively unconscionable under Mississippi law.
The district court rejected the Plaintiffs’ arguments and ordered them to submit
their claims against all four Defendants to arbitration.
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 nonparties to the contract
through a number of state-contract-law theories, including equitable estoppel.
The relevant Arizona law, made controlling by the Provider Agreement’s choice-
of-law clause, supports the non-signatory Defendants’ motion to enforce the
agreement to arbitrate against the Plaintiffs based on state-law equitable
estoppel doctrine. Accordingly we AFFIRM the district court’s judgment
compelling arbitration. Coincidentally, we recognize that our prior decisions
applying federal common law, rather than state contract law, to decide such
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questions, see Grigson v. Creative Artists Agency L.L.C., 210 F.3d 524 (5th Cir.
2000), have been modified to conform with Arthur Andersen.
BACKGROUND
The Defendants were formed in 2007 when CVS, a national pharmacy
chain, merged with Caremark, the PBM. Insurance carriers frequently hire
PBMs to administer the payment of claims for prescription drugs. Accordingly,
following the merger, the Defendants operated retail pharmacies that were
direct competitors to those owned and operated by the Plaintiffs. At the same
time, the Defendants became responsible for administering insurance claims for
prescription drug benefits. Each Plaintiff provides services in at least one of the
PBM networks operated by the Defendants. They receive access to participants
in those networks in exchange for agreeing to fill prescriptions at discounted
prices.
The Plaintiffs brought suit against the Defendants in Mississippi state
court. The Plaintiffs assert that the Defendants conspired in various ways to
harm the Plaintiffs’ business interests. In particular, the Plaintiffs allege that
the Defendants collected proprietary patient information from local pharmacies
that participate in their PBM networks and used that information for the
financial benefit of CVS pharmacies. The Plaintiffs further allege that the
Defendants accepted payments from drug companies to directly market certain
drugs to patients who are likely candidates based on their prescription history
and that the Defendants directly targeted patients who filled subscriptions at
non-CVS pharmacies for marketing of CVS pharmacies and services. Lastly, the
Plaintiffs assert that the Defendants conspired to deprive patients of their right
to use any pharmacy of their choosing by forming pharmacy networks that either
exclude non-CVS pharmacies or provide economic incentives for using CVS
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pharmacies. See MISS. CODE ANN. § 83-9-6.2 The Plaintiffs allege that the
Defendants coerced prescription-drug benefit plans into requiring that all
routine maintenance prescriptions be filled at CVS pharmacies. The Plaintiffs
argued that these actions deprived them of millions of dollars in potential
business and that the Defendants’ actions violated Mississippi’s Uniform Trade
Secrets Act and Any Willing Provider Law. Additionally, the Plaintiffs claimed
intentional interference with business relations and requested damages and
injunctive relief.
The Defendants removed the action to the U.S. District Court for the
Southern District of Mississippi and moved to compel the Plaintiffs to arbitrate
their claims against all four Defendants (or, in the alternative, to stay the
federal proceeding until arbitration was completed) on the basis of the Provider
Agreement and the Provider Manual’s arbitration clause. The district court
found—and the Plaintiffs have not disputed—that each Plaintiff is a party to a
Provider Agreement that incorporates the terms of the Provider Manual, which
in turn includes an arbitration clause. That clause provides:
Any and all disputes in connection with or arising out of the
Provider Agreement by the parties will be exclusively settled by
arbitration before a single arbitrator in accordance with the Rules
of the American Arbitration Association. The arbitrator must follow
the rule of Law, and may only award remedies provided for in the
Provider Agreement. . . . Any such arbitration must be conducted
2
Mississippi’s Any Willing Provider Law bars “[a] health insurance plan, policy,
employee benefit plan or health maintenance organization” from “[p]rohibit[ing] or limit[ing]
any person who is a participant or beneficiary of the policy or plan from selecting a pharmacy
or pharmacist of his choice who has agreed to participate in the plan according to the terms
offered by the insurer.” Id. § 83-9-6(3)(a). The Law additionally prohibits “[d]eny[ing] a
pharmacy or pharmacist the right to participate as a contract provider under the policy or plan
if the pharmacy or pharmacist agrees to provide pharmacy services[] . . . that meet the terms
and requirements set forth by the insurer under the policy or plan and agrees to the terms of
reimbursement set forth by the insurer” and bars “[i]mpos[ing] a monetary advantage or
penalty under a health benefit plan that would affect a beneficiary’s choice among those
pharmacies or pharmacists who have agreed to participate in the plan according to the terms
offered by the insurer.” Id. § 83-9-6(3)(b), (3)(d).
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in Scottsdale, Arizona, and Provider agrees to such jurisdiction,
unless otherwise agreed to by the parties in writing. The expenses
of arbitration, including reasonable attorney’s fees, will be paid for
by the party against whom the award of the arbitrator is rendered.
. . . Arbitration shall be the exclusive and final remedy for any
dispute between the parties in connection with or arising out of the
Provider Agreement; provided, however, that nothing in this
provision shall prevent either party from seeking injunctive relief
for breach of this Provider Agreement in any state or federal court
of law. . . .
The district court granted the Defendants’ motion to compel arbitration and
dismissed the plaintiffs’ civil actions with prejudice. The Plaintiffs filed a timely
notice of appeal.
