Arbitrability disputes come in various forms.  Some involve broad arbitration clauses, some narrow clauses, and some clauses that are neither broad nor narrow.  Chelsea Family Pharmacy, PLLC v. Medco Health Solutions, Inc., ___ F.3d ___ (10^th Cir. 2009) (available here) provides a relatively simple illustration of how courts may decide controversies concerning relatively narrow arbitration clauses and the results that may ensue. 

Background

Chelsea is a local retail pharmacy.  Medco is a third-party prescription drug program administrator that, among other things, contracted with local pharmacies to fill program members’ prescriptions and facilitate insurance reimbursement to the pharmacies. 

Medco entered into an agreement with Chelsea under which Chelsea agreed to participate in pharmacy networks and provide services to network members.  The agreement incorporated a “Pharmacy Services Manual” and several additional schedules setting “payment rates” for the reimbursement of Chelsea for services provided to network members.  The Pharmacy Services Manual contained an arbitration clause, which provided in pertinent part that: 

Any controversy or claim arising out of or relating to the payments to Pharmacy by Medco or audit issues, but not relating to termination of Pharmacy’s Agreement with Medco or Pharmacy’s Termination from Medco’s Networks, that are not settled by the parties will be determined by arbitration.  .  .  .

 Chelsea contended that the agreement illegally prevented Chelsea from competing with Medco’s mail-order pharmacy because Medco may offer lower dispensing rates than Chelsea is permitted to offer and because Medco is permitted to provide certain services that Chelsea is not.  Chelsea claimed that Medco possessed undue bargaining power and used it to undermine Chelsea’s ability to compete for the business of its local customers. 

Chelsea filed a class action suit on on behalf of itself and similarly situated pharmacies in Oklahoma, alleging that the Medco contract terms set reimbursement rates too low and prevented Chelsea from competing with Medco’s mail-order business.  The complaint alleged three separate causes of action:  violation of Oklahoma’s Third Party Prescription Act, breach of contract, and unfair business practices.  The complaint alleged the same set of facts for each cause of action, and each cause of action addressed both reimbursement rates and the mail order program. 

Medco moved for a stay pursuant to Federal Arbitration Act Section 3, contending that the phrase “relating to payments” in the arbitration clause should be construed to require arbitration of any claim that has payment as a component.  According to Medco, each of Chelsea’s claims focused on Medco’s alleged failure to reimburse at prevailing rates and that, accordingly, each claim was “related to payments” by Medco to Chelsea. 

In response, Chelsea argued that the “gravamen” of its complaint was Medco’s alleged unfair and anticompetitive practices.  According to Chelsea, the arbitration clause was narrow and the entire dispute fell outside its scope. 

The District Court denied Medco’s motion in its entirety, finding that the arbitration clause was narrow and was intended to apply solely to disputes over specific payments.  Medco appealed. 

The appeal raised four issues: 

1.      What was the scope of the arbitration clause;

2.      For the purpose of the arbitration clause, what were the relevant “claims” or “controversies” alleged in the complaint;

3.      Which of those claims or controversies, if any, fell within the scope of the arbitration clause; and

4.      Assuming some but not all of the claims or controversies were arbitrable, should the entire litigation be stayed?   

Scope of the Arbitration Clause

The Tenth Circuit has adopted the Second Circuit’s analytical framework for analyzing the scope of an arbitration clause.  The Court determines whether the arbitration clause is “broad” or “narrow” by considering whether the “the parties clearly manifested an intent to narrowly limit arbitration to specific disputes.”  2009 WL 1520109, at *3 (quotation omitted).  While the Court construes doubts in favor of arbitration irrespective of whether the clause is broad or narrow, the Court presumes all matters to be arbitrable under a broad clause, whereas it does not indulge in that presumption when faced with a narrow clause.  See id. at *4. 

