Opinion Analysis


West Virginia CVS Pharmacy, LLC v. McDowell Pharmacy, Inc.

Case Opinion Date Opinion Author Decision Vote
16-0209
02/09/2017 Justice Davis Reversed Unanimous

Facts

In this case, Respondents are all pharmacies operating in West Virginia.  Six of Respondents entered into a provider agreement with Petitioner, Caremark.  The agreement contained a choice-of-law provision stating that Arizona law applied to all contractual issues.  The agreement also referenced a provider manual which, among other things, contained arbitration language expressly incorporating the rules of the American Arbitration Association (“AAA”).  Neither the agreement nor the manual contained a delegation clause, but the AAA rules did.  There were also three pharmacies that did not have sign agreements with petitioner, Caremark.  These pharmacies did, however, have signed agreements with Petitioner’s predecessor.

Respondents filed a complaint against Petitioner alleging statutory claims involving the conduct of its business together with common law claims for tortious interference and fraud.  Petitioner sought to compel arbitration.  The trial court denied Petitioner’s motion, and Petitioner appealed.

Issues

  1. Are the issues to be determined according to the law of the jurisdiction listed in the agreement (Arizona) or the jurisdiction where suit was brought (West Virginia?)
  1. Were the arbitration provisions clearly and unambiguously incorporated?
  1. Was the delegation clause contained in the AAA rules enforceable?

Analysis

The Supreme Court began with the choice-of-law issue.  Specifically, it cited General Electric, Co. v. Keyser, 166 W.Va. 456, 275 S.E.2d 289 (1981) which “ recognized the presumptive validity of a choice-of-law provision, (1) unless the provision bears no substantial relationship to the chosen jurisdiction, or (2) the application of the laws of the chosen jurisdiction would offend the public policy of this state.”  Because there were “many” connections between Arizona and the provider agreements–including language referring any inquiries, grievances, or questions to Petitioner’s office in Scottsdale, Arizona–the Court had no trouble finding that the Keyser test had been met.

That said, the Court did acknowledge a possible means of challenging a contractual choice-of-law provision.  Citing Work While U-Wait, Inc. v. Teleasy Corp., No. Civ. 2:07-00266 (S.D.Va. 2007), Respondents argued that the provision was narrow and, therefore, did not apply to the kinds of claims asserted by them, including a fraud claim.  The Court, however, found that the language of the provision was broad, requiring the application of Arizona law to both interpretation and enforcement of the contract.  Furthermore, the Court found that the issue did not concern the substance of the underlying claims but, instead, whether those claims could be arbitrated–an issue it found to be “indisputably contractual.”

Next, the Supreme Court turned its attention to the incorporation issue.

The trial court found that there was no mutual assent regarding arbitration because the provider agreement itself did not specifically mention arbitration, and, at various times thereafter, Petitioner had altered the language of the agreement.  Nevertheless, the Court held that the arbitration agreement was properly incorporated because the provider manual had, in fact, (1) been called to Respondents’ attention, and (2) was easily available to them.

Importantly, the Court pointed out in a footnote that “this standard differs from the West Virginia standard for incorporation by reference.”  The Court then quoted, in its entirety, the three part test established in State ex rel. U-Haul Co., of W.Va. v. Zakaib, 232 W.Va. 432, 752 S.E.2d 586 (2013):

“In the law of contracts, parties may incorporate by reference separate writings together into one agreement.  However, a general reference in one writing to another document is not sufficient to incorporate that other document into a final agreement.  To uphold the validity of terms in a document incorporated by reference, (1) the writing must make a clear reference to the other document so that the parties’ assent to the reference is unmistakable; (2) the writing must describe the other document in such terms that its identity may be ascertained beyond doubt; and (3) it must be certain that the parties to the agreement had knowledge of and assented to the incorporated document so that the incorporation will not result in surprise or hardship.”

Without deciding the issue, the Court simply observed that “the outcome of this case may be different were we to apply U-Haul.”  Thus, the issue remains an open one under West Virginia law.

The situation for the remaining pharmacies was no different.  Even though three of the pharmacies did not have contracts with Petitioner, they did have signed, written, contracts with Petitioner’s predecessor.  According to the Court, Petitioner provided a notice to the pharmacies after acquiring the business stating that their relationship would be governed by the prior contract–a contract which, on its face, contained an arbitration clause.  This provided proof that the pharmacies had clearly and unambiguously agreed to arbitration.

The third and final issue related to the delegation clause.  The provider agreement stated that any dispute arising thereunder would be “exclusively settled by arbitration before a single arbitrator in accordance with the rules of the American Arbitration Association.”  There was no delegation language.  However, the AAA rules themselves do provide that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim our counterclaim.”  The question was whether this was a sufficient incorporation of the delegation clause to make it enforceable.  Citing federal cases from the Fifth, Eighth, Ninth and Tenth Circuits, the Court found that “incorporation of the AAA rules furnishes clear and unmistakable evidence that the parties intended to delegate gateway issues of arbitrabitility to the arbitrator.”

Even though, technically, this issue was addressed under Arizona law, the Court did not signal that West Virginia law was in any way different.  Therefore, it is likely this case will be cited in the future as an expression of West Virginia law.

 

Commentary

Sadly, arbitration is here to stay.  The Federal Arbitration Act makes it difficult to escape the effects of almost any arbitration language.  This is certainly a case in point.  The Court’s resolution of the third issue is disappointing.  Big businesses should not profit when they completely omit any reference to delegation and, instead, provide only a vague citation to the AAA rules.

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