Uptown Drug Company, Inc. v. CVS Caremark Corporation et al

Filing 50

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO COMPEL ARBITRATION AND TO STAY ACTION AND GRANTING MOTIONS TO SEAL by Judge Jon S. Tigar, granting 42 Administrative Motion to File Under Seal; granting 17 Administrative Motion to File Under Seal; granting in part and denying in part 18 Motion to Compel. (wsn, COURT STAFF) (Filed on 7/22/2013)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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UPTOWN DRUG COMPANY, INC.,

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Case No. 12-cv-06559-JST

Plaintiff,
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v.
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CVS CAREMARK CORPORATION, et al.,

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Defendants.

Re: ECF No. 17, 18, 42

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United States District Court
Northern District of California

ORDER GRANTING IN PART AND
DENYING IN PART MOTION TO
COMPEL ARBITRATION AND TO
STAