NECA-IBEW Rockford Local Union v. A&A Drug Company , 736 F.3d 1054 ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-3070
NECA-IBEW ROCKFORD LOCAL
UNION 364 HEALTH AND WELFARE
FUND,
Plaintiff-Appellant,
v.
A&A DRUG COMPANY, A NEBRASKA
CORPORATION DOING BUSINESS AS
SAV-RX PRESCRIPTION SERVICES,
Defendant-Appellee.
Appeal from the United States District Court for the
Northern District of Illinois, Western Division.
No. 3:11-cv-50165 — Philip G. Reinhard, Judge.
ARGUED OCTOBER 9, 2013 — DECIDED NOVEMBER 25, 2013
Before WOOD, Chief Judge, and KANNE and TINDER, Circuit
Judges.
PER CURIAM. The issue in this case is whether the parties
must arbitrate their dispute. The NECA-IBEW Health and
2 No. 12-3070
Welfare Fund is a trust fund that provides health benefits to
members of Rockford Local 364, a union of electrical workers.
The Fund negotiated an agreement (which we will call the
Local Agreement) with Sav-Rx, a provider of prescription-drug
benefits. Under the Local Agreement, Sav-Rx reimburses
pharmacies for dispensing medication and then invoices the
Fund for some of its costs. A few months later, Sav-Rx
negotiated a different agreement with the national
organization of the International Brotherhood of Electrical
Workers, with which the Local 364 is affiliated. This National
Agreement offers locals reduced charges and more services
than the Local Agreement. It also contains a mandatory
arbitration clause.
Local unions and local trust funds could opt into the
National Agreement, but the Fund's trustees never voted on
the matter. Over the next eight years, however, the Fund
accepted from Sav-Rx services provided by the National
Agreement. The Fund has sued Sav-Rx for invoicing the Fund
at rates not authorized by either the Local or National
Agreement. Contending that the National Agreement, with the
arbitration clause, governs the dispute, Sav-Rx moved to
dismiss. Finding that Fund had accepted the benefits of the
National Agreement and were thus bound to it, the district
court granted Sav-Rx's motion. Because Sav-Rx established that
the Fund knew it was accepting benefits under the National
Agreement, the Fund therefore ratified that agreement, and
accordingly we affirm the district court’s judgment.
No. 12-3070 3
I. FACTUAL BACKGROUND
Over a decade ago, the Fund began searching for a
pharmacy-benefit provider for its local union members. As a
trust, the Fund is governed by a board of trustees. Sav-Rx,
through its vice-president, understands that the Fund acts
through its board of trustees. The trustees met with the
president of Sav-Rx in Rockford, Illinois, and voted in 2002 to
approve Sav-Rx to provide prescription-drug benefits to its
local union members. After the vote, Sav-Rx sent the Fund a
copy of its Local Agreement for providing prescription-drug
benefits. That agreement does not mandate arbitration of
disputes. Although the Fund never signed it, on January 1,
2003, Sav-Rx began providing services to the Fund under the
terms of that agreement, which it did for almost four months.
Meanwhile, the national union of the International
Brotherhood of Electrical Workers was also searching for a
benefits provider, and it also decided on Sav-Rx. This decision
resulted in the National Agreement, which local unions and
local funds could opt into by signing a participation agreement
or electing one of the National Agreements’s pricing options
(designated by an "M" or "R"). The national union announced
the National Agreement in April 2003 at a conference that Tom
Eschen, the chair of the Fund's board of trustees, attended. This
agreement offered better pricing and services than the Local
Agreement. Under the National Agreement, Sav-Rx invoices
participating members at lower rates than under the Local
Agreement, conducts annual audits to assess its compliance
with those rates, and remits to members any applicable drug
rebates. It also contains a mandatory arbitration provision.
4 No. 12-3070
Shortly after the announcement of the National Agreement,
Eschen asked for a copy from Sav-Rx and received one. To save
the Fund money, he also asked Sav-Rx to reduce the Fund's
prices to the levels provided under the National Agreement,
which Sav-Rx did, retroactive to April 1, 2003. Sometime later,
someone at the Fund (the record does not disclose who) told
Sav-Rx that the Fund selected the "R" pricing package,
available only under the National Agreement. The Fund's
board of trustees never themselves discussed the terms of the
National Agreement, and one trustee has disclaimed first-hand
knowledge of its terms. For eight years, between 2003 and
2011, the Fund received audits, pricing, and credits provided
by the National Agreement. Early in this period, the Fund's
business manager received from the national union a letter
detailing the advantages of the National Agreement, including
the annual audits, and it listed "Rockford Local 364" as a
"participating member" of that Agreement. Later, after an
annual audit disclosed possible overcharges, Sav-Rx wrote
directly to the Fund's trustees, informing them that, in light of
the audit, and at the Fund's request, it would credit the Fund
about $5,000. Following this exchange with the Fund's trustees,
the Fund's administrative manager communicated with Sav-Rx
other times about the annual audits.
In this suit, the Fund alleges that Sav-Rx invoiced the Fund
at price levels not justified under either the Local or National
Agreement, and Sav-Rx contends that, because the National
Agreement governs, this dispute must be arbitrated. In
response to Sav-Rx's motion to dismiss, the Fund replied that
its trustees never actually knew that Sav-Rx was providing
benefits under the National Agreement and they never voted
No. 12-3070 5
to adopt it, so the Fund cannot be bound to it. The district court
granted Sav-Rx's motion, finding that the Fund had assumed
the National Agreement because it accepted its benefits.
II. ANALYSIS
Before reaching the merits, we address a threshold issue:
the standard of review. The question of which forum will
decide this case is for the court, see Begolli v. Home Depot U.S.A.,
Inc., 701 F.3d 1158, 1160–61 (7th Cir. 2012), and the parties ask
for de novo review of the issue of arbitrability. But neither party
seeks a trial on any of the fact questions underlying
arbitrability that the district court resolved. Under these
circumstances, the “clearly-erroneous standard is the proper
one” to apply to those judicial findings of fact. Am. Nat’l Bank
and Trust Co. of Rockford, Ill. v. United States, 832 F.2d 1032, 1036
(7th Cir. 1987).
On the merits, the sole issue in ths case is whether the Fund
bound itself to the National Agreement. As a general matter,
a party may become bound to an unsigned contract, including
one that contains an arbitration clause, by its or its agent’s
conduct. See Fyrnetics Ltd. v. Quantum Group., Inc., 293 F.3d
1023, 1029 (7th Cir. 2002). As we discuss below, the Fund is
bound to the National Agreement if the Fund or an agent with
actual, implied, or apparent authority, assented to it, or if the
Fund ratified it. Although the parties do not carefully observe
these distinct possibilities, we consider each in turn. (We also
observe that the federal common law of agency, Illinois agency
law, and the Restatement of Agency are all in accord on
general agency principles, thereby obviating choice-of-law
6 No. 12-3070
concerns. See Opp v. Wheaton Van Lines, Inc., 231 F.3d 1060, 1064
(7th Cir. 2000).)
We begin with actual authority. Because the Fund is a trust,
the trustees have actual authority to bind the Fund and must
act through a vote. See 760 ILCS 5/10; Mason & Dixon Lines, Inc.
v. Glover, 975 F.2d 1298, 1303 (7th Cir. 1992). The trustees voted
to approve Sav-Rx as its benefits manager, but they never
voted to approve or reject the National Agreement. Similarly,
the record contains no evidence that the trustees voted to grant
actual authority to anyone else to enter the National
Agreement. Therefore, no one at the Fund with actual
authority entered into the National Agreement.
That brings us to implied authority. Sav-Rx argues that the
chair of the board of trustees, Eschen, bound the Fund to the
National Agreement when he asked Sav-Rx to apply its better
pricing to the Fund. Because Eschen was the chair of the board
of trustees, his authority to bind the Fund on some matters
may be implied from his position. See Orix Credit Alliance, Inc.
v. Taylor Mach. Works, Inc., 125 F.3d 468, 474 (7th Cir. 1997);
Wasleff v. Dever, 550 N.E.2d 1132, 1138 (Ill. App. Ct. 1990). The
president of a corporation has presumptive authority to enter
into ordinary contracts that fall within the corporation's
everyday business. Guar. Fed. Sav. & Loan Ass'n v. Am. Nat’l
Bank & Trust Co. of Chi., 509 N.E.2d 1313, 1319 (Ill. 1987); Smith
v. Shoreline Printers & Publishers, Inc., 127 N.E.2d 677, 680
(Ill. App. Ct. 1955); see also Opp, 231 F.3d at 1064; Barefoot
Architect, Inc. v. Bunge, 632 F.3d 822, 831 (3d Cir. 2011). But the
chief executive of a corporation does not have implied
authority to bind the company to extraordinary contracts or
those that surrender some of its substantial rights. See Orix
No. 12-3070 7
Credit Alliance, 125 F.3d at 475; Chase v. Consol. Foods Corp., 744
F.2d 566, 569 (7th Cir. 1984); Smith, 127 N.E.2d at 680. The Local
and National Agreements do not appear to be everyday
business for the Fund; the arrangement with Sav-Rx was a
once-in-a-decade transaction. And the National Agreement
foregoes an important right—access to the courts to resolve
disputes. Accordingly, the record does not establish that
Eschen had implied authority to bind the Fund.
