Court Opinion

ID: 4689061
Source: CourtListenerOpinion
Date Created: 2021-05-21 17:01:37.347384+00
Date Added: 2024-06-11T08:04:51.797439
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

BRYON STAFFORD, on behalf of                   No. 20-55333
himself and all others similarly
situated,                                      D.C. Nos.
             Plaintiff-Appellee,        3:17-cv-01340-AJB-JLB
                                        3:18-cv-00152-AJB-JLB
                 v.
                                                 OPINION
RITE AID CORPORATION,
         Defendant-Appellant.

       Appeal from the United States District Court
          for the Southern District of California
       Anthony J. Battaglia, District Judge, Presiding

             Argued and Submitted April 12, 2021
                    Pasadena, California

                       Filed May 21, 2021

  Before: MILAN D. SMITH, JR., SANDRA S. IKUTA,
      Circuit Judges, and KATHRYN H. VRATIL, *
                      District Judge.

             Opinion by Judge Milan D. Smith, Jr.

    *
      The Honorable Kathryn H. Vratil, United States District Judge for
the District of Kansas, sitting by designation.
2                 STAFFORD V. RITE AID CORP.

                          SUMMARY **

                            Arbitration

    The panel affirmed the district court’s order denying Rite
Aid Corporation’s motion to compel arbitration in a putative
class action alleging that Rite Aid fraudulently inflated the
reported prices of prescription drugs to insurance companies,
which resulted in class members paying Rite Aid a higher
co-payment for their drugs.

    Although Rite Aid and lead plaintiff Bryon Stafford had
no contract between them containing an arbitration clause,
Rite Aid did have such contracts with the intermediaries who
coordinated insurance reimbursement and co-payment
calculations, called “pharmacy benefits managers.”

    The panel held that, under California law, Stafford’s
claims did not depend on Rite Aid’s contractual obligations
to the pharmacy benefits managers. Consequently, equitable
estoppel did not apply to bind Stafford to the arbitration
agreements in those contracts. The panel affirmed the district
court’s denial of Rite Aid’s arbitration motion to compel
arbitration, and remanded for further proceedings.

    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
               STAFFORD V. RITE AID CORP.                  3

                        COUNSEL

Stephanie Schuster (argued) and Bryan Killian, Morgan,
Lewis & Bockius LLP, Washington, D.C.; J. Warren Rissier
and Joseph Bias, Morgan, Lewis & Bockius LLP, Los
Angeles, California; for Defendant-Appellant.

Andrew S. Love (argued), Robbins Geller Rudman & Dowd
LLP, San Francisco, California; David W. Mitchell, Brian
O. O’Mara, Robert R. Henssler Jr., and Arthur L. Shingler
III, Robbins Geller Rudman & Dowd LLP, San Diego,
California; for Plaintiff-Appellee.

                        OPINION

M. SMITH, Circuit Judge:

    Bryon Stafford brought a class action against Rite Aid
Corporation, alleging that Rite Aid fraudulently inflated the
reported prices of prescription drugs to insurance companies.
Stafford alleged that this resulted in class members paying
Rite Aid a higher co-payment for the drugs than they would
have paid if Rite Aid had reported the correct price to their
insurance companies.

    After filing and litigating several motions to dismiss,
Rite Aid moved to compel arbitration. Although Rite Aid
and Stafford had no contract between them containing an
arbitration clause, Rite Aid did have such contracts with the
intermediaries who coordinated insurance reimbursements
and co-payment calculations, called “pharmacy benefits
managers.” Rite Aid sought to compel Stafford to arbitrate
through the theory of equitable estoppel, contending that
Stafford’s claims were intertwined with Rite Aid’s contracts
4                 STAFFORD V. RITE AID CORP.

with the pharmacy benefits managers. According to Rite
Aid, it would be unfair to permit Stafford to sue in court for
relief provided by contracts with arbitration clauses.

    The district court denied Rite Aid’s motion to compel
arbitration. We have jurisdiction pursuant to 9 U.S.C. § 16,
and we affirm.

    FACTUAL AND PROCEDURAL BACKGROUND

    Bryon Stafford used his third-party insurance coverage
to purchase prescription drugs from Rite Aid’s pharmacies.
To facilitate insurance coverage for customers, Rite Aid
submits a claim for a prescription drug to an insurance
company through a “pharmacy benefits manager,” which the
parties and district court refer to as a PBM. The claim form
that Rite Aid submits includes the “usual and customary”
price of the relevant prescription drug. According to
Stafford’s complaint, “usual and customary” is a term of art
that is defined using an industry-specific standard: the
“[a]mount charged cash customers for the prescription
exclusive of sales tax[.]” The usual and customary price is
essential information for insurance companies because it
governs how much of the cost an insurance company will
pay, and how much must be borne by the customer. Rite
Aid’s contracts with pharmacy benefits managers also
require Rite Aid to submit the usual and customary price of
the prescription drug. These contracts—between Rite Aid
and various pharmacy benefits managers—contain
agreements to arbitrate contractual disputes. 1

