Catamaran Corporation v. Towncrest Pharmacy , 864 F.3d 966 ( 2017 )

United States Court of Appeals
For the Eighth Circuit
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No. 16-3275
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Catamaran Corporation
lllllllllllllllllllll Plaintiff - Appellant
v.
Towncrest Pharmacy; Clark’s Pharmacy; Meyer’s Healthmart Pharmacy;
Osterhaus Pharmacy
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Southern District of Iowa - Des Moines
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Submitted: April 6, 2017
Filed: July 28, 2017
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Before SMITH, Chief Judge, SHEPHERD, Circuit Judge, and FENNER,1 District
Judge.
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SHEPHERD, Circuit Judge.
This case presents a question of first impression in this circuit: whether a court
or an arbitrator should determine whether an arbitration agreement authorizes class
1
The Honorable Gary A. Fenner, United States District Judge for the Western
District of Missouri, sitting by designation.
arbitration. After reviewing relevant Supreme Court precedent and the opinions of
our sister circuits, we hold that a court must decide the question because of the
fundamental differences between bilateral and class arbitration.
I.
Catamaran Corp.2 operates as a pharmacy benefit manager. It contracts with
entities that sponsor, administer, or otherwise participate in prescription drug benefit
plans. Among the services Catamaran provides is reimbursing pharmacies who
furnish prescription drugs to individuals covered by such a plan. The defendants in
this case are four pharmacies who have agreements with Catamaran for
reimbursements.
There are two relevant agreements here.3 One agreement was with SXC Health
Solutions Corp., a predecessor in interest to Catamaran. The other agreement was
with Catalyst Health Solutions, Inc., also a predecessor in interest to Catamaran.
Each of the four pharmacies were parties to these agreements, which were brokered
on their behalf by AccessHealth, a pharmacy services administration organization
comprised of some 85 independent pharmacies. AccessHealth acted as the attorney-
in-fact for the pharmacies in these two agreements.
The SXC Agreement contains an arbitration provision stating that if “any
disputes arising during the term of this Agreement” cannot be resolved informally,
then “either party may submit the dispute to binding arbitration in accordance with
2
Catamaran has since been acquired by another pharmacy benefit manager,
OptumRx.
3
The parties disagree as to which agreement controls; Catamaran argues that
the SXC Agreement controls, while the pharmacies believe the Catalyst Agreement
governs. Our analysis is the same regardless, so we discuss both agreements.
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the Rules for the Conduct of Arbitration of the American Arbitration Association
[AAA] . . . in effect at the date of commencement of such arbitration.” The Catalyst
Agreement contains a similar provision: “Any controversy or claim arising out of or
relating to this Agreement shall be settled by arbitration in accordance with the
applicable rules of the [AAA].” Neither agreement uses the word “class” or refers to
class arbitration. The AAA Supplementary Rules for Class Arbitration permit class
arbitration and give arbitrators the power to decide whether an agreement
contemplates class arbitration.
Eventually, a dispute arose between Catamaran and the four pharmacies. The
pharmacies filed a demand for class arbitration with the AAA, asserting claims on
behalf of themselves and similarly situated independent pharmacies—a class of over
85 pharmacies.
Catamaran responded by filing a declaratory judgment action under 28 U.S.C.
§ 2201 and the Federal Arbitration Act (FAA) in the district court. Catamaran sought
declaratory relief and an injunction preventing the pharmacies from proceeding with
class arbitration. Catamaran then moved for summary judgment, arguing that the
relevant agreements do not permit the pharmacies to proceed to arbitration as a class.
Rather, Catamaran contends that each pharmacy must engage Catamaran in bilateral
arbitration proceedings.
After oral arguments, the district court denied Catamaran’s motion for
summary judgment. The court viewed the issue before it as twofold: (1) whether the
availability of class arbitration is a substantive or a procedural question; and (2)
whether the agreements clearly and unmistakably commit the class arbitration
question to an arbitrator. On the first question, the court recognized that the Eighth
Circuit has yet to offer an answer. The court surveyed case law from around the
country but ultimately did not make any determination on this question. Instead, the
court answered the second question in the affirmative. Relying on Eighth Circuit
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precedent analyzing bilateral arbitration, the court held that the agreements’ reference
to the AAA rules was a clear and unmistakable commitment for an arbitrator to
decide whether the agreements contemplate class arbitration. Catamaran appeals.
