When can you compel arbitration of a putative class action? The law is developing quickly[1] and still doesn’t provide a crystal clear answer. The Ninth Circuit recently weighed in on two cases examining what happens when the parties don’t have an arbitration agreement to begin with. In Stafford v. Rite Aid Corporation and Franklin v. Community Regional Medical Center, et al., the defendants sought to compel arbitration on the basis of equitable estoppel, based on arbitration agreements between the defendants and third parties. The Ninth Circuit affirmed the district court’s denial of the motion to compel arbitration in Stafford but came to the opposite conclusion in Franklin. The decisions show that the nature of the parties’ business and relationships, and the allegations in the complaint, can shape whether a dispute is arbitrable.
STAFFORD V. RITE AID CORPORATION
The Parties’ Relationship and Claims at Issue:
Plaintiff Byron Stafford filed a putative class action against Rite Aid Corporation, alleging that it had fraudulently inflated the reported prices of prescription drugs to insurance companies. This practice allegedly resulted in plaintiff and others being overcharged for co-payments to Rite Aid.[2] According to plaintiff, Rite Aid submitted claims for prescription drugs to the insurance company through its pharmacy benefits manager, who coordinated insurance reimbursements and co-payment calculations. The price on a claim form submitted to the pharmacy benefits manager allegedly determined the price that plaintiff was charged for his prescription drugs. Plaintiff claimed that because Rite Aid reported an improperly high price to the pharmacy benefits manager, Stafford paid more for the drugs than he should have. Based on these allegations, plaintiff asserted claims against Rite Aid under California’s Unfair Competition Law and the California Consumer Legal Remedies Act and for unjust enrichment and negligent misrepresentation.
Rite Aid and plaintiff did not have a contract between them containing an arbitration clause. But, Rite Aid moved to compel arbitration based on the theory of equitable estoppel, arguing that plaintiff’s claims were intertwined with Rite Aid’s contracts with the pharmacy benefits managers, which contained arbitration clauses, and thus plaintiff’s claims were subject to arbitration. Under California law, plaintiffs can be bound by arbitration clauses in contracts they did not sign if the claims asserted are “dependent upon, or founded in and inextricably intertwined with, the underlying contractual obligations of the agreement contained the arbitration clause.”[3]
The Ninth Circuit Affirms the Denial of Rite Aid’s Motion to Compel:
The district court denied Rite Aid’s motion to compel, finding that the principles of equitable estoppel did not bind plaintiff to the arbitration provisions in contracts he did not sign because his claims were based on Rite Aid’s alleged fraudulent actions rather than any breach of Rite Aid’s contracts with the pharmacy benefits managers. Rite Aid appealed, and the Ninth Circuit affirmed.
The Ninth Circuit similarly held that equitable estoppel was inapplicable to plaintiff’s claims because he was not seeking damages for Rite Aid’s breach of its contracts with the pharmacy benefits managers, but rather for Rite Aid’s alleged fraud. The Ninth Circuit therefore found “irrelevant” Rite Aid’s contracts with the pharmacy benefits managers because “Rite Aid’s duty not to commit fraud is independent from any contractual requirements with the pharmacy benefits managers.”[4] Because plaintiff’s claims did not depend on Rite Aid’s contractual obligations, the Court held that equitable estoppel did not bind plaintiff to the arbitration agreements in contracts to which he was not a party.
FRANKLIN V. COMMUNITY REGIONAL MEDICAL CENTER, ET AL.
