Sugartown Pediatrics, LLC v. Merck Sharp & Dohme Corp. (In re Rotavirus Vaccines Antitrust Litig.)

• Decision Date: 21 March 2022
• Docket Number: 20-3460
• Parties: IN RE: ROTAVIRUS VACCINES ANTITRUST LITIGATION Sugartown Pediatrics, LLC; Schwartz Pediatrics SC ; Margiotti & Kroll Pediatrics, PC v. Merck Sharp & Dohme Corp., Appellant
• Court: U.S. Court of Appeals — Third Circuit

30 F.4th 148

IN RE: ROTAVIRUS VACCINES ANTITRUST LITIGATIONSugartown Pediatrics, LLC; Schwartz Pediatrics SC ; Margiotti & Kroll Pediatrics, PC

v.Merck Sharp & Dohme Corp., Appellant

No. 20-3460

United States Court of Appeals, Third Circuit.

Argued on September 24, 2021

Filed: March 21, 2022

Ashley E. Bass [argued], Andrew D. Lazerow, Mark W. Mosier, Covington & Burling, 850 10th Street, N.W., One City Center, Washington, DC 20001, Lisa C. Dykstra, Morgan Lewis & Bockius, 1701 Market Street, Philadelphia, PA 19103, Counsel for Appellant

Leonardo Chingcuanco, Daniel H. Silverman [argued], Daniel A. Small, Cohen Milstein, 1100 New York Avenue, N.W., West Tower, Suite 500 Washington, DC 20005, Gary L. Azorsky, Cohen Milstein, 1717 Arch Street, 3 Logan Square, Suite 3610, Philadelphia, PA 19103, Eric L. Cramer, David A. Langer, Daniel J. Walker, Berger Montague, 1818 Market Street, Suite 3600, Philadelphia, PA 19103, Counsel for Appellees

Before: CHAGARES, Chief Judge, HARDIMAN, and MATEY, Circuit Judges

OPINION OF THE COURT

HARDIMAN, Circuit Judge.

This appeal comes to us from an order denying a motion to compel arbitration. Appellant Merck contends the District Court should have compelled Sugartown Pediatrics, Schwartz Pediatrics, and Margiotti & Kroll Pediatrics (the Pediatricians) to arbitrate their claim that Merck's vaccine bundling scheme was anticompetitive. We agree. We will reverse and remand for the District Court to grant Merck's motion to compel arbitration.

I

This case involves two types of contracts. Both are part of Merck's loyalty program, whereby medical practices receive discounts if they buy sufficient vaccine quantities from Merck. The first type of contract is between Merck and Physician Buying Groups (PBGs). These loyalty contracts entitle PBG members to discounts if they buy a large enough percentage of their vaccines from Merck. The loyalty contracts also include an arbitration provision. The second type of contract is between PBGs and medical practices. These membership contracts give medical practices discounts on Merck vaccines for enrolling in PBGs. PBGs thus form the bridge between medical practices and Merck, contracting with both Merck and medical practices. They are middlemen in all but one relevant sense: PBGs never possess the vaccines. Medical practices buy their vaccines directly from Merck, but they receive discounts for belonging to a PBG.

Though they were members of PBGs that contracted with Merck,¹ the Pediatricians never signed contracts containing an arbitration clause. So the Pediatricians filed federal suits alleging Merck's vaccine bundling program was anticompetitive. Merck responded with a motion to compel arbitration based on the arbitration clause contained in its loyalty contracts with the PBGs, which the District Court denied under the summary judgment standard. In re Rotavirus Vaccines Antitrust Litig. (Rotavirus I ), 362 F. Supp. 3d 255, 261, 264–65 (E.D. Pa. 2019). The first time this case came before us, we vacated the order of the District Court, holding that it should have allowed discovery on arbitrability. In re Rotavirus Vaccines Antitrust Litig. (Rotavirus II ), 789 F. App'x 934, 938 (3d Cir. 2019).

After the parties conducted discovery, Merck renewed its motion to compel arbitration and the Pediatricians cross-moved for summary judgment on arbitrability. In re Rotavirus Vaccines Antitrust Litig. (Rotavirus III ), 2020 WL 6828123, at *1 (E.D. Pa. Nov. 20, 2020). The District Court once again denied Merck's motion to compel arbitration and granted summary judgment for the Pediatricians. Id. at *15. The Court concluded, as relevant here, that the Pediatricians were not bound under an agency theory because they had not authorized the PBGs to enter into arbitration agreements. Id. at *13–14. This appeal followed.

II

The District Court had jurisdiction over the Pediatricians' antitrust claims. See 28 U.S.C. § 1331 ; 15 U.S.C. § 4. We have jurisdiction to review the order denying a motion to compel arbitration under 9 U.S.C. § 16(a)(1)(B). For jurisdictional purposes, motions to compel arbitration and motions for summary judgment on arbitrability—both of which are at issue in this appeal—are equivalent. See Bacon v. Avis Budget Grp., Inc. , 959 F.3d 590, 598–99 & n.4 (3d Cir. 2020).

Our review of the District Court's decision, including its legal conclusion that the PBGs were not the Pediatricians' agents, is plenary. O'Hanlon v. Uber Techs., Inc. , 990 F.3d 757, 766 n.5 (3d Cir. 2021). We apply the summary judgment standard, so "[t]he party opposing arbitration is given the benefit of all reasonable doubts and inferences that may arise." Griswold v. Coventry First LLC , 762 F.3d 264, 270 (3d Cir. 2014) (quoting Kaneff v. Del. Title Loans, Inc. , 587 F.3d 616, 620 (3d Cir. 2009) ). No material facts are in dispute.

