In re: Rotavirus Vaccines Antitrust Litigation v. ( 2022 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 20-3460
_____________
In re: ROTAVIRUS VACCINES ANTITRUST
LITIGATION
SUGARTOWN PEDIATRICS, LLC;
SCHWARTZ PEDIATRICS SC;
MARGIOTTI & KROLL PEDIATRICS, PC
v.
MERCK SHARP & DOHME CORP.,
Appellant
_____________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 2-18-cv-01734)
District Judge: Honorable J. Curtis Joyner
_____________
Argued on September 24, 2021
Before: CHAGARES, Chief Judge, HARDIMAN, and
MATEY, Circuit Judges
(Filed: March 21, 2022)
Ashley E. Bass [argued]
Andrew D. Lazerow
Mark W. Mosier
Covington & Burling
850 10th Street, N.W.
One City Center
Washington, DC 20001
Lisa C. Dykstra
Morgan Lewis & Bockius
1701 Market Street
Philadelphia, PA 19103
Counsel for Appellant
Leonardo Chingcuanco
Daniel H. Silverman [argued]
Daniel A. Small
Cohen Milstein
1100 New York Avenue, N.W.
West Tower, Suite 500
Washington, DC 20005
Gary L. Azorsky
Cohen Milstein
1717 Arch Street
3 Logan Square, Suite 3610
Philadelphia, PA 19103
Eric L. Cramer
David A. Langer
2
Daniel J. Walker
Berger Montague
1818 Market Street
Suite 3600
Philadelphia, PA 19103
Counsel for Appellees
________________
OPINION OF THE COURT
________________
HARDIMAN, Circuit Judge.
This appeal comes to us from an order denying a motion
to compel arbitration. Appellant Merck contends the District
Court should have compelled Sugartown Pediatrics, Schwartz
Pediatrics, and Margiotti & Kroll Pediatrics (the Pediatricians)
to arbitrate their claim that Merck’s vaccine bundling scheme
was anticompetitive. We agree. We will reverse and remand
for the District Court to grant Merck’s motion to compel
arbitration.
I
This case involves two types of contracts. Both are part
of Merck’s loyalty program, whereby medical practices
receive discounts if they buy sufficient vaccine quantities from
Merck. The first type of contract is between Merck and
Physician Buying Groups (PBGs). These loyalty contracts
entitle PBG members to discounts if they buy a large enough
percentage of their vaccines from Merck. The loyalty contracts
also include an arbitration provision. The second type of
3
contract is between PBGs and medical practices. These
membership contracts give medical practices discounts on
Merck vaccines for enrolling in PBGs. PBGs thus form the
bridge between medical practices and Merck, contracting with
both Merck and medical practices. They are middlemen in all
but one relevant sense: PBGs never possess the vaccines.
Medical practices buy their vaccines directly from Merck, but
they receive discounts for belonging to a PBG.
Though they were members of PBGs that contracted
with Merck, 1 the Pediatricians never signed contracts
containing an arbitration clause. So the Pediatricians filed
federal suits alleging Merck’s vaccine bundling program was
anticompetitive. Merck responded with a motion to compel
arbitration based on the arbitration clause contained in its
loyalty contracts with the PBGs, which the District Court
denied under the summary judgment standard. In re Rotavirus
Vaccines Antitrust Litig. (Rotavirus I), 362 F. Supp. 3d 255,
261, 264–65 (E.D. Pa. 2019). The first time this case came
before us, we vacated the order of the District Court, holding
that it should have allowed discovery on arbitrability. In re
Rotavirus Vaccines Antitrust Litig. (Rotavirus II), 789 F.
App’x 934, 938 (3d Cir. 2019).
After the parties conducted discovery, Merck renewed
its motion to compel arbitration and the Pediatricians cross-
moved for summary judgment on arbitrability. In re Rotavirus
Vaccines Antitrust Litig. (Rotavirus III), 2020 WL 6828123, at
*1 (E.D. Pa. Nov. 20, 2020). The District Court once again
1
Schwartz was a member of Children’s Community
Physicians Association Purchasing Partners (CCPAPP).
Sugartown and Margiotti & Kroll were members of Main
Street Vaccines (MSV).