STANDARD OF REVIEW
“This court reviews an order compelling arbitration de novo.” Paper,
Allied-Indus. Chem. & Energy Workers Int’l Union, Local 4-12 v. Exxon Mobil
Corp., 657 F.3d 272, 275 (5th Cir. 2011). “We review the district court’s findings
of fact under the clearly erroneous standard.” Cargill Inc. v. Golden Chariot MV,
31 F.3d 316, 317 (5th Cir. 1994). We review the district court’s use of equitable
estoppel to compel arbitration for an abuse of discretion. See Noble Drilling
Servs., Inc. v. Certex USA, Inc., 620 F.3d 469, 472 & n.4 (5th Cir. 2010). “To
constitute an abuse of discretion, the district court’s decision must be either
premised on an application of the law that is erroneous, or on an assessment of
the evidence that is clearly erroneous.” Id. at 473 (internal quotation marks
omitted). Lastly, “we may affirm the district court on any ground supported by
the record, and it is our duty to enunciate the correct law on the record facts.”
Freudensprung v. Offshore Technical Servs., Inc., 379 F.3d 327, 338 n.5 (5th Cir.
2004) (citing Okeye v. Univ. of Tex. Hous. Health Sci. Ctr., 245 F.3d 507, 511 (5th
Cir. 2001); Empire Life Ins. Co. of Am. v. Valdak Corp., 468 F.2d 330, 334 (5th
Cir. 1972)).
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DISCUSSION
I.
The Defendants ask us to rule that they may compel the Plaintiffs to
arbitrate their claims. However, as an initial matter, we must consider what
law applies to these questions—federal or state, Arizona or Mississippi.
A.
FAA § 2—the Act’s substantive mandate—“makes written arbitration
agreements ‘valid, irrevocable, and enforceable, save upon such grounds as exist
at law or in equity for the revocation of a contract.’” Arthur Andersen, 556 U.S.
at 629-30 (quoting 9 U.S.C. § 2). “That provision creates substantive federal law
regarding the enforceability of arbitration agreements, requiring courts ‘to place
such agreements upon the same footing as other contracts.’” Id. at 630 (quoting
Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S.
468, 478 (1989)). FAA § 3, “in turn, allows litigants already in federal court to
invoke agreements made enforceable by § 2.” Id.
Neither § 2 nor § 3, however, “purports to alter background principles of
state contract law regarding the scope of agreements (including the question of
who is bound by them).” Id. Section 2, for instance, “explicitly retains an
external body of law governing revocation (such grounds ‘as exist at law or in
equity’).” Id. (quoting 9 U.S.C. § 2). Further, the Supreme Court concluded that
“§ 3 adds no substantive restrictions to § 2’s enforceability mandate.” Id.
Rather, “‘[s]tate law[]’ . . . is applicable to determine which contracts are binding
under § 2 and enforceable under § 3 ‘if that law arose to govern issues
concerning the validity, revocability, and enforceability of contracts generally.’”
Id. at 630-31 (quoting Perry v. Thomas, 482 U.S. 482, 493 n.9 (1987)). These
“background principles” of state contract law, when relevant, “allow a contract
to be enforced by or against nonparties to the contract through ‘assumption,
piercing the corporate veil, alter ego, incorporation by reference, third-party
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beneficiary theories, waiver and estoppel.’” Id. at 631 (quoting 21 R. LORD,
WILLISTON ON CONTRACTS § 57:19, at 183 (4th ed. 2001)). Accordingly, whenever
the relevant state law would make a contract to arbitrate a particular dispute
enforceable by a nonsignatory, that nonsignatory is entitled to request and
obtain a stay under § 3 and an order to compel arbitration under § 4 because
that dispute is “referable to arbitration under an agreement in writing.” Id. at
630-32.
B.
The Defendants assert that Arizona law applies on the basis of a choice-of-
law clause in the Provider Agreement. That clause provides that “[u]nless
otherwise mandated by applicable Law, the [Provider] Agreement will be
construed, governed, and enforced in accordance with the laws of the State of
Arizona without regard to choice of law provisions.” The Plaintiffs assert that
Mississippi law applies but otherwise do not explain why or address the Provider
Agreement’s choice-of-law clause. Pursuant to Arthur Andersen, then, we must
determine which state’s law is relevant, that of Arizona or that of Mississippi.
“A federal court sitting in diversity follows the choice of law rules of the
state in which it sits.” Sorrels Steel Co., Inc. v. Great Sw. Corp., 906 F.2d 158,
167 (5th Cir.1990). “In the absence of law directly on point, Mississippi courts
have approvingly cited the Restatement (Second) of Conflicts of Laws (1971).”
PIC Grp. Inc. v. LandCoast Insulation, Inc., 718 F. Supp. 2d 795, 799 (S.D. Miss.
2010) (citing Sorrels Steel Co., 906 F.2d at 167); see Boardman v. United Servs.
Auto. Ass’n, 470 So. 2d 1024, 1032-34 (Miss. 1985). In relevant part, the
Restatement provides:
The law of the state chosen by the parties to govern their
contractual rights and duties will be applied, even if the particular
issue is one which the parties could not have resolved by an explicit
provision in their agreement directed to that issue, unless either
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(a) the chosen state has no substantial relationship to the
parties or the transaction and there is no other reasonable
basis for the parties’ choice, or
(b) application of the law of the chosen state would be
contrary to a fundamental policy of a state which has a
materially greater interest than the chosen state in the
determination of the particular issue and which, under the
rule of § 188, would be the state of the applicable law in the
absence of an effective choice of law by the parties.
RESTATEMENT (SECOND) OF CONFLICTS OF LAWS § 187(2).
