SAN FRANCISCO (LN) — The 9th Circuit affirmed a district court’s order compelling arbitration in an antitrust dispute between independent pharmacies and CVS Health, ruling that the agreement’s core provisions were enforceable despite challenges regarding unconscionability. However, the court upheld the lower court’s decision to strike down a delegation clause that required an arbitrator to decide whether claims were arbitrable.
Plaintiffs Osterhaus Pharmacy, Cammack’s Pharmacies, JCH Pharmacy Holdings, and Calls Community Pharmacy alleged anticompetitive conduct by Caremark and its affiliates regarding prescriptions filled under Medicare health plans.
The district court had granted Caremark’s motion to compel arbitration, dismissing the case without prejudice after severing three provisions it found unconscionable: an uneven remedies clause, an escrow provision, and a confidentiality provision.
On appeal, the pharmacies argued the arbitration agreement was unenforceable due to six challenged provisions, including fee-shifting, unilateral modification, and the escrow requirement.
The 9th Circuit panel, consisting of Judges Clifton, Bybee, and Miller, affirmed the district court’s decision, holding that the pharmacies failed to meet their burden of proving the arbitration costs were prohibitive under Arizona law.
The court noted that the arbitration agreement included a “loser pays” provision requiring the unsuccessful party to cover arbitration expenses.
“Plaintiffs’ assertion that they risk being subject to costs and fees, if they lose their dispute, is exactly the type of ‘risk’ that the Randolph Court deemed speculative and conclusory at best,” the opinion stated, citing Green Tree Fin. Corp.-Ala. v. Randolph.
The court also upheld a provision shortening the limitations period for antitrust claims from four years to two years, finding that Arizona courts have recognized similar agreements.
Regarding the unilateral amendment provision, the 9th Circuit distinguished the case from prior rulings where providers could change terms without notice. Caremark agreed to provide advance notice and allow parties to discontinue the agreement.
The court rejected the pharmacies’ argument that a “gross disparity in economic leverage” rendered the agreement unconscionable, noting that procedural unconscionability requires more than just bargaining power differences.
On cross-appeal, Caremark argued the district court erred in declining to enforce the delegation clause, which required an arbitrator to decide gateway issues of arbitrability.
The 9th Circuit agreed with the district court that the delegation clause was substantively unconscionable when read in conjunction with the escrow provision.
The escrow provision required Plaintiffs to set aside an upfront sum sufficient to cover estimated attorney’s fees and arbitration expenses, totaling no less than $50,000.
“The escrow provision would require Plaintiffs to set aside an enormous upfront sum, potentially, to initiate a claim or even to determine if the delegation clause required the initial challenge to be considered by an arbitral tribunal instead of by the court,” the opinion said.
The district court reasonably concluded that the delegation clause, read alongside the escrow provision, would prevent Plaintiffs from effectively vindicating their rights forum due to prohibitive costs.
The 9th Circuit affirmed the district court’s order declining to enforce the delegation clause.
Each party was ordered to bear its own costs.
The case was appealed from the U.S. District Court for the District of Arizona, where John Joseph Tuchi served as district judge.