4
denied Merck’s motion to compel arbitration and granted
summary judgment for the Pediatricians. Id. at *15. The Court
concluded, as relevant here, that the Pediatricians were not
bound under an agency theory because they had not authorized
the PBGs to enter into arbitration agreements. Id. at *13–14.
This appeal followed.
II
The District Court had jurisdiction over the
Pediatricians’ antitrust claims. See 28 U.S.C. § 1331; 15
U.S.C. § 4. We have jurisdiction to review the order denying a
motion to compel arbitration under 9 U.S.C. § 16(a)(1)(B). For
jurisdictional purposes, motions to compel arbitration and
motions for summary judgment on arbitrability—both of
which are at issue in this appeal—are equivalent. See Bacon v.
Avis Budget Grp., Inc., 959 F.3d 590, 598–99 & n.4 (3d Cir.
2020).
Our review of the District Court’s decision, including
its legal conclusion that the PBGs were not the Pediatricians’
agents, is plenary. O’Hanlon v. Uber Techs., Inc., 990 F.3d
757, 766 n.5 (3d Cir. 2021). We apply the summary judgment
standard, so “[t]he party opposing arbitration is given the
benefit of all reasonable doubts and inferences that may arise.”
Griswold v. Coventry First LLC, 762 F.3d 264, 270 (3d Cir.
2014) (quoting Kaneff v. Del. Title Loans, Inc., 587 F.3d 616,
620 (3d Cir. 2009)). No material facts are in dispute.
III
The Federal Arbitration Act (FAA) “‘declare[s] a
national policy favoring arbitration’ of claims that parties
contract to settle in that manner.” Preston v. Ferrer, 552 U.S.
5
346, 353 (2008) (quoting Southland Corp. v. Keating, 465 U.S.
1, 10 (1984)). But courts must be sure that the parties have
agreed to arbitrate their claims. After all, “[a]rbitration is
strictly a matter of consent.” Lamps Plus, Inc. v. Varela, 139
S. Ct. 1407, 1415 (2019) (quoting Granite Rock Co. v.
Teamsters, 561 U.S. 287, 299 (2010)).
Nonsignatories will be bound to an arbitration
agreement only when “traditional principles of contract and
agency law” so require. Hamilton Park Health Care Ctr. Ltd.
v. 1199 SEIU United Healthcare Workers E., 817 F.3d 857,
864 (3d Cir. 2016) (quoting E.I. DuPont de Nemours & Co. v.
Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d
187, 194 (3d Cir. 2001)). Pennsylvania contract law recognizes
“five theories for binding nonsignatories to arbitration
agreements,” including agency. Allstate Settlement Corp. v.
Rapid Settlements, Ltd., 559 F.3d 164, 170 (3d Cir. 2009)
(quoting Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529,
532 (3d Cir. 2005)). A principal will be bound by his agent’s
acts—including an agreement to arbitrate—if the agent has
actual or apparent authority. Wisler v. Manor Care of
Lancaster PA, LLC, 124 A.3d 317, 323 (Pa. Super. Ct. 2015).
A
Merck argues that the Pediatricians granted the PBGs
actual authority to consent to the arbitration clauses on the
Pediatricians’ behalf. We agree, at least as to Schwartz
Pediatrics.
Under Pennsylvania law, “the three basic elements of
agency are: [1] the manifestation by the principal that the agent
shall act for him, [2] the agent’s acceptance of the
undertaking[,] and [3] the understanding of the parties that the
6
principal is to be in control of the undertaking.”
Commonwealth v. Britton, 229 A.3d 590, 598 (Pa. 2020)
(quoting Basile v. H & R Block, Inc., 761 A.2d 1115, 1120 (Pa.
2000)).
Schwartz’s contract with its PBG satisfies the first two
prongs of this test. Its 2016 PBG membership contract made
the PBG Schwartz’s “non-exclusive agent to arrange for the
purchase of goods and services,” Rotavirus III, 2020 WL
6828123, at *9; and a previous version of the membership
agreement, effective in 1999, contained a similarly explicit
provision, see App. 2412 (“Each Limited Partner hereby
appoints the Partnership as its agent for the purpose of
negotiating and entering into Vendor Arrangements, and the
Partnership hereby accepts such appointment.”). By agreeing
to these terms, Schwartz manifested an intent to have the PBG
act for it, and the PBG accepted that responsibility. The PBG
acted on this authority in 2012 by executing the loyalty
contract with Merck that included the arbitration clause. Thus,
the first two elements of the agency test are satisfied here for
Schwartz.