“The first exception to the application of the state’s law selected by
contract is a lax one.” PIC Grp., 718 F. Supp. 2d at 800. “When the state of the
chosen law has some substantial relationship to the parties or the contract, the
parties will be held to have had a reasonable basis for their choice.”
RESTATEMENT (SECOND ) OF CONFLICTS OF LAWS § 187(2) cmt. f. Before the
district court, the Plaintiffs asserted, without elaboration, that “Arizona has no
substantial relationship to pharmacies in Mississippi, nor to the prescriptions
filed here.” The Defendants, however, note that their business operations are
located in Arizona and highlight that the Provider Manual requires the Plaintiffs
to (1) direct any inquiries, grievances, or requested changes to Caremark’s
Scottsdale, Arizona office; (2) dispute a claim or request that a claim be adjusted
via Caremark’s Scottsdale office; and (3) appeal any audit Caremark conducts
to ensure claims accuracy to Caremark’s audit manager, located in the
company’s Scottsdale office. In the absence of evidence to the contrary, we
conclude that the Plaintiffs have failed to demonstrate that Arizona “has no
substantial relationship to the parties or the transaction [or that] there is no
other reasonable basis for the parties’ choice.” RESTATEMENT (SECOND) OF
CONFLICTS OF LAWS § 187(2)(a).
Nor have the Plaintiffs demonstrated that § 187(2)’s second exception
applies. Assuming arguendo that Mississippi “has a materially greater interest
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than [Arizona] in the determination of the particular issue” and that Mississippi
“would be the state of the applicable law in the absence of an effective choice of
law by the parties,”3 we must determine whether “application of the law of
[Arizona] would be contrary to a fundamental policy” of Mississippi. Id. §
187(2)(b). Again, in the absence of evidence to the contrary, we conclude that the
Plaintiffs have failed to demonstrate that applying Arizona law in this instance
would be contrary to a fundamental policy of Mississippi. As discussed in
greater detail infra, both states permit 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.4 “The states obviously
have different laws, and, even if the relevant statutes were identical, each state
would have its own case law interpreting the bounds of the laws.” PIC Grp., 718
F. Supp. 2d at 800. Nevertheless, “[t]he forum will not refrain from applying the
chosen law merely because this would lead to a different result than would be
obtained under the local law of the state of the otherwise applicable law.”
RESTATEMENT (SECOND) OF CONFLICTS OF LAWS § 187 cmt. g. Because the result
would be the same under either state’s law, application of Arizona law would not
be contrary to a fundamental policy of Mississippi. Accordingly, we will apply
Arizona law.
3
No party has argued that any other state “has a materially greater interest . . . in the
determination of the particular issue” or “would be the state of the applicable law in the
absence of an effective choice of law by the parties.” Id. § 187(2)(b). Moreover, it appears that,
under the Restatement, Mississippi would be the state whose fundamental public policy we
would compare to Arizona law. See id. § 188; see also id. § 6.
4
See Schoneberger v. Oezle, 96 P.3d 1078, 1079 (Ariz. Ct. App. 2004); Goldman v.
KPMG LLP, 92 Cal. Rptr. 3d 534, 542 (Cal. Ct. App. 2009); Sawyers v. Herrin-Gear Chevrolet
Co., 26 So. 3d 1026, 1039 (Miss. 2010); see also Moore v. Browning, 50 P.3d 852, 860 (Ariz.
2002) (permitting reference to California law when interpreting Arizona law).
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C.
In Schoneberger v. Oezle, the Arizona Court of Appeals considered
“whether an arbitration provision in an instrument establishing an irrevocable
inter vivos trust may be enforced against trust beneficiaries who sued the
trustors and trustees.” 96 P.3d 1078, 1079 (Ariz. Ct. App. 2004). The court held
that “the trust beneficiaries are not required to arbitrate their claims because
such a trust is not a ‘written contract’ requiring arbitration.” Id. Consequently,
Schoneberger is not on all fours with the present appeal because (1) the existence
of a trust, as opposed to a contract, was dispositive, (2) the court accordingly did
not compel arbitration on the basis of equitable estoppel, and (3) the case
involved the inverse situation from that present here: a signatory defendant
sought to compel non-signatory plaintiffs to arbitrate certain claims.5
Nevertheless, the Schoneberger court appeared inclined to accept an
arbitration-by-estoppel theory even though it did not so hold. See id. at 1081 n.5
(noting that “[u]nder well-established common law principles, a nonsignatory
may be entitled to enforce, or be bound by, an arbitration provision in a contract
executed by others”). Given this, it seems likely that Arizona courts would
recognize arbitration by estoppel under different facts from those presented in
5
This appeal requires us to consider whether a non-signatory to an agreement
containing an arbitration clause may compel a signatory to that agreement to arbitrate his
claim. The inverse scenario, often called “direct-benefit estoppel,” considers whether a
signatory to an agreement containing an arbitration clause may compel a non-signatory to that
agreement to arbitrate his claim. The latter scenario is justified on the basis that courts will
not permit a non-signatory to enjoy rights or benefits under an agreement while
simultaneously avoiding that agreement’s burdens and obligations. See, e.g., Hellenic Inv.
Fund, Inc. v. Det Norske Veritas, 464 F.3d 514, 517-18 (5th Cir. 2006) (“Direct-benefit estoppel
involve[s] non-signatories who, during the life of the contract, have embraced the contract
despite their non-signatory status but then, during litigation, attempt to repudiate the
arbitration clause in the contract.”) (alteration in original) (internal quotation marks omitted);
see also Bridas S.A.P.I.C. v. Gov’t of Turkmenistan, 345 F.3d 347, 360-62 (5th Cir. 2003)
(discussing distinctions between the two types of estoppel).