III

The Federal Arbitration Act (FAA) " ‘declare[s] a national policy favoring arbitration’ of claims that parties contract to settle in that manner." Preston v. Ferrer , 552 U.S. 346, 353, 128 S.Ct. 978, 169 L.Ed.2d 917 (2008) (quoting Southland Corp. v. Keating , 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) ). But courts must be sure that the parties have agreed to arbitrate their claims. After all, "[a]rbitration is strictly a matter of consent." Lamps Plus, Inc. v. Varela , ––– U.S. ––––, 139 S. Ct. 1407, 1415, 203 L.Ed.2d 636 (2019) (quoting Granite Rock Co. v. Teamsters , 561 U.S. 287, 299, 130 S.Ct. 2847, 177 L.Ed.2d 567 (2010) ).

Nonsignatories will be bound to an arbitration agreement only when "traditional principles of contract and agency law" so require. Hamilton Park Health Care Ctr. Ltd. v. 1199 SEIU United Healthcare Workers E. , 817 F.3d 857, 864 (3d Cir. 2016) (quoting E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S. , 269 F.3d 187, 194 (3d Cir. 2001) ). Pennsylvania contract law recognizes "five theories for binding nonsignatories to arbitration agreements," including agency. Allstate Settlement Corp. v. Rapid Settlements, Ltd. , 559 F.3d 164, 170 (3d Cir. 2009) (quoting Trippe Mfg. Co. v. Niles Audio Corp. , 401 F.3d 529, 532 (3d Cir. 2005) ). A principal will be bound by his agent's acts—including an agreement to arbitrate—if the agent has actual or apparent authority. Wisler v. Manor Care of Lancaster PA, LLC , 124 A.3d 317, 323 (Pa. Super. Ct. 2015).

A

Merck argues that the Pediatricians granted the PBGs actual authority to consent to the arbitration clauses on the Pediatricians' behalf. We agree, at least as to Schwartz Pediatrics.

Under Pennsylvania law, "the three basic elements of agency are: [1] the manifestation by the principal that the agent shall act for him, [2] the agent's acceptance of the undertaking[,] and [3] the understanding of the parties that the principal is to be in control of the undertaking." Commonwealth v. Britton , 229 A.3d 590, 598 (Pa. 2020) (quoting Basile v. H & R Block, Inc. , 563 Pa. 359, 761 A.2d 1115, 1120 (2000) ).

Schwartz's contract with its PBG satisfies the first two prongs of this test. Its 2016 PBG membership contract made the PBG Schwartz's "non-exclusive agent to arrange for the purchase of goods and services," Rotavirus III , 2020 WL 6828123, at *9 ; and a previous version of the membership agreement, effective in 1999, contained a similarly explicit provision, see App. 2412 ("Each Limited Partner hereby appoints the Partnership as its agent for the purpose of negotiating and entering into Vendor Arrangements, and the Partnership hereby accepts such appointment."). By agreeing to these terms, Schwartz manifested an intent to have the PBG act for it, and the PBG accepted that responsibility. The PBG acted on this authority in 2012 by executing the loyalty contract with Merck that included the arbitration clause. Thus, the first two elements of the agency test are satisfied here for Schwartz.

Accordingly, the only remaining question is whether Schwartz exercised sufficient control over its PBG to meet the control requirement of the Pennsylvania agency test. See Britton , 229 A.3d at 598.

Although the parties dispute how it applies here, Pennsylvania agency law is clear on the control requirement. "[A]n agency relationship is established only when the principal exercises control over the action at hand." Id. ; see also Menichini v. Grant , 995 F.2d 1224, 1233 n.14 (3d Cir. 1993). The principal can control the agent by "prescribing what the agent shall or shall not do before the agent acts," or by directly controlling the agent during performance. Smalich v. Westfall , 440 Pa. 409, 269 A.2d 476, 480–81 (1970) (quoting Restatement (Second) of Agency § 14 cmt. a (Am. L. Inst. 1958)). The question in this appeal is whether Schwartz—the alleged principal—had the right or ability to control its PBG, the alleged agent. See Commonwealth v. Minds Coal Mining Corp. , 360 Pa. 7, 60 A.2d 14, 20 (1948) ("[C]ontrol over the means of performance is not the test of agency.").

Here, Schwartz exercised control over its PBG by circumscribing the PBG's authority. Schwartz made the PBG its agent only for the limited purpose of vaccine purchases. Rotavirus III , 2020 WL 6828123, at *9 (2016 CCPAPP membership contract, limiting agency to "the purchase of goods and services as set forth herein"); App. 2412 (1999 membership contract "appoint[ing] the [PBG] as [Schwartz's] agent for the purpose of negotiating and entering into Vendor Arrangements"). Thus, Schwartz simultaneously demonstrated its intent to create an agency relationship and exercised control over the scope of the PBG's agency by contract.

The Pediatricians counter that this case is like Basile , where the Pennsylvania Supreme Court held that no agency relationship exists where the alleged agent merely presents an opportunity to the alleged principal. Basile , 761 A.2d at 1121. In Basile , H & R Block offered its customers the opportunity to obtain loans from a third party. Id. at 1117. The court held that H & R...