Accordingly, the only remaining question is whether
Schwartz exercised sufficient control over its PBG to meet the
control requirement of the Pennsylvania agency test. See
Britton, 229 A.3d at 598.
1
Although the parties dispute how it applies here,
Pennsylvania agency law is clear on the control requirement.
“[A]n agency relationship is established only when the
principal exercises control over the action at hand.” Id.; see
also Menichini v. Grant, 995 F.2d 1224, 1233 n.14 (3d Cir.
7
1993). The principal can control the agent by “prescribing what
the agent shall or shall not do before the agent acts,” or by
directly controlling the agent during performance. Smalich v.
Westfall, 269 A.2d 476, 480–81 (Pa. 1970) (quoting
Restatement (Second) of Agency § 14 cmt. a (Am. L. Inst.
1958)). The question in this appeal is whether Schwartz—the
alleged principal—had the right or ability to control its PBG,
the alleged agent. See Commonwealth v. Minds Coal Mining
Corp., 60 A.2d 14, 20 (Pa. 1948) (“[C]ontrol over the means
of performance is not the test of agency.”).
Here, Schwartz exercised control over its PBG by
circumscribing the PBG’s authority. Schwartz made the PBG
its agent only for the limited purpose of vaccine purchases.
Rotavirus III, 2020 WL 6828123, at *9 (2016 CCPAPP
membership contract, limiting agency to “the purchase of
goods and services as set forth herein”); App. 2412 (1999
membership contract “appoint[ing] the [PBG] as [Schwartz’s]
agent for the purpose of negotiating and entering into Vendor
Arrangements”). Thus, Schwartz simultaneously demonstrated
its intent to create an agency relationship and exercised control
over the scope of the PBG’s agency by contract.
The Pediatricians counter that this case is like Basile,
where the Pennsylvania Supreme Court held that no agency
relationship exists where the alleged agent merely presents an
opportunity to the alleged principal. Basile, 761 A.2d at 1121.
In Basile, H & R Block offered its customers the opportunity
to obtain loans from a third party. Id. at 1117. The court held
that H & R Block’s “mere facilitation” of the loan did not
create an agency relationship. Id. at 1121. “Rather, the action
[giving rise to the agency relationship] must be a matter of
consequence or trust, such as the ability to actually bind the
principal or alter the principal’s legal relations.” Id. (emphasis
8
omitted). Because such action was lacking, there was no
agency relationship.
The Pediatricians’ reliance on Basile is inapt. In that
case, the customers did not contractually designate H & R
Block as their agent. So the court looked to the parties’ conduct
to determine whether an agency relationship existed. In doing
so, the Basile court distinguished “mere facilitation” of an
opportunity from an agency relationship. Id. Unlike in Basile,
here Schwartz signed a membership contract that expressly
designated the PBG as its purchasing agent. Because of the
explicit authority delegated by that contract, Merck need not
rely on the relationship between the parties to establish an
agency relationship.
2
The Pediatricians also argue that the PBGs were not
acting as their agents because they did not notify the
Pediatricians about the arbitration clauses. The Pediatricians
claim that the PBGs had no authority to agree to “undisclosed
terms” with Merck. This argument also rests on a flawed
analogy to Basile.
To exercise the requisite degree of control, the principal
must be adequately informed of the agent’s actions.
Accordingly, the agent has a fiduciary duty to keep the
principal informed of “all relevant information.” Id. at 1120.
Because of the agent’s duty to disclose, the agent’s knowledge
is imputed to the principal. W.C.A.B. v. Evening Bulletin, 445
A.2d 1190, 1192 (Pa. 1982); see also Restatement (Third) of
Agency § 5.03 (Am. L. Inst. 2006) (“[N]otice of a fact that an
agent knows or has reason to know is imputed to the principal
9
if knowledge of the fact is material to the agent’s duties to the
principal.”).
But what if the agent does not fulfill its fiduciary duties?
An agency relationship still exists even if the agent fails to
notify the principal of all relevant information. See
Restatement (Third) of Agency § 5.03 cmt. b (Am. L. Inst.
2006) (“A principal may not rebut the imputation of an agent’s
notice of a fact by establishing that the agent kept silent.”). Put
more simply, an agent might fail to perform his duty but remain
the principal’s agent. In such a case, the proper recourse for the
principal is an action against the agent for breach of fiduciary
duty or malpractice; but the principal will nevertheless be
bound by the agent’s actions. See, e.g., Patel v. Mericle Com.
Real Est. Grp., 2017 WL 11144107, at *4 (M.D. Pa. 2017)
(allowing malpractice and breach of fiduciary duty claims
against an agent to proceed based on the agent’s failure to
disclose material information).
Here, the Pediatricians claim ignorance of the
arbitration clause. Based on that fact, the District Court
concluded that the Pediatricians were not bound by the
arbitration clause because the PBGs were not acting within the
scope of their agency authority when they agreed to the
arbitration clauses. Rotavirus III, 2020 WL 6828123, at *14
(“[W]e are constrained to conclude that the member practices[]
granted only very limited authority to their PBGs to enter into
those terms and conditions of the Merck contracts which had
been communicated to them.”).
The District Court’s conclusion does not follow from its
premise. The Pediatricians’ lack of notice is relevant to the
adequacy of the PBGs’ performance as agents, but it does not
answer the antecedent question of whether an agency
10
relationship existed. See Restatement (Third) of Agency § 5.03
cmt. b (Am. L. Inst. 2006). Unlike in Basile, where there was
no contract conferring agency on H & R Block, the contracts
between the PBGs and the Pediatricians clearly established the
agency relationship, and the authority to agree to an arbitration
clause is part and parcel of the agency relationship in
commercial contexts. See Dye v. Tamko Bldg. Prods., Inc., 908
F.3d 675, 684–86 (11th Cir. 2018); see also HealthplanCRM,
LLC v. AvMed, Inc., 458 F. Supp. 3d 308, 335 (W.D. Pa. 2020)
(noting that Dye “provides persuasive guidance consistent with
Pennsylvania law”). Subsequent actions, such as the PBGs’
alleged failure to notify, go only to whether the PBGs fulfilled
their fiduciary duties. Even if the PBGs breached their duties
to the Pediatricians, that does not release the Pediatricians from
their obligations under the arbitration clause. If this case were
more like Basile, and there was no explicit contract conferring
agency on the PBGs, then the Pediatricians would be correct—
we would look to the parties’ conduct to determine the
existence and scope of their agency relationship. But here, a
written contract created an agency relationship that included
the implied authority to accept an arbitration provision.
For these reasons, Schwartz Pediatrics is bound to
arbitrate because it granted actual authority to its PBG.
B
Sugartown and Margiotti & Kroll’s contract with their
PBG would have established actual authority had it been
signed earlier. That contract authorized the PBG to “act as a
purchasing agent for [PBG members] to enter into contracts
with third-party vendors to furnish goods or services to [PBG
members].” Rotavirus III, 2020 WL 6828123, at *11. But that
language was not inserted into the membership contract until
11
2019, years after the PBG executed its 2012 loyalty contract
with Merck. The earlier contracts between the two
Pediatricians and their PBG were less explicit about the PBG’s
agency but still contained provisions from which agency could
be inferred. See App. 2347 (stating that the Pediatricians
“accept[] the conditions and terms offered in the [PBG-Merck]
contract” and wish to “participate”); see also App. 2224–25
(testimony by MSV president that MSV acts as members’
“limited agent” and has “always negotiated the contracts on
behalf of [its] members”). In any event, we need not decide
whether those earlier contracts sufficed to establish actual
agency authority because, at a minimum, the PBG had apparent
authority to act for Sugartown and Margiotti & Kroll.
An agent has apparent authority if “the principal, by
word or conduct, causes people with whom the alleged agent
deals to believe that the principal has granted the agent
authority to act.” Wisler, 124 A.3d at 324 (quoting Walton v.