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Schoneberger—namely, a situation in which, as here, non-signatory defendants
seek to compel signatory plaintiffs to arbitrate certain claims.
Although there is a dearth of Arizona precedent on this subject—and on
all fours with the facts of this case—the Arizona Supreme Court has said that
“if Arizona law has not addressed an issue, we ‘look approvingly to the laws of
California,’ especially when interpreting a similar or identical statute,” so long
as the reasoning of the California case law is sound. Moore v. Browning, 50 P.3d
852, 859 (Ariz. 2002) (quoting State v. Vallejos, 358 P.2d 178, 182 (Ariz. 1960));
see also Amerisure Ins. Co. v. Navigators Ins. Co., 611 F.3d 299, 310 n.4 (5th Cir.
2010) (“In making an Erie guess, this court may consult the decisions of other
jurisdictions so long as the highest court of the forum state has not addressed
the issue.”). Therefore, to further explore whether Arizona would recognize an
arbitration-by-estoppel theory, we may consider apposite and well reasoned
California authority.
California courts recognize that “[a]s a general matter, one cannot be
required to submit a dispute to arbitration unless one has agreed to do so.”
Goldman v. KPMG LLP, 92 Cal. Rptr. 3d 534, 542 (Ct. App. 2009).
Nevertheless, “it is well-established that[] . . . a nonsignatory to an arbitration
clause may, in certain circumstances, compel a signatory to arbitrate, based on
ordinary contract and agency principles.” Id. “Equitable estoppel applies when
the signatory to a written agreement containing an arbitration clause must rely
on the terms of the written agreement in asserting [its] claims against the
nonsignatory.” Id. at 541 (quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d
942, 947 (11th Cir. 1999)) (internal quotation marks omitted). “The reason for
this equitable rule is plain: One should not be permitted to rely on an agreement
containing an arbitration clause for its claims, while at the same time
repudiating the arbitration provision contained in the same contract.” DMS
Servs., Inc. v. Superior Court, 140 Cal. Rptr. 3d 896, 902 (Cal. Ct. App. 2012).
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“The focus is [therefore] on the nature of the claims asserted by the plaintiff
against the nonsignatory defendant.” Boucher v. Alliance Title Co., 25 Cal.
Rptr. 3d 440, 447 (2005). Notably, however, the plaintiff to be estopped need not
rely exclusively on the terms of the agreement containing an arbitration clause.
Id. at 446.6
On review of the facts of this case and the Plaintiffs’ allegations, we
conclude that California’s test for arbitration by estoppel—which informs our
Erie guess whether Arizona would adopt such a test—is satisfied because the
Plaintiffs’ “claims against the nonsignatory [Defendants] are founded in and
inextricably bound up with the obligations imposed by the agreement containing
the arbitration clause.” Goldman, 92 Cal. Rptr. 3d at 541. The Plaintiffs’ trade-
secret misappropriation claim, for instance, alleges that the Defendants misused
patient and prescription information. However, this information would not have
been provided but for the Plaintiffs’ participation in the Defendants’ PBM
network pursuant to the Provider Agreement. In order to prevail, the Plaintiffs
must establish, inter alia, that the Defendants acquired the trade secret
“through a breach of a confidential relationship or discovered by improper
means.” Block Corp. v. Nunez, No. 1:08-CV-53, 2008 WL 1884012, at *5 (N.D.
Miss. Apr. 25, 2008). In their complaint, the Plaintiffs allege that they
voluntarily provided the relevant information to the Defendants and so, to
prevail, they must demonstrate that the Defendants exceeded the scope of their
permitted use of this information. However, the Provider Manual, which the
Provider Agreement incorporates by reference, states that the disclosed patient
6
The Goldman court ruled, however, that “a nonsignatory may compel arbitration only
when the claims against the nonsignatory are founded in and inextricably bound up with the
obligations imposed by the agreement containing the arbitration clause.” 92 Cal. Rptr. 3d at
541 (emphasis added). “In other words,” the court said, “allegations of substantially
interdependent and concerted misconduct by signatories and nonsignatories, standing alone,
are not enough.” Id.
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and prescription information “is the property of Caremark, and [each Plaintiff]
agrees not to claim any right, title, or interest in [the] information.” The
Provider Manual further states that “Caremark has the right to use, reproduce,
and adapt any information or data obtained from Provider in any manner
deemed appropriate, even if such use is outside the scope of the Provider
Agreement, provided such use is in accordance with applicable Law.”
The Plaintiffs further allege that they were denied access to and
participation in the Defendants’ PBM network. However, the Provider
Agreement governs the PBM networks in which the Plaintiffs may participate
as well as the terms of and eligibility to participate in Caremark’s various
networks.7 As such, the Plaintiffs’ “claims against the nonsignatory
[Defendants] are founded in and inextricably bound up with the obligations
imposed by the agreement containing the arbitration clause.” Goldman, 92 Cal.
Rptr. 3d at 541.8 Accordingly, because Schoneberger suggests that Arizona
courts would likely accept an arbitration-by-estoppel theory, we believe that
Arizona law, as informed by apposite and well reasoned California law, would
permit the non-signatory Defendants to compel the signatory Plaintiffs to
7
The Defendants have also argued that the Plaintiffs’ business-interference claim and
request for injunctive relief are derivative of their trade-secret misappropriation and Any-
Willing-Provider-Law claims, an argument to which the Plaintiffs have failed to respond in
their reply brief.
