Background
Independent pharmacies sued pharmacy benefit managers alleging anticompetitive conduct regarding Medicare prescriptions. The district court compelled arbitration and dismissed the case without prejudice, severing unconscionable provisions while enforcing the remainder of the agreement. The pharmacies appealed the dismissal, while the pharmacy benefit managers cross-appealed the district court’s refusal to enforce the delegation clause.
The court’s reasoning
The court reviewed the arbitration agreement under Arizona law. It found the agreement expressly stated that unenforceable provisions were severable, justifying the district court’s decision to strike the unconscionable fee-shifting, escrow, and confidentiality provisions while enforcing the rest. Regarding costs, the court held that plaintiffs did not prove arbitration fees were so excessive as to deny them the opportunity to vindicate their rights, noting the loser-pays provision mitigated the risk. The court also upheld the shortened limitations period and the amendment provision, finding they did not prevent effective vindication of rights. On the cross-appeal, the court agreed that the delegation clause was unenforceable because the escrow provision’s high upfront costs would prevent plaintiffs from effectively vindicating their rights in the arbitral forum.
What it means going forward
The ruling reinforces the enforceability of arbitration agreements in the pharmacy industry, provided that specific unconscionable provisions are severed. It clarifies that plaintiffs must provide specific evidence of prohibitive costs to invalidate an agreement and that delegation clauses may be unenforceable if coupled with prohibitive escrow requirements.
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