The Court found that the arbitration clause was narrow because it expressly exempted disputes “relating to termination of [Chelsea]’s Agreement with Medco or [Chelsea]’s Termination from Medco’s Networks.”  Though the arbitration clause did not expressly exempt disputes other than those relating to termination, it was limited in scope to “[a]ny controversy or claim arising out of or relating to payments to [Chelsea] by Medco or audit issues.  .  .  .”   The Court found that the limited scope of the clause, coupled with its express exemption of termination disputes, was the “analytical[] equivalent [of].  .  . an express exclusion of other issues.”  2009 WL 1520109, at *3. 

What were the “Controversies or Claims” to which the Narrow Arbitration Agreement Applied?  

To determine whether a particular dispute is within the scope of a narrow arbitration clause, the Tenth Circuit considers whether the dispute “relates to an issue that is on its face within the purview of the [narrow] clause.  .  ..”   2009 WL 1520109, at *4.  “Collateral matters” are not subject to arbitration under a narrow clause.  Id.

But in Chelsea the Tenth Circuit had to consider what controversies or claims were alleged to determine whether there were any that fell within the scope of the narrow clause.  Since Chelsea alleged the same facts in support of three different causes of action, it was necessarily to look through the form of the pleading to determine what specific claims were alleged. 

Focusing on the substance of the factual allegations, rather than on the form in which the causes of action were pleaded, the Court found that each cause of action alleged two distinct harms:  (a) Medco’s reimbursement of Chelsea in an amount less than permitted by Oklahoma law; and (b) Medco’s unlawful restriction of Chelsea’s ability to compete with Medco’s mail-order pharmacy.  Id.   Each of these separate harms, said the Court, was a claim or controversy for the purposes of the arbitration clause.  Id. at 5. 

Once the Court had identified two separate claims potentially subject to the arbitration agreement, it was fairly easy to determine whether one or both were arbitrable.  The Court determined that the claim concerning Medco’s reimbursement of rates was “on its face, within the purview of the arbitration clause.”  Id.  Noting that the arbitration clause was narrow “in the context of the overall agreement,” the Court found that the clause “sweeps broadly within the category of payment disputes.”  Id. at 5 & 6.  The Court therefore disagreed with the District Court’s conclusion that the clause was limited to disputes over “specific payments,” and found that it applied to any matter concerning payments from Medco to Chelsea, including Chelsea’s claim concerning Medco’s allegedly inadequate reimbursement rates.  Id. at 6. 

As respects the anti-competitive practices claim, Medco did not contend that it would fall within the scope of the arbitration clause if it was considered a claim independent from the inadequate reimbursement of rates claim.  Since it was effectively undisputed that the anti-competitive practices claim did not fall within the purview of the narrow clause, the Court held that it was not subject to arbitration.  Id.

Chelsea’s Request for a Stay of  Litigation

Having found that there were two distinct claims at issue, one arbitrable and one not, the Court had to decide whether it should stay litigation of the arbitrable claim only, or stay the entire litigation.  Noting that avoiding “piecemeal litigation” was not in and of itself a reason to stay the nonarbitrable claim, the Court held that only the arbitrable claim should be stayed: 

Because the two claims.  .  . are distinct and unrelated, Chelsea’s arbitrable illegal reimbursement claim cannot have a preclusive effect on the nonarbitrable mail order claim; one does not ‘predominate’ over the other.  This being the case, it would be inappropriate to stay the mail order claim pending resolution of the reimbursement rate claim.  

Id. at 7. 

The Concurring Opinion

Judge Gorsuch submitted a concurring opinion questioning the validity of the Second Circuit’s analytical approach to arbitrability questions.  The Second Circuit’s approach was adopted by the Tenth Circuit in an earlier case, and applied in this case.  Judge Gorsuch joined the majority opinion because the analysis and result was dictated by prior precedent, but his comments about the wisdom of classifying clauses as either broad or narrow are certainly well worth reading, albeit outside the scope of this post.