The Parties’ Relationship and Claims at Issue:
The same day Stafford came out, the Ninth Circuit issued its opinion in Franklin, a putative wage and hour lawsuit asserting claims under the Fair Labor Standards Act and California law.[5] Plaintiff was employed as a nurse by staffing agency United Staffing Solutions Inc. (“USSI”), and USSI assigned her to work at the defendant hospital. USSI and plaintiff signed two arbitration agreements—one in her employment agreement and another in the assignment contract governing her wages, overtime, shifts, and reimbursements at the hospital. The hospital was not a signatory to either contract, and no contracts existed between either (a) the hospital and plaintiff or (b) the hospital and USSI. Instead, the hospital contracted with a managed service provider to source nursing staff like plaintiff, and the managed service provider in turn contracted with USSI to provide the nursing staff for the hospital. Under this multi-party arrangement, the hospital retained supervision over plaintiff, but did not pay her directly. Rather, the hospital paid the managed service provider, which then paid USSI, which then paid plaintiff for her work.
In 2018, plaintiff filed a putative class and collective action against the hospital, alleging violations of the FLSA, California Labor Code, and California Unfair Competition law for the hospital’s purported failure to pay plaintiff for work she performed during meal breaks and off the clock, failure to provide accurate itemized wages statements, and failure to reimburse her for travel expenses. The hospital moved to compel arbitration of plaintiff’s claims.
The Ninth Circuit Affirms the Compelling Plaintiff’s Claims to Arbitration:
The district court granted the hospital’s motion to compel arbitration under the theory of equitable estoppel. It found that even though the hospital was a non-signatory to the arbitration provisions between Franklin and USSI, plaintiff’s statutory claims against the hospital were intimately founded in and intertwined with her contracts with USSI. Plaintiff appealed, and the Ninth Circuit affirmed.
The Ninth Circuit ultimately followed the California Court of Appeal’s decision in Garcia v. Pexco, LLC, 217 Cal. Rptr. 3d 793 (Ct. App. 2017), which held that an employee’s Labor Code claims against a staffing agency’s non-signatory client were subject to arbitration because they were “intimately founded in and intertwined with” his employment contract with the staffing agency that contained binding arbitration provisions. The Ninth Circuit in Franklin found that “[i]t does not matter that Franklin’s allegations are leveled only at the Hospital and not USSI” because “[i]n matters of equity, such as the application of equitable estoppel, it is the substance of the plaintiff’s claim that counts, not the form of its pleading.”[6] Based on the allegations and claims asserted in the complaint, the Court found that plaintiff’s employment with USSI “is central to her claims.”[7] Because USSI was responsible for various employment practices plaintiff alleged were violated (including paying her), and plaintiff’s other claims required reference to the terms of her contracts with USSI, plaintiff could not avoid arbitration simply because she had sued only the hospital and omitted any mention of USSI in her complaint.
TAKEAWAYS
Stafford and Franklin are reminders that the way a company structures its business and contractual relationships can subject even the most carefully drafted arbitration provisions to an uncertain future. Applying the same principles of equitable estoppel, the Stafford court found the plaintiff’s fraud-based claims were not subject to arbitration, while the Franklin court found the plaintiff’s employment-related claims must be arbitrated. These two decisions—issued the same day by the same Court (albeit different panels of judges)—demonstrate the fact-specific analysis involved if a motion to compel is not based on a direct agreement containing an arbitration provision between the plaintiff and defendant.
Morrison & Foerster’s Class Actions and Mass Torts attorneys have advised companies on a variety of arbitration-related issues. They can provide further insights on these recent court decisions, share best practices, and help draft and present arbitration provisions based on the needs of your business.
[1] See, e.g., our October 2020 post on how appellate courts have addressed “delegation clauses” in arbitration agreements. Available at https://classdismissed.mofo.com/topics/recent-appellate-decisions-on-delegation-clauses-arbitration-agreements.html.
[2] See generally Stafford v. Rite Aid Corp., No. 20-55333, 2021 WL 2024511 (9th Cir. May 21, 2021).
[3] Id. at *3 (quoting Goldman v. KPMG, LLP, 92 Cal. Rptr. 3d 534, 542 (Ct. App. 2009)).
[4] Id. at *4.
[5] See generally Franklin v. Cmty. Reg'l Med. Ctr., No. 19-17570, 2021 WL 2024516 (9th Cir. May 21, 2021).
[6] Id. at *6.
[7] Id.