Johnson, 66 A.3d 782, 786 (Pa. Super. Ct. 2013)). In
Pennsylvania, “apparent authority [may] be established with a
showing of: (1) limited authority given to the agent by the
principal; and (2) conduct of the agent which demonstrates to
the third-party the agent’s apparent authority to bind the
principal.” Leidigh v. Reading Plaza Gen., Inc., 636 A.2d 666,
667–68 (Pa. Super. Ct. 1994) (citation omitted).
Both prongs of the test for apparent authority are met
here. The District Court found “the member practices[] granted
only very limited authority to their PBGs.” Rotavirus III, 2020
WL 6828123, at *14. Testimony in the District Court
confirmed that Sugartown and Margiotti & Kroll’s PBG acted
on their behalf. See, e.g., id. at *9 (describing testimony by
MSV’s president that “if a practice was enrolling in the [MSV]
program through completion of their Enrollment
12
Form/Membership Agreement, they were also enrolling into
the contract which [MSV] had with Merck and agreeing that
they would abide by the terms and conditions of this contract”);
App. 2224–25 (testimony by MSV’s president that MSV acts
as members’ “limited agent” and has “always negotiated the
contracts on behalf of [its] members”). At a minimum, this
testimony justified the District Court’s finding that the
Pediatricians delegated “very limited authority” to their PBGs.
Rotavirus III, 2020 WL 6828123, at *14.
So we turn to the second prong of the test: the conduct
of the agent. Pennsylvania law tilts in favor of finding that an
agent has apparent authority. Third parties dealing with an
agent need only exercise “reasonable diligence to ascertain the
agent’s authority.” Bolus v. United Penn Bank, 525 A.2d 1215,
1222 (Pa. Super. Ct. 1987). Moreover, “[a]n admitted agent is
presumed to be acting within the scope of his authority where
the act is legal and the third party has no notice of the
limitations on the agent’s authority.” Id. at 1222.
Here, Merck was justified in believing that the PBGs
were the Pediatricians’ agents because the PBGs represented
themselves as agents in their contracts with Merck. App. 2141
(Merck-CCPAPP contract, warranting that CCPAPP had “the
authority of the [Pediatricians] to participate in this
Agreement”); App. 2157 (Merck-MSV contract with identical
language). Additionally, the Merck-PBG contracts required
each PBG to meet the federal definition of a “group purchasing
organization.” App. 2145 (Merck-CCPAPP contract); App.
2161 (Merck-MSV contract). “Group purchasing
organization” is defined by federal regulation as “an entity
authorized to act as a purchasing agent” for medical providers.
42 C.F.R. § 1001.952(j)(2). By purchasing vaccines at the rates
specified in the Merck-PBG contracts, the Pediatricians
13
confirmed the impression that the PBGs were acting as their
agents. Thus, Merck had reason to believe the PBGs were the
Pediatricians’ agents.
The Pediatricians’ best argument to the contrary is
based on a supposed concession by Merck. Merck represented
to the District Court that, until the Pediatricians submitted their
contracts with the PBGs, “Merck did not have sufficient
information about the nature of the relationship between the
PBGs and their members to assert that the PBGs acted as
agents for the members with respect to Merck’s contracts.”
App. 124 n.6. Such a concession would defeat an apparent
authority theory because Merck could not have believed the
PBGs were the Pediatricians’ agents if Merck did not know
about the “nature of the relationship between the PBGs and [the
Pediatricians].” Id.Merck claims this footnote did not concede anything
substantive; it merely recognized a procedural hurdle.
Specifically, Merck explains it could not prove an agency
relationship based solely on the Pediatricians’ complaint and
needed the Pediatricians to incorporate the agreements into the
complaint, which they eventually did. Merck’s explanation is
plausible since the Pediatricians’ complaint devotes only a few
paragraphs to their relationship with their PBGs. However,
Merck’s District Court briefing states that “Merck did not have
sufficient information,” not just that the Pediatricians’
complaint lacked sufficient information. Id. So even if we do
not fully accept Merck’s explanation, Merck knew something
about the “nature” of the PBG-Pediatrician relationship
because of (1) the PBGs’ contractual representations that they
were the Pediatricians’ agents and (2) the Pediatricians’
subsequent purchases of discounted vaccines. That gave Merck
sufficient reason to believe that the PBGs were the
14
Pediatricians’ agents, even if it never saw the PBG-Pediatrician
contracts before this litigation.