8
Although “allegations of substantially interdependent and concerted misconduct by
signatories and nonsignatories, standing alone, are not enough,” id., we note that the Plaintiffs
have alleged such misconduct. In particular, in their complaint, the Plaintiffs asserted their
claims against all four Defendants without distinction and specifically alleged that Caremark
acted through the non-signatory Defendants in order to carry out the allegedly impermissible
actions. This, we believe, strengthens our conclusion that the Defendants may compel the
Plaintiffs to arbitrate their claims. We further observe that Mississippi law—the applicable
law according to the Plaintiffs—permits arbitration by estoppel on the basis of allegations of
substantially interdependent and concerted misconduct. See Sawyers v. Herrin-Gear Chevrolet
Co., 26 So. 3d 1026, 1039 (Miss. 2010).
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arbitrate their claims. See Moore, 50 P.3d at 860; Schoneberger, 96 P.3d at 1081
n.5; Goldman, 92 Cal. Rptr. 3d at 541-42.
D.
Arthur Andersen instructs that a non-signatory to an arbitration
agreement may compel a signatory to that agreement to arbitrate based on, inter
alia, equitable estoppel if the relevant state contract law so permits.
Consequently, prior decisions allowing non-signatories to compel arbitration
based on federal common law, rather than state contract law, such as Grigson,
have been modified to conform with Arthur Andersen. See, e.g., Lawson v. Life
of the S. Ins. Co., 648 F.3d 1166, 1172 (11th Cir. 2011) (holding that “to the
extent any of our earlier decisions indicate to the contrary, those indications are
overruled or at least undermined to the point of abrogation by [Arthur
Andersen]”).9
9
Accord Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1128 (9th Cir. 2013) (citing
Arthur Andersen and applying California law to the equitable estoppel analysis); Awuah v.
Coverall N. Am., Inc., 703 F.3d 36, 41-42 (1st Cir. 2012) (citing Arthur Andersen and applying
Massachusetts law to the equitable estoppel analysis); The Republic of Iraq v. BNP Paribas
USA, 472 F. App’x 11, 13-14 (2d Cir. 2012) (citing Arthur Andersen and applying New York
law to the equitable estoppel analysis); Lenox MacLaren Surgical Corp. v. Medtronic, Inc., 449
F. App’x. 704, 708 n. 2 (10th Cir. 2011) (stating that Arthur Andersen “made it clear that state
law governs who may be bound to an arbitration clause”); Donaldson Co. v. Burroughs Diesel,
Inc., 581 F.3d 726, 732 (8th Cir. 2009) (“The Supreme Court has ruled that state contract law
governs the ability of nonsignatories to enforce arbitration provisions.”); see also Allstate
Settlement Corp. v. Rapid Settlements, Ltd., 559 F.3d 164, 170 (3d Cir. 2009) (recognizing, pre-
Arthur Andersen, that state law determines whether non-signatories may be bound by an
arbitration agreement); MacDonald v. Unisys Corp., Civil Action No. 12-1705, 2013 WL
2626929, at *6 (E.D. Pa. 2013) (“Post-Arthur Andersen it is incontrovertible that state law
governs the equitable estoppel and third-party beneficiary determinations.”). But see Ragone
v. Atl. Video at Manhattan Ctr., 595 F.3d 115, 126-28 (2d Cir. 2010) (failing to mention Arthur
Andersen and failing to cite to any particular state law); In re Apple iPhone Antitrust Litig.,
874 F. Supp. 2d 889, 895-96 (N.D. Cal. 2012) (reasoning that it is not clear whether Arthur
Andersen meant to overrule federally created arbitration-by-estoppel precedent); Kingsley Cap.
Mgmt., LLC v. Sly, 820 F. Supp. 2d 1011, 1022-23 (D. Ariz. 2011) (same).
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II.
Even if all four Defendants may compel the Plaintiffs to arbitrate their
claims, the Plaintiffs nevertheless argue that their claims are outside the scope
of the Provider Manual’s arbitration clause and, therefore, not subject to
arbitration. Ordinarily, whether a claim is subject to arbitration is a question
for a court. See JP Morgan Chase & Co. v. Conegie ex rel. Lee, 492 F.3d 596, 598
(5th Cir. 2007). 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. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
In this case, we conclude that this standard has been satisfied and that,
consequently, the Plaintiffs must submit this argument to the arbitrator in the
first instance.
It is undisputed that each Plaintiff is a party to a Provider Agreement with
Caremark or CaremarkPCS. The Provider Agreement, incorporating the
Provider Manual by reference, includes an arbitration clause, pursuant to which
the Plaintiffs agreed to arbitrate “[a]ny and all disputes in connection with or
arising out of the Provider Agreement . . . before a single arbitrator in
accordance with the Rules of the American Arbitration Association” (“the AAA
Rules”). The AAA Rules for commercial arbitration include Rule 7, which
provides 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 to the arbitrability of any claim or
counterclaim.” In Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., we
concluded that express incorporation of the same AAA Rules constitutes clear
and unmistakable evidence that the parties agreed to arbitrate arbitrability.
687 F.3d 671, 675 (5th Cir. 2012) (collecting cases). Accordingly, there is clear
and unmistakable evidence that the parties to the Provider Agreement agreed
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to arbitrate arbitrability, and so we conclude that whether the Plaintiffs’ claims
are subject to arbitration must be decided in the first instance by the arbitrator,
not a court.