II.
We review de novo a district court’s order on a motion for summary judgment.
See Lamoureux v. MPSC, Inc., 849 F.3d 737, 739 (8th Cir. 2017).
A.
Under the FAA, arbitration agreements are deemed “valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of
any contract.” 9 U.S.C. § 2. But the FAA also imposes a basic principle: arbitration
is a process of consent and not coercion. See Stolt-Nielsen S.A. v. AnimalFeeds Int’l
Corp., 559 U.S. 662, 681 (2010). “[A]rbitration is a matter of contract and a party
cannot be required to submit to arbitration any dispute which he has not agreed so to
submit.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (internal
quotation marks omitted). Courts must therefore play a threshold role to determine
“whether the parties have submitted a particular dispute to arbitration.” Id.
These threshold or gateway issues are called substantive questions of
arbitrability. Substantive questions include “whether the parties have a valid
arbitration agreement at all or whether a concededly binding arbitration clause applies
to a certain type of controversy.” Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452
(2003). Courts presume that substantive questions are “for judicial determination
[u]nless the parties clearly and unmistakably provide otherwise.” Howsam, 537 U.S.
at 83 (alteration in original) (internal quotation marks omitted). Because arbitration
is about consent of the parties, we “hesitate to interpret silence or ambiguity” in an
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agreement as grounds for committing such important questions to an arbitrator. See
First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 945 (1995).
Many questions that arise in the arbitration context are procedural or subsidiary
questions that courts presume an arbitrator may decide. Howsam, 537 U.S. at 84.
“Procedural questions arise once the obligation to arbitrate a matter is established,
and may include such issues as the application of statutes of limitations, notice
requirements, laches, and estoppel.” Dell Webb Cmtys., Inc. v. Carlson, 817 F.3d
867, 873 (4th Cir.), cert. denied sub nom. Carlson v. Dell Webb Cmtys., Inc., 137 S.
Ct. 567 (2016). These are questions for an arbitrator both because the parties would
most likely expect an arbitrator to decide them, see Howsam, 537 U.S. at 84, and
because they do not challenge the arbitrator’s underlying authority, see AT&T Techs.,
Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 648-49 (1986).
B.
The first issue we must determine is whether the question of class arbitration
is substantive in nature, and hence one for the court to decide absent clear and
unmistakable language to the contrary, or procedural in nature and presumably for an
arbitrator to decide.
The Supreme Court has not offered a definitive answer on this question. At
one time, a plurality of the Court held that class arbitration was a procedural question
for an arbitrator because “it concerns neither the validity of the arbitration clause nor
its applicability to the underlying dispute between the parties.” See Bazzle, 539 U.S.
at 452. Instead, the plurality considered class arbitration simply a matter of “contract
interpretation and arbitration procedures.” Id. at 453. The plurality, we can safely
assume, did not believe class arbitration affected or changed the underlying dispute.
In later cases, however, the Supreme Court disavowed the Bazzle plurality’s decision.
In Stolt-Nielsen, the Court admonished the parties not to assume that arbitrators
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should decide whether a contract permitted class arbitration; “[i]n fact, however, only
the [Bazzle] plurality decided that question.” 559 U.S. at 680. And in Oxford Health
Plans, LLC v. Sutter, the Court stated emphatically that it “has not yet decided
whether the availability of class arbitration” is a procedural or substantive question
of arbitrability. 133 S. Ct. 2064, 2068 n.2 (2013).
But recent cases have strongly hinted at the Supreme Court’s ultimate
conclusion: the question of class arbitration is substantive in nature and requires
judicial determination. See Carlson, 817 F.3d at 875 (“The evolution of the Court’s
cases are but a short step away from the conclusion that whether an arbitration
agreement authorizes class arbitration presents a question as to the arbitrator’s
inherent power, which requires judicial review.”); Reed Elsevier, Inc. ex rel.
