Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—N.D. Cal.: Pharmacy must arbitrate trade secret-based unfair competition claims against CVS Caremark, (Jul 24, 2013)

By Tobias J. Gillett, J.D., LL.M.

A pharmacy asserting claims on behalf of a putative class under California’s Uniform Trade Secrets Act (UTSA), the unlawful prong of California’s Unfair Competition Law (UCL), and for interference with prospective economic advantage (IPEA) that CVS Caremark’s pharmacy benefit manager (PBM) branch shared confidential information with Caremark’s retail pharmacies must arbitrate those claims under the terms of the pharmacy’s agreements with Caremark, the federal district court in San Francisco has ruled (Uptown Drug Co., Inc. v. CVS Caremark Corp., July 22, 2013, Tigar, J.). However, the pharmacy did not have to arbitrate a claim under the unfair prong of the UCL over the alleged exclusion of pharmacies from certain networks established by Caremark’s PBM branch with third-party insurers and plan sponsors. The action was stayed pending arbitration.

Uptown Drug Company, Inc. provides pharmacy services to customers enrolled in certain group health plans that provide benefits that are sponsored, administered, or insured by PBMs. CVS Caremark Corp. is a pharmacy chain that competes with Uptown. In 1995, Uptown entered into a provider agreement with PCS Health Systems, which ultimately became Caremark PCS Health through various mergers and acquisitions. In 2007, CVS Caremark merged with Caremark Rx, the parent corporation of Caremark PCS Health.

The provider agreement allows Uptown to fill prescriptions for participants in Caremark’s PBM plans at discounted prices and requires Uptown to disclose certain customer information when submitting claims for reimbursement. According to Uptown, Caremark Rx disclosed confidential information given to Caremark Rx for the purpose of adjudicating prescription claims to Caremark’s retail pharmacies for marketing purposes, allegedly in violation of the Health Insurance Portability and Accountability Act and Caremark’s own internal policies.

Uptown filed suit on behalf of itself and other similarly situated pharmacies for violations of the UTSA and the unlawful and unfair prongs of the UCL, as well as for interference with prospective economic advantage (IPEA). Caremark moved to compel arbitration under an arbitration clause in the 2011 Caremark Provider Manual.

Unconscionability. The court concluded that Uptown did not show that the arbitration clause was unconscionable. The court applied California law to the question, despite a claim by Caremark that Arizona law should apply by virtue of a choice-of-law provision in the 1995 PCS provider agreement. The court observed that Caremark had not shown that the clause was contained in Uptown’s agreement with Caremark, which had been amended multiple times since 1995.

However, the court observed that unconscionability under California law required a showing of both procedural and substantive unconscionability, and that Uptown had failed to demonstrate procedural unconscionability. Although Uptown claimed a power imbalance existed between Uptown and Caremark, since “CVS Caremark is the largest provider of prescriptions and related health services in the nation,” the court noted that an arbitration clause had been present in Uptown’s contracts with PCS Health and its successors since 1995, and Uptown had not shown a power imbalance or a lack of meaningful choice as to PCS Health.

Moreover, the court found Uptown’s arguments regarding Caremark’s superior bargaining power to be “conclusory and unsupported by the evidence before the Court.” Although Uptown stated that Caremark was the largest PBM in the country, it did not provide evidence such as “Caremark’s market share, the existence and market share of competitors, the existence of alternative retail partners, or the other mechanisms, if any, by which patients choose a pharmacy.” Without that evidence, the court was unable to conclude that Uptown lacked a meaningful choice.

Uptown’s argument that the clause was unconscionable “because Caremark presented it to Uptown on a take-it-or-leave-it basis and because Caremark reserved the right to unilaterally modify the clause” was also “unpersuasive,” in the court’s view. Caremark had complied with its contractual obligation to give advance notice to Uptown when it amended the agreement, and Uptown provided no evidence that it could not have negotiated the terms of the amendments or terminated its relationship with Caremark.

Finally, the clause was not unconscionable, even though it was in the middle of a 217-page document. The arbitration clause was clearly identified in the table of contents, and was “written in reasonably sized text and in plain language.” Although it did not contain an express opt-out clause, Uptown did not show that the advance-notice requirement for proposed amendments was not “the functional equivalent of an opt-out clause.” The agreement was between two business entities, and Uptown had not shown it was “in any way unsophisticated.”

Enforcement of the clause. The court also concluded that the arbitration clause could be enforced against Uptown. Caremark was the successor to PCS Health and therefore could enforce the provider agreement. Moreover, the PCS Manual and the 2011 Caremark Provider Manual, which contained the arbitration clause, were “clearly and unequivocally incorporated” into the 1995 PCS provider agreement and the Caremark provider agreement respectively.

Finally, even though only Caremark, L.L.C. was a party to the 2011 Provider Manual, the court determined that CVS Caremark, CVS Pharmacy, and Caremark Rx could enforce the arbitration clause with respect to Uptown’s claims for violations of the UTSA and the unlawful prong of the UCL, as well as the IPEA claim, but not with respect to its claim for violation of the unfair prong of the UCL. The court explained that equitable estoppel applied under California law “(1) when a signatory must rely on the terms of the written agreement in asserting its claims against the nonsignatory or the claims are intimately founded in and intertwined with the underlying contract, and (2) when the signatory alleges substantially interdependent and concerted misconduct by the nonsignatory and another signatory and the allegations of interdependent misconduct are founded in or intimately connected with the obligations of the underlying agreement.”

Here, Uptown’s UTSA, UCL unlawful prong, and IPEA claims were predicated on Caremark’s alleged misappropriation of trade secret information, the court observed. Uptown would have to show that Caremark disclosed the information despite knowing that it had a duty to maintain its confidentiality, which would require reviewing the terms of the provider agreement, since it governed the collection and use of the information. Although Uptown never mentioned the provider manual or agreement in its complaint, other than to deny that its claims arose under it, the court noted that “the complaint is replete with implicit references to that contract,” and that Uptown would not have been required to disclose the information at issue in the absence of the agreement. Therefore, equitable estoppel applied, according to the court.

However, the violations of the UCL’s unlawful prong were based on Caremark’s alleged exclusion of Uptown and other putative class members from certain Maintenance Choice networks that Caremark’s PBM branch established with third-party insurers and plan sponsors. The provider agreement did not “create any rights or duties with respect to the Maintenance Choice networks,” the court observed. Therefore, the nonsignatory defendants could not compel arbitration as to that claim.

Since Uptown’s claims based on misappropriation of information arose out of the provider agreement, and thus fell within the scope of the arbitration clause, and because both the signatory and nonsignatory defendants could compel arbitration of them, the court granted the motion to compel those claims. However, the UCL unfair prong claim did not address matters covered by the provider agreement, and thus fell outside the scope of the arbitration clause. Because the nonsignatory defendants could not compel arbitration of the claim, the motion to compel arbitration of that claim was denied.

Stay. The court chose to stay the remaining claim and Uptown’s requests for injunctive relief pending arbitration.

The case is No. 12-cv-06559-JST.

Attorneys: Bonny E. Sweeney (Robbins Geller Rudman & Dowd LLP) for Uptown Drug Company, Inc. Michael A. Naranjo (Foley & Lardner LLP) for CVS Caremark Corp.

Companies: Uptown Drug Company, Inc.; CVS Caremark Corp.

Cases: StateUnfairTradePractices CaliforniaNews