III.
A.
Next, the Plaintiffs argue that the Provider Agreement and the Provider
Manual’s arbitration clause are procedurally and substantively unconscionable
and therefore unenforceable. Although the Supreme Court has indicated that,
under certain circumstances, questions of unconscionability must be submitted
to the arbitrator in the first instance, see Rent-A-Center, W., Inc. v. Jackson, 130
S. Ct. 2772, 2779 (2010), here, neither the Plaintiffs nor the Defendants contend
that the Plaintiffs’ unconscionability argument must be decided first by the
arbitrator. In fact, the Defendants—the parties seeking to compel
arbitration—asserted, both before the district court and on appeal, that the only
argument advanced by the Plaintiffs that must be decided in the first instance
by the arbitrator and not a court was the Plaintiffs’ contention that their claims
are not subject to arbitration. Rather, the Defendants, along with the Plaintiffs,
have asked this court to address the Plaintiffs’ unconscionability arguments in
the first instance. If parties to an arbitration agreement do not agree to submit
a particular issue to arbitration, then the court should decide that issue as it
would any other question that the parties had not submitted to arbitration,
namely independently. See First Options, 514 U.S. at 943. We proceed to decide
this issue without remanding because although the district court applied
Mississippi rather than Arizona law, we ultimately conclude that the same
result is required by Arizona law.
B.
Under Arizona law, “[a]n unconscionable contract is unenforceable.” Clark
v. Renaissance W., LLC, 307 P.3d 77, 79 (Ariz. Ct. App. 2013). Arizona law
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recognizes two types of unconscionability: procedural and substantive. Id.
“Procedural unconscionability addresses the fairness of the bargaining process,
which ‘is concerned with “unfair surprise,” fine print clauses, mistakes or
ignorance of important facts or other things that mean bargaining did not
proceed as it should.’” Id. (quoting Maxwell v. Fidelity Fin. Servs, Inc., 907 P.2d
51, 57-58 (Ariz. 1995)). “In contrast, substantive unconscionability addresses the
fairness of the terms of the contract itself. A contract may be substantively
unconscionable when the terms of the contract are so one-sided as to be overly
oppressive or unduly harsh to one of the parties.” Id. (citation omitted).
Importantly, the Plaintiffs bear the burden of proving an unconscionability-
related defense to arbitration, see Heinig v. Hudman, 865 P.2d 110, 117-18 (Ariz.
Ct. App. 1994), which, with respect to invalidating an arbitration clause, is “a
high bar to meet,” Coup v. Scottsdale Plaza Resort, LLC, 823 F. Supp. 2d 931,
947 (D. Ariz. 2011) (internal quotation marks omitted). On review of the
Plaintiffs’ arguments, we conclude that neither the Provider Agreement nor the
Provider Manual’s arbitration clause is procedurally or substantively
unconscionable.
1. Procedural Unconscionability
Under Arizona law, procedural unconscionability is concerned with “unfair
surprise,” and courts consider factors pertaining to
the real and voluntary meeting of the minds of the contracting
party: age, education, intelligence, business acumen and experience,
relative bargaining power, who drafted the contract, whether the
terms were explained to the weaker party, whether alterations in
the printed terms were possible [and] whether there were
alternative sources of supply of the goods in question.
Maxwell, 907 P.2d at 57-58 (quoting Johnson v. Mobil Oil Corp., 415 F. Supp.
264, 268 (E.D. Mich. 1976)). For the reasons that follow, we conclude that the
Plaintiffs have failed to meet their burden of proof to satisfy this standard.
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a. Contracts of adhesion
The Plaintiffs argue that their agreements to arbitrate with the
Defendants are procedurally unconscionable because the Defendants dictate the
terms of participation in their patient networks and offer these terms on a “take
it or leave it” basis.
An adhesion contract is typically a standardized form “offered to
consumers of goods and services on essentially a ‘take it or leave it’
basis without affording the consumer a realistic opportunity to
bargain and under such conditions that the consumer cannot obtain
the desired product or services except by acquiescing in the form
contract.”
Broemmer v. Abortion Servs. of Phx., Ltd., 840 P.2d 1013, 1015 (Ariz. Ct. App.
1992) (quoting Wheeler v. St. Joseph Hosp., 133 Cal. Rptr. 775, 783 (Cal. Ct. App.
1976)). For such a contract, “[t]he distinctive feature . . . is that the weaker
party has no realistic choice as to its terms.” Id. at 1016 (quoting Wheeler, 133
Cal. Rptr. at 783). However, a “conclusion that [a] contract [is] one of adhesion
is not, of itself, determinative of its enforceability.” Id. Rather, “[a] contract of
adhesion is fully enforceable[] . . . unless the contract is also unduly oppressive
or unconscionable.” Brady v. Universal Technical Inst. of Ariz., Inc., No. CV-09-
1044-PHX-FJM, 2009 WL 5128577, at *2 (D. Ariz. Dec. 17, 2009) (citing
Broemmer, 840 P.2d at 1016). “Mere inequality in bargaining power is not
sufficient to invalidate an arbitration agreement.” EEOC v. Cheesecake Factory,
Inc., No. CV 08-1207-PHX-NVW, 2009 WL 1259359, at *3 (D. Ariz. May 6, 2009)
(citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 33 (1991)).