    1
      Rite Aid’s opening brief states that the contracts with pharmacy
benefits managers “are executed and handled by Rite Aid HQ, a
subsidiary that provides corporate-level managerial services,” and not by
                   STAFFORD V. RITE AID CORP.                             5

    Under the terms of many insurance plans, the amount
that the plan participant must pay for the prescription drug is
a percentage of the usual and customary price. Therefore,
the higher the usual and customary price reported to the
pharmacy benefits manager, the higher the price will be to
the consumer.

    Rite Aid offered a discount program—called the Rx
Savings Program—for customers who did not use insurance
benefits to pay for their prescriptions. Rite Aid allegedly
reported a usual and customary price to pharmacy benefits
managers that exceeded the amount an uninsured customer
paid for that same prescription drug under the Rx Savings
Program. The heart of Stafford’s suit is that Rite Aid falsely
reported a usual and customary price that exceeded the
“[a]mount charged cash customers for the prescription” to
all insurance companies that paid out claims to Rite Aid.
This resulted in Stafford paying more by using his insurance
benefit than he would have paid without it.

   Stafford brought this suit as a putative class action,
seeking to certify the following Class and Subclass:

         Class: All persons or entities in the United
         States and its territories who, between
         January 2008 and the present (“Class

Rite Aid itself, which “is a holding company with no employees.” Rite
Aid provides no citations to the record to support these statements, which
contradict its representations to the district court in its motion to compel
arbitration. Nor does Rite Aid explain the relevance of Rite Aid’s
corporate structure to this dispute—except by implying that Rite Aid and
Stafford are on equal footing because neither actually signed the
contract. This argument both strains credulity and is ultimately
irrelevant due to our holding that Stafford is not equitably estopped from
pursuing his claims in court.
6               STAFFORD V. RITE AID CORP.

       Period”), paid for, in full or in part, a
       prescription generic drug included on the [Rx
       Savings Program] formulary and were
       insured for the purchase through a third-party
       payor.

       Subclass: All persons or entities in the state
       of California who, during the Class Period,
       paid for, in full or in part, a prescription
       generic drug included on the [Rx Savings
       Program] formulary and were insured for the
       purchase through a third-party payor.

Stafford filed a First Amended Complaint on July 28, 2017,
which Rite Aid moved to dismiss for failure to state a claim,
and for being time-barred. The district court dismissed the
First Amended Complaint without prejudice on the statute of
limitations ground. Stafford’s Second Amended Complaint
included factual allegations sufficient to support a claim that
the statute of limitations was tolled, and the district court
denied Rite Aid’s second motion to dismiss for failure to
state a claim. Rite Aid then moved to compel arbitration.

    The district court denied the motion to compel
arbitration. The district court held that principles of
equitable estoppel did not bind Stafford to the arbitration
agreements in contracts to which he was not a signatory,
because Stafford’s claims are not based on Rite Aid’s breach
of its contracts with the pharmacy benefits managers.
Instead, Stafford sought recovery under California law for
Rite Aid’s fraudulent claims to the pharmacy benefits
managers that had the effect of increasing the cost of
Stafford’s prescription drugs. The district court also rejected
Rite Aid’s contention that an arbitrator ought to decide
arbitrability on the grounds that (1) there was no valid
                  STAFFORD V. RITE AID CORP.                          7

arbitration clause; and (2) Stafford could not have clearly
and unmistakably agreed to submit arbitrability to an
arbitrator because he was not a signatory to the contract.
Finally, the district court held that Rite Aid had waived its
right to arbitrate the dispute in any event. Rite Aid appealed.

     On appeal, Rite Aid argues that equitable estoppel binds
Stafford to arbitrate his claims because his claims are based
in part on the contracts between Rite Aid and the pharmacy
benefits managers. Second, Rite Aid contends that the
dispute over whether the claims must be arbitrated must
itself be submitted to arbitration under those contracts’
delegation clauses. Finally, Rite Aid maintains that it did
not waive its right to arbitrate because it could not have
known that Stafford’s claims were based on the contracts
prior to conducting discovery.