Sav-Rx cannot invoke apparent authority to bind the Fund
either. Apparent authority arises when a principal "creates, by
its words or conduct, the reasonable impression in a third
party that the agent has the authority to perform a certain act
on its behalf." Opp, 231 F.3d at 1065 (citing Weil, Freiburg &
Thomas, P.C. v. Sara Lee Corp., 577 N.E.2d 1344, 1350 (Ill. App.
Ct. 1991)); Wilson v. Edward Hosp., 981 N.E.2d 971, 978 (Ill.
2012). Sav-Rx identifies no evidence that the trustees held
Eschen out as having the authority to bind the Fund to the
National Agreement. Even if it had, the Fund presented
evidence that Sav-Rx's vice president understood that the Fund
acted only through its board of trustees. Accordingly, this
record does not establish that Eschen had apparent authority
to enter into the National Agreement.
The final option, then, and the one that supports affirming
the district court’s decision, is ratification. A principal like the
Fund can ratify a contract when the principal enjoys the
benefits of the contract and does not repudiate it. Sphere Drake
Ins. Ltd. v. Am. Gen. Life Ins. Co., 376 F.3d 664, 677 (7th Cir.
2004); George F. Mueller & Sons, Inc. v. Northern Ill. Gas Co., 299
N.E.2d 601, 603 (Ill. App. Ct. 1973). Ratification requires "that
the principal have full knowledge of the facts and the choice to
8 No. 12-3070
either accept or reject the benefit of the transaction." Sphere
Drake Ins., 376 F.3d at 677. A trust’s "knowledge" may be
imputed from its employees or agents. See Nat'l Prod. Workers
Union Ins. Trust v. Cigna Corp., 665 F.3d 897, 903 (7th Cir. 2011).
This imputation of knowledge is commonplace with
corporations, which "do not have brains, but they do have
employees. One fundamental rule of agency law is that
corporations ‘know’ what their employees know—at least,
what employees know on subjects within the scope of their
duties." Prime Eagle Group Ltd. v. Steel Dynamics, Inc., 614 F.3d
375, 378–79 (7th Cir. 2010); see also Nat'l Prod. Workers Union
Ins. Trust, 665 F.3d at 903. Courts presume that when
employees obtain information while acting for the benefit of
the corporation, they "report[] that knowledge to the corporate
principal." United States v. One Parcel of Land, 965 F.2d 311, 316
(7th Cir. 1992).
Here, the record supports the finding of ratification
because, by imputation or direct knowledge, the Fund’s
trustees knew two critical facts necessary for ratification. First,
they knew the terms of the Local and National Agreements
and therefore their differences. The trustees themselves
received copies of the Local Agreement, and according to the
Fund, they agreed to it. The Fund therefore knew about its
terms. It also knew about the National Agreement. After
attending a conference for the benefit of the Fund and in order
to save it money, the Fund’s chair, Eschen, asked for and
received a copy of the National Agreement. In addition, the
Fund's business manager received a detailed description of the
advantages of the National Agreement. Because both agents
received this contract information while performing their
No. 12-3070 9
regular duties, the trustees (save the one who has disclaimed
knowledge of the National Agreement) imputedly knew about
both agreements. They therefore knew that only the National
Agreement guaranteed the better pricing and the added
services, like annual audits and credits.
Second, the trustees knew that the Fund was receiving the
discounted prices, audits, and credits provided under the
National Agreement. Sav-Rx told the Fund's business manager
that the Fund was receiving the discounted pricing, and he also
received an audit report in 2004 that compared the Fund's
invoices to the pricing under the National Agreement. The
administrative manager received similar audit reports. The
trustees themselves received a letter from Sav-Rx that referred
to the results of an audit. That audit led Sav-Rx to tell the
trustees that it was crediting the Fund $5,000 that the Fund
itself had requested. The trustees thus knew, both directly and
by imputation, that the Fund was receiving pricing, audit
reports, and credits guaranteed under only the National
Agreement. By knowing that the Fund received the benefits of
the National Agreement and never repudiating those benefits,
the trustees ratified the National Agreement.
The Fund’s responses are unavailing. It argues that Sav-Rx
may have offered these added benefits gratuitously under the
Local Agreement. But Sav-Rx denies that intent, and no one at
the Fund has sworn to believing that was Sav-Rx’s purpose.
The Fund also suggests that Sav-Rx may have slipped in these
extra benefits to bootstrap the Fund unwittingly into an
unwanted contract. But the Fund knowingly accepted the
benefits of the National Agreement without protest. Even
today, the trustees do not contend, let alone swear in an
10 No. 12-3070
affidavit, that if asked to vote on the National Agreement, they
would reject it because the pricing and service benefits are not
worth the arbitration provision. Under these circumstances,
then, the record supports binding the Fund to the National
Agreement and its arbitration provision. Therefore, we
AFFIRM the district court’s judgment.