“Moreover, an agreement may be enforceable even if the terms offered are not
negotiable.” Id. (citing Phx. Baptist Hosp. & Med. Ctr. v. Aiken, 877 P.2d 1345,
1349 (Ariz. Ct. App. 1994); Broemmer, 840 P.2d at 1016).
The Plaintiffs have failed to present any evidence that they were
prevented from contracting with another PBM or could not have abstained from
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contracting with the Defendants at all. The Plaintiffs submitted three identical
affidavits in which the affiants alleged that Caremark is the largest PBM in
Mississippi and controls a significant percentage of the state’s prescription-
filling business. Based on this, the Plaintiffs reasoned that Caremark had
“undisputed” control over the prescription-filling business for a large swath of
Mississippi citizens. Yet, beyond this affidavit evidence, the Plaintiffs have not
supplied record evidence or apposite case law to contradict the conclusion that
they failed to present any evidence that there were no other PBMs with which
they could contract or that it was not economically feasible to refrain from
contracting with the Defendants at all. Given this and given the Plaintiffs’
burden of proof, Heinig, 865 P.2d at 117-18, the Plaintiffs’ lack of evidence is
fatal to their adhesion challenge, see Beus Gilbert PLLC v. Pettit, No. 1 CA-CV
10-0650, 2011 WL 1949058, at *3 (Ariz. Ct. App. May 12, 2011) (“Although Pettit
suggests he had no choice but to sign the agreement, he offers no evidence to
support the proposition that he could not have rejected the arbitration provision
and/or retain another law firm to represent him.”); see also Coup, 823 F. Supp.
2d at 948-49 (“Even if Plaintiffs had shown that the terms of the [relevant
agreements] were somehow grossly unfavorable to them, which they have not,
their unconscionability argument would nonetheless fail because they have not
made any showing of the lack of meaningful choice as necessary to establish
procedural unconscionability.” (citing Pettit, 2011 WL 1949058, at *3)).
b. Inconspicuousness
The Plaintiffs argue that their agreements to arbitrate with the
Defendants were so inconspicuously buried in the lengthy Provider Manual (the
latest iteration of which includes over 200 pages, including appendices) that this
renders their agreements to arbitrate procedurally unconscionable. Under
Arizona law, courts will enforce adhesion contracts unless the contract (or a term
therein) “exceeds a party’s reasonable expectations.” Banner Health v. Med. Sav.
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Ins. Co., 163 P.3d 1096, 1108 (Ariz. Ct. App. 2007). “In determining whether a
party enforcing an agreement had reason to believe [a] term exceeded the other
party’s reasonable expectations,” Arizona law asks, inter alia, “whether the term
is bizarre or oppressive, whether the term eviscerates non-standard terms
specifically agreed to, whether the term eliminates the dominant purpose of the
contract, whether the other party had an opportunity to read the term, and
whether the term is illegible or otherwise hidden from view.” Id. (emphasis
added) (citing Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682
P.2d 388, 397 (Ariz. 1984)). In this case, the arbitration provision is clearly
marked, both in the Provider Manual’s table of contents and via a boldface
heading later in the agreement, and appears in the same font and size as other
sections of the parties’ agreement.
On appeal, the Plaintiffs complain that the arbitration clause is
“concealed” deep within the Provider Manual and that the Defendants took no
steps to bring the clause to the Plaintiffs’ attention, highlight it for them, warn
them about it, negotiate its contours, or take any other action to ensure that they
were made aware of it. 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. See Banner Health, 163
P.3d at 1108. 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. The Plaintiffs’ failure to familiarize themselves with what they
signed does not render the Provider Manual’s arbitration clause unconscionable
or unenforceable. See Rocz v. Drexel Burnham Lambert, Inc., 743 P.2d 971, 975
(Ariz. Ct. App. 1987) (“Parties cannot repudiate their written contracts by
asserting that they neglected to read them or did not really mean them.”); see
also Coup, 823 F. Supp. 2d at 949 (“Plaintiffs’ admitted failure to read the
employee manual . . . do[es] not render [the] arbitration policy and clause
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procedurally unconscionable.” (citing Rocz, 743 P.2d at 975)). Consequently, the
Plaintiffs may not escape their agreements on procedural-unconscionability
grounds because the Defendants did not draw their attention to what they were
signing. We therefore conclude that the Provider Manual’s arbitration clause is
not procedurally unconscionable; neither is it illegible or hidden from view, nor
were the Defendants obligated to draw the Plaintiffs’ attention to it.
c. Amendments over the years
Before the district court, the Plaintiffs argued that they should not be
bound by contracts signed and executed, in some cases, over sixteen years ago
with entities far removed from the current CVS Caremark Corporation. In
particular, the Plaintiffs asserted that when they first entered into their
respective agreements, the PBM business was in its infancy such that the
Plaintiffs could not have reasonably anticipated that the PBM with which they
had contracted would some day be acquired by a competitor, which,
coincidentally, would also be the largest chain of retail pharmacies in the
country. The Plaintiffs repeat this argument in their opening brief but do not
present any legal authority in support of their position, despite their burden of
proof on this issue. See Heinig, 865 P.2d at 117-18. Moreover, despite the
changed circumstances to which the Plaintiffs allude, they do not explain why
their claims must be made in a judicial forum rather than an arbitral one.
Accordingly, the Plaintiffs’ agreement to arbitrate their claims is not
procedurally unconscionable simply because they were made sixteen or
seventeen years ago.10
10
For the first time in their reply brief, the Plaintiffs complain that the Defendants
retained the unilateral right to modify the terms of the parties’ agreements at any time and
without notice. Because the Plaintiffs have raised this argument for the first time in their
reply brief, it is waived. See Medina Cnty. Envtl. Action Ass’n v. Surface Transp. Bd., 602 F.3d
687, 702 (5th Cir. 2010).
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2. Substantive Unconscionability
“Substantive unconscionability concerns the actual terms of the contract
and examines the relative fairness of the obligations assumed.” Maxwell, 907
P.2d at 58; see also Harrington v. Pulte Home Corp., 119 P.3d 1044, 1055 (Ariz.
Ct. App. 2005) (factors showing substantive unconscionability include
“contractual terms so one-sided as to oppress or unfairly surprise an innocent
party, an overall imbalance in the obligations and rights imposed by the bargain,
and significant cost-price disparity”). “In Arizona, a case-by-case approach is
used in determining whether the terms imposed under an arbitration agreement
denies a potential litigant the opportunity to vindicate her rights.” Wernett,
2009 WL 1955612, at *5 (citing Batory v. Sears, Roebuck & Co., 456 F. Supp. 2d
1137, 1141 (D. Ariz. 2006)). As before, the Plaintiffs have failed to meet their
burden of proof to satisfy this standard.
a. Damages limitations
The Plaintiffs argue that their agreements to arbitrate are substantively
unconscionable because they restrict any award of damages to only those
enumerated in the Provider Manual. The district court found that neither party
had addressed the relevant language of the Provider Manual or presented any
argument with respect to what remedies are provided for. Because the
Plaintiffs, who bear the burden of proving a defense to arbitration, see Heinig,
865 P.2d at 117-18, failed to provide any argument with respect to this issue, the
district court declined to address it.
In their response to the Defendants’ motion to compel arbitration, the
Plaintiffs argued only that the arbitration clause purported to limit the
arbitrator’s ability to award statutory damages but did not provide any further
explanation or argument. In their opening brief, the Plaintiffs assert that the
remedies prohibited are “obviously” the ones that they asked for in their
complaint, namely actual loss of business, other compensatory damages,
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punitive damages, and injunctive relief. Despite this, the Plaintiffs do not
explain, with reference to the language of the Provider Manual, what damages
are or are not available. More fundamentally, this further elaboration on their
argument was not included in their submissions to the district court. “The
general rule of this court is that arguments not raised before the district court
are waived and will not be considered on appeal.” Celanese Corp. v. Martin K.
Eby Constr. Co., 620 F.3d 529, 531 (5th Cir. 2010). Therefore, we decline to
address the Plaintiffs’ damages-limitations argument.
b. Costs of arbitration
The Plaintiffs argue that the costs of arbitration render their agreements
to arbitrate substantively unconscionable because (1) they will not be able to
afford travel for themselves, their attorneys, and any witnesses from Mississippi
to Scottsdale, Arizona, and (2) they risk the possibility of having to pay costs and
attorneys’ fees in the event that the arbitrator sides with the Defendants.
“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.’” Clark, 307 P.3d at 79 (quoting
Harrington, 119 P.3d at 1055); see also Green Tree Fin. Corp. v. Randolph, 531
U.S. 79, 90 (2000) (“It may well be that the existence of large arbitration costs
could preclude a litigant . . . from effectively vindicating her federal statutory
rights in the arbitral forum.”). However, the mere “risk that [a litigant] will be
saddled with prohibitive costs is too speculative to justify the invalidation of an
arbitration agreement.” Randolph, 531 U.S. at 91. Thus, “[t]he party seeking
to invalidate an arbitration agreement on [the] grounds [of excessive fees or
costs] has the burden of proving that arbitration would be prohibitively
expensive.” Clark, 307 P.3d at 80. Under Arizona law, such a showing requires
the court to consider several factors:
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First, the party seeking to invalidate the arbitration agreement
must present evidence concerning the cost to arbitrate. This
evidence cannot be speculative; it must be based on specific facts
showing with reasonable certainty the likely costs of arbitration.
Second, a party must make a specific, individualized showing
as to why he or she would be financially unable to bear the costs of
arbitration. This evidence must consist of more than conclusory
allegations stating a person is unable to pay the costs of arbitration.
Rather, parties must show that based on their specific
income/assets, they are unable to pay the likely costs of arbitration.
Third, a court must consider whether the arbitration
agreement or the applicable arbitration rules referenced in the
arbitration agreement permit a party to waive or reduce the costs
of arbitration based on financial hardship.
Id. (citations omitted).
In this case, the Plaintiffs failed to present any specific, individualized
evidence that they were likely to face prohibitive costs if forced to arbitrate their
underlying claims. More fundamentally, the Plaintiffs’ contention that they will
not prevail before the arbitrator and will therefore have to bear costs and
attorneys’ fees is speculative and conclusory at best. Lastly, although not briefed
by the parties, Arizona courts have noted that the AAA Rules provide for the
waiver or reduction of fees based on “extreme hardship.” See Harrington, 119
P.3d at 1055. Given this, the Plaintiffs’ burden of proof, and the Plaintiffs’
failure to point to any record evidence detailing what it will cost to travel to
Arizona, who will be traveling, and how much costs will be, we conclude that the
potential costs of arbitration do not render the arbitration clause substantively
unconscionable. See Clark, 307 P.3d at 80; Harrington, 119 P.3d at 1055.
CONCLUSION
For these reasons, we AFFIRM the judgment of the district court.
25