                            ANALYSIS

    “Equitable estoppel generically precludes a party from
asserting rights he otherwise would have had against another
when his own conduct renders assertion of those rights
contrary to equity.” Goldman v. KPMG, LLP, 92 Cal. Rptr.
3d 534, 542 (Ct. App. 2009) (internal quotation marks and
citation omitted). Pursuant to the equitable estoppel
doctrine, a plaintiff 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.” 2 Id. at 540. However, if

     2
       Originally, equitable estoppel was applied to bind signatory
plaintiffs to arbitration when suing nonsignatory defendants. See
Goldman, 92 Cal. Rptr. 3d at 537. More recently, the doctrine has been
applied to claims by nonsignatory plaintiffs suing signatory defendants,
8                  STAFFORD V. RITE AID CORP.

the plaintiffs’ claims merely “reference [ ] an agreement with
an arbitration clause,” equitable estoppel will not warrant
compelling arbitration. Id. at 541. The touchstone for
equitable estoppel is whether “a nonsignatory is ‘relying on
an agreement for one purpose while disavowing the
arbitration clause of the agreement.’” Namisnak v. Uber
Techs., Inc., 971 F.3d 1088, 1095 (9th Cir. 2020) (quoting
Goldman, 92 Cal. Rptr. 3d at 551). In that instance, “the
plaintiff should be equitably estopped from repudiating the
contract’s arbitration clause.” JSM Tuscany, 123 Cal. Rptr.
3d at 443. Ultimately, “[t]he linchpin for equitable estoppel
is . . . fairness.” UFCW & Emps. Benefit Tr. v. Sutter Health,
194 Cal. Rptr. 3d 190, 206 (Ct. App. 2015) (internal
quotation marks and citation omitted).

    Stafford’s complaint alleges that Rite Aid violated
California’s Unfair Competition Law (Cal. Bus. & Prof.
Code § 17200, et. seq.) and the California Consumer Legal
Remedies Act (Cal. Civ. Code § 1770(a), et seq.) by
“reporting to insurance companies, and state and federal
health care entities fraudulent ‘usual and customary’ prices”;
concealing that the “usual and customary” price reported
was higher than the actual usual and customary price; and,
as a result, “wrongfully obtaining monies from Plaintiff and
the Subclass.” 3 Stafford also alleged a common law claim

which is the case here. JSM Tuscany, LLC v. Superior Ct., 123 Cal. Rptr.
3d 429, 443 (Ct. App. 2011).

    3
      Pursuant to § 17200, Rite Aid had a duty not to engage in, among
other things, “any unlawful, unfair or fraudulent business act or practice”
or any “unfair, deceptive, untrue or misleading advertising,” including
acts proscribed by § 17500. And pursuant to § 1770(a)(13), among other
provisions in that statute, Rite Aid had a duty not to “mak[e] false or
misleading statements of fact concerning reasons for, existence of, or
amounts of, price reductions.”
                STAFFORD V. RITE AID CORP.                   9

for unjust enrichment on the theory that Rite Aid’s allegedly
fraudulent usual and customary price reporting was “unfair
and unconscionable,” and “it is inequitable for Rite Aid to
be permitted to retain the benefits it received . . . from the
imposition of artificially inflated prices on Plaintiff, the
Class, and Subclass[.]” Finally, Stafford alleged a common
law claim for negligent misrepresentation, contending that
Rite Aid owed a duty to Stafford to “provide [him] with
accurate information regarding the prices of its generic
prescription drugs,” and breached that duty by knowingly
submitting false information to pharmacy benefits managers,
causing Stafford to pay a higher copayment than the actual
price of the prescription drug.

     Stafford is not seeking damages for Rite Aid’s breach of
its contracts with the pharmacy benefits managers. Instead,
Stafford’s causes of action are based on Rite Aid’s
misrepresentations to the pharmacy benefits managers of the
usual and customary price of Stafford’s prescriptions drugs.
Stafford claims that “usual and customary price” is defined
by industry standards and means the “[a]mount charged cash
customers for the prescription exclusive of sales tax[,]” and
that the language of the contracts is the genesis of this
definition. Stafford alleges that Rite Aid told the pharmacy
benefit managers that the “[a]mount charged cash customers
for the prescription exclusive of sales tax” was higher than it
actually was.

    It is irrelevant whether the contracts between Rite Aid
and the pharmacy benefits managers required Rite Aid to
report the usual and customary price of a prescription drug.
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
10             STAFFORD V. RITE AID CORP.

independent from any contractual requirements with the
pharmacy benefit managers. As noted, statutes and common
law—not provisions in the contracts—entitle Stafford to
relief. The principles of equitable estoppel therefore do not
require Stafford to submit to the arbitration clauses of
contracts between Rite Aid and the pharmacy benefits
managers.

                     CONCLUSION

    Stafford’s claims do not depend on Rite Aid’s
contractual obligations to the pharmacy benefits managers.
Consequently, equitable estoppel does not apply to bind
Stafford to the arbitration agreements in those contracts. We
affirm the judgment of the district court and remand for
further proceedings consistent with this opinion.

     AFFIRMED.