LexisNexis Div. v. Crockett, 734 F.3d 594, 598 (6th Cir. 2013) (“[R]ecently the Court
has given every indication, short of an outright holding, that classwide arbitrability
is a gateway question rather than a subsidiary one.”). To that predicted end, the Court
has identified a number of fundamental differences between bilateral and class
arbitration suggesting that the question of whether an agreement permits class
arbitration is reserved for the courts to decide.
First, the benefits of arbitration are substantially lessened in a class arbitration
proceeding. See Stolt-Nielsen, 559 U.S. at 685. “In bilateral arbitration, parties forgo
the procedural rigor and appellate review of the courts in order to realize the benefits
of private dispute resolution: lower costs, greater efficiency and speed, and the ability
to choose expert adjudicators to resolve specialized disputes.” Id. But “the switch
from bilateral to class arbitration sacrifices the principal advantage of arbitration—its
informality—and makes the process slower, more costly, and more likely to generate
procedural morass than final judgment.” AT&T Mobility LLC v. Concepcion, 563
U.S. 333, 348 (2011). The benefits are lost because class arbitration requires the kind
of procedural formality seen in class-action litigation. Id. at 349 (commenting that
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the AAA Supplementary Rules for Class Arbitration “mimic the Federal Rules of
Civil Procedure for class litigation”).
Second, confidentiality is lost or becomes more difficult. Stolt-Nielsen, 559
U.S. at 686. “Under the Class Rules, the presumption of privacy and confidentiality
that applies in many bilateral arbitrations shall not apply in class arbitrations.” Id.
(internal quotation marks omitted). Again, this is so because class arbitration requires
procedural formalities similar to class-action suits. But the loss of confidentiality
“potentially frustrat[es] the parties’ assumptions when they agreed to arbitrate.” Id.
Third, class arbitration brings the bet-the-company stakes of class-action
litigation into the realm of arbitration without the safety net of multilayered judicial
review. Id. at 686-87. In class-action litigation, multilayered judicial review is
available, and appellate courts review questions of law de novo. See Carlson, 817
F.3d at 875. But under the FAA, courts have limited grounds to vacate or even
modify an arbitration award. See 9 U.S.C. §§ 9, 10. “The absence of multilayered
review makes it more likely that errors will go uncorrected. Defendants are willing
to accept the costs of these errors in arbitration, since their impact is limited to the
size of individual disputes, and presumably outweighed by savings from avoiding the
courts.” Concepcion, 563 U.S. at 350. Class arbitration, on the other hand,
aggregates many disputes, significantly raising the costs and risks to defendants,
while still allowing errors to go uncorrected in multilayered judicial review. We
doubt that defendants would contractually agree to “bet the company with no
effective means of review.” Id. at 351. “Thus, in sum, ‘[a]rbitration is poorly suited
to the higher stakes of class litigation.’” Crockett, 734 F.3d at 598 (quoting
Concepcion, 563 U.S. at 350).
Fourth, class arbitration raises important due process concerns. See Stolt-
Nielsen, 559 U.S. at 686. In class arbitration, “[t]he arbitrator’s award no longer
purports to bind just the parties to a single arbitration agreement, but adjudicates the
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rights of absent parties as well.” Id. In that situation, absent parties “must be
afforded notice, an opportunity to be heard, and a right to opt out of the class.”
Concepcion, 563 U.S. at 349. These formalities further raise the costs and reduce the
efficiency of arbitration. And if we were to dispense with such formalities, “absent
class members would not be bound by the arbitration,” leaving defendants open to
further arbitration actions. Id.
After considering all of these fundamental differences, we conclude that the
question of class arbitration belongs with the courts as a substantive question of
arbitrability. See Carlson, 817 F.3d at 877; Opalinski v. Robert Half Int’l Inc., 761
F.3d 326, 334 (3d Cir. 2014); Crockett, 734 F.3d at 599. The answer to this question
will change the very nature of the underlying controversy. For “whether the parties
arbitrate one claim or 1,000 in a single proceeding is no mere detail.” Crockett, 734
F.3d at 598. And questions concerning “whether the parties have submitted a
particular dispute to arbitration” presumptively lie with the court. See Howsam, 537
U.S. at 83.
