May 28, 2021 - This Week at the Ninth

This Week at the Ninth: Independent or Intertwined?

This week, the Ninth Circuit simultaneously issued two decisions addressing the circumstances in which equitable estoppel can require a plaintiff to arbitrate a claim absent an arbitration agreement with the defendant. In the first, the Court held that a plaintiff could not be held to the terms of an arbitration agreement between the defendant and a third party when when the plaintiff's claims did depend on that contract. In the second, by contrast, the Court concluded that the plaintiff could be held to the arbitration provision in its contract with a third party because the plaintiff's claims depended on that contract, even if she had sued a different defendant.

STAFFORD v. RITE AID CORP.
The Court holds that a plaintiff bringing fraud claims cannot be compelled to adhere to an arbitration provision in a contract between a third party and the defendant.

The panel: Judges M. Smith, Ikuta, and Vratil (D.Kan.), with Judge M. Smith writing the opinion.

Key highlight: “Even if the contracts contained no provision requiring Rite Aid to report the usual and customary price, the fact remains that Rite Aid did report that information and allegedly purposely inflated it. Rite Aid’s duty not to commit fraud is independent from any contractual requirements with the pharmacy benefit managers.”

Background: Plaintiff Bryan Stafford purchased prescription drugs at Rite Aid pharmacies using his insurance coverage. Rite Aid submitted claim forms to Stafford’s insurance provider through third-party “pharmacy benefits managers.” Pursuant to its contracts with these pharmacy benefits managers, Rite Aid agreed to submit claims for the “usual and customary” price for these drugs. 

Advancing claims under California’s consumer-protection laws, Stafford contended that given Rite Aid’s discount program, the prices Rite Aid submitted with these claims exceeded the “usual and customary” price for these drugs, and that as a result he had paid more by using his insurance coverage than he would have paid out of pocket. Rite Aid moved to compel arbitration, citing the arbitration clause contained in its contracts with its pharmacy benefits managers. The district court denied the motion, and Rite Aid appealed.

Result: The Ninth Circuit affirmed, rejecting Rite Aid’s invocation of the equitable estoppel doctrine. “[A] plaintiff,” the Court explained, “may be bound to an arbitration clause in a contract he did not sign if the claims asserted are dependent upon, or founded in and inextricably intertwined with, the underlying contractual obligations of the agreement containing the arbitration clause.” But the mere fact that a plaintiff’s claim “reference[s]” an agreement containing an arbitration clause does not mean that the plaintiff can be compelled to arbitrate. 

Here, the Court concluded, Stafford was not seeking to hold Rite Aid liable for breach of its contracts with its pharmacy benefits managers. Rather, his claims were premised on Rite Aid’s alleged misrepresentations to those third parties regarding the price of these drugs. That Rite Aid’s contracts also required it to accurately report these prices was irrelevant to Stafford’s claims, and thus “principles of equitable estoppel” did not “require Stafford to submit to the arbitration clauses” of those contracts.

FRANKLIN v. COMMUNITY REGIONAL MEDICAL CENTER
The Court holds that a plaintiff bringing wage-and-hour claims against a third-party defendant can be compelled to adhere to an arbitration provision contained in her contract with her employer. 

The panel: Judges Wallace, Bea, and Bennett, with Judge Bennett writing the opinion. 

Key highlight: “It is true that Franklin could hypothetically sustain her claims even if there were no Assignment Contract, but in that case a factfinder would still need information about how and whether Franklin was paid by USSI. Here, that necessary information is established by the terms of her Assignment Contract. Thus, we agree with the district court that ‘whether [Franklin] can maintain liability against the Hospital[,] given USSI’s role as [her] employer, cannot be answered without reference to the Assignment Contract.’”

Background: Plaintiff Isabelle Franklin was a nurse employed by a staffing agency, USSI. Franklin was assigned to work at Community Regional Medical Center’s hospital in Fresno. Although she had no contract with the hospital, her contract with the staffing agency required her to use the hospital’s timekeeping system to report her hours. 

Franklin brought a putative class action against the hospital, alleging that it had violated federal and California law by failing to pay her for times she was required to work or provide accurate wage statements. Invoking the arbitration provision contained in Franklin’s contract with her employer, the hospital moved to compel arbitration. The district court granted the motion, and Franklin appealed. 

Result: The Ninth Circuit affirmed, holding that Franklin could be compelled to arbitrate under the doctrine of equitable estoppel. The key question, the Court explained, was whether Franklin’s claims against the hospital were “intimately founded in and intertwined with” her employment contract. The Court held that they were. 

In reaching that conclusion, the Court relied in part on the California Court of Appeal’s decision in Garcia v. Pexco, LLC, 217 Cal. Rptr. 3d 793 (Ct. App. 2017), which had affirmed an order compelling arbitration in similar circumstances. The Ninth Circuit rejected Franklin’s contention that Garcia was an “outlier” decision that would not be adhered to by the California Supreme Court, noting that Franklin had identified no decisions inconsistent with Garcia’s result and reasoning. The Ninth Circuit dismissed Franklin’s contention that Garcia was wrong in holding that a statutory claim could ever be intertwined with a contract. While a statutory claim might sometimes be outside a particular arbitration clause’s coverage, that was a distinct issue--and here the arbitration clause specifically covered “all disputes,” including those arising from statutes. Moreover, the Court continued, “principles of federalism and comity weigh strongly in favor of following Garcia,” as rejecting its conclusion would lead to the “classic pre-Erie problems of forum shopping and inconsistent enforcement of state law.”

Turning to Franklin’s specific claims, the Court concluded that their “thrust” was that “she is owed wages (and overtime) for unrecorded time that she worked,” and that Franklin’s employment contract was “central” to such claims.  As the Court explained, Franklin’s employer was responsible for all of the various obligations Franklin contended the hospital had violated, including paying her the wages due and ensuring the accuracy of any recordkeeping. Because Franklin's claims were “not fully viable without reference to the terms of the contract,” she could be compelled to arbitrate.