Because both prongs of the apparent authority test are
satisfied here, Sugartown and Margiotti & Kroll must arbitrate
their disputes with Merck.
C
In a final attempt to avoid arbitration, the Pediatricians
argue that the arbitration clause’s language does not
encompass them or their claims. The clause reads: “Any
controversy, claim or dispute arising out of or relating to the
performance, construction, interpretation or enforcement of
this Agreement shall, if not resolved through negotiations
between the parties, be submitted to mandatory binding
arbitration pursuant to the Federal Arbitration Act, 9 U.S.C.
Sec. 1, et. seq.” Rotavirus III, 2020 WL 6828123, at *2.
1
The Pediatricians insist their antitrust claims against
Merck do not “arise out of or relate to” the contracts between
Merck and the PBGs. Ped. Br. 25–26. Pennsylvania law
suggests otherwise. When confronted with an arbitration
clause nearly identical to this one—with the same “arising out
of or relating to” language—the Pennsylvania Supreme Court
concluded that it was framed in the “broadest conceivable
language,” and inferred “that the parties intended the scope of
the submission to be unlimited.” Borough of Ambridge Water
Auth. v. Columbia, 328 A.2d 498, 501 (Pa. 1974); see also
Battaglia v. McKendry, 233 F.3d 720, 727 (3d Cir. 2000)
(“[W]hen phrases such as ‘arising under’ and ‘arising out of’
15
appear in arbitration provisions, they are normally given broad
construction.”).
The Pediatricians rely on a case where a more limited
arbitration clause was at issue. See CardioNet, Inc. v. Cigna
Health Corp., 751 F.3d 165, 173–74 (3d Cir. 2014) (“[O]nly
those disputes ‘regarding the performance or interpretation of
the Agreement’ must be arbitrated.” (emphasis added)). In
CardioNet, we held that the arbitration agreement did not cover
the plaintiffs’ claims. Id. at 179. But in doing so, we
distinguished a case where an “undisputedly broader”
arbitration clause was at issue. Id. at 176 (citing Sweet Dreams
Unlimited, Inc. v. Dial-A-Mattress Int’l, Ltd., 1 F.3d 639, 642–
43 (7th Cir. 1993)). That broader clause required arbitration for
disputes “arising out of” the contract—the same language
contained in the arbitration clause at issue here. Sweet Dreams,
1 F.3d at 642. So CardioNet undermines the Pediatricians’
arguments.
For these reasons, we hold that the Pediatricians’
antitrust claims are covered by the arbitration clause.
2
The Pediatricians also claim they are not “parties”
within the meaning of the contractual language. We disagree.
First, it is not clear that the scope of the arbitration provision is
limited to the “parties.” The portion of the clause which
mentions “the parties” applies only to pre-arbitration
negotiations: “Any controversy . . . arising out of or relating to
. . . this Agreement shall, if not resolved through negotiations
between the parties [be arbitrated].” Rotavirus III, 2020 WL
6828123, at *2 (emphasis added). The operative provision of
the arbitration clause, on the other hand, is not limited to “the
16
parties.” See id. (requiring arbitration of “[a]ny controversy,
claim or dispute arising out of or relating to [the contract]”).
And even if the Pediatricians were right that the
arbitration provision is limited to “the parties,” they would still
be covered under agency principles. The PBGs were acting as
their agents, who stand “in the shoes” of their principals,
including when they “alter the legal relations between the
principal and third persons.” Tribune-Review Publ’g Co. v.
Westmoreland Cnty. Hous. Auth., 833 A.2d 112, 120 (Pa.
2003) (cleaned up). When the PBGs signed the agreement in
their capacity as agents, they bound the Pediatricians.
For these two independently sufficient reasons, we hold
that the Pediatricians are covered by the arbitration provision.
* * *
The District Court erred when it denied Merck’s motion
to compel arbitration. Schwartz Pediatrics made the PBG its
agent by contract, then the PBG used its authority to bind
Schwartz to an arbitration clause. Sugartown and Margiotti &
Kroll must arbitrate because their PBG had apparent authority
to bind them to the arbitration clause with Merck. We will
reverse the order of the District Court and remand with the
instruction that the Court grant Merck’s motion to compel
arbitration.
17