C.
Even though we presume the question of class arbitration lies with the courts,
parties to an agreement may nonetheless commit the question to an arbitrator. Id.
This highlights the contractual nature of arbitration—“the parties’ intentions control.”
Stolt-Nielsen, 559 U.S. at 682 (internal quotation marks omitted). To overcome the
presumption, the parties must clearly and unmistakably delegate the question to an
arbitrator. See Howsam, 537 U.S. at 83.
Looking at the SXC and Catalyst Agreements, we see no mention of class
arbitration. Each agreement states that any dispute or controversy that arises out of
the agreement shall be resolved by arbitration under the AAA’s applicable rules. But
regarding class arbitration, there is complete silence. And silence is insufficient
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grounds for delegating the issue to an arbitrator. See Kaplan, 514 U.S. at 944-45;
Opalinski, 761 F.3d at 335.
The pharmacies argue that the agreements’ incorporation of AAA rules
commits the question to an arbitrator and not the court. They direct us to three Eighth
Circuit opinions, each holding that incorporation by reference of AAA Rules
constitutes a clear and unmistakable indication that the parties intended for an
arbitrator to decide substantive questions of arbitrability. See Eckert/Wordell
Architects, Inc. v. FJM Props. of Willmar, LLC, 756 F.3d 1098, 1100 (8th Cir. 2014);
Green v. SuperShuttle Int’l, Inc., 653 F.3d 766, 769 (8th Cir. 2011) (“By
incorporating the AAA Rules, the parties agreed to allow the arbitrator to determine
threshold questions of arbitrability.”); Fallo v. High-Tech Inst., 559 F.3d 874, 878
(8th Cir. 2009). These opinions, the pharmacies contend, compel the conclusion that
the SXC and Catalyst Agreements leave the question of class arbitration to an
arbitrator. The district court relied on this reasoning in its order denying Catamaran’s
motion for summary judgment.
But, as the district court admitted, these prior opinions—Eckert/Wordell,
Green, and Fallo—each dealt with bilateral arbitration agreements. These opinions
therefore never grappled with the fundamental changes in the underlying controversy
that arise when dealing with class arbitration. Accordingly, “we believe that this
‘bilateral arbitration dispute case law’ is entitled to relatively little weight in the class
arbitrability context.” Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 809
F.3d 746, 758 (3d Cir.), cert. denied, 137 S. Ct. 40 (2016).4
Incorporation of AAA Rules by reference is insufficient evidence that the
parties intended for an arbitrator to decide the substantive question of class
4
We leave undisturbed the precedential authority of these cases in the context
of bilateral arbitration disputes.
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arbitration. See Crockett, 734 F.3d at 599-600. When dealing with class arbitration,
we seek clear and unmistakable evidence of an agreement to arbitrate the particular
question of class arbitration. Chesapeake Appalachia, 809 F.3d at 761. The risks
incurred by defendants in class arbitration (bet-the-company stakes without effective
judicial review, loss of confidentiality) and the difficulties presented by class
arbitration (due process rights of absent class members, loss of speed and efficiency,
increase in costs) all demand a more particular delegation of the issue than we may
otherwise deem sufficient in bilateral disputes. And because these agreements fail
to delegate the particular issue of class arbitration, the question falls to the courts.
III.
Because the district court erred in concluding that the question of class
arbitration was procedural rather than substantive, we reverse the court’s order
denying Catamaran’s motion for summary judgment and remand for further
proceedings. The Supreme Court requires a “contractual basis” for concluding that
parties have submitted to class arbitration “because class-action changes the nature
of arbitration to such a degree that it cannot be presumed the parties consented to it
by simply agreeing to submit their disputes to an arbitrator.” See Stolt-Nielsen, 559
U.S. at 684-685. On remand, the district court shall determine whether such a
“contractual basis” for class arbitration exists in the agreements between Catamaran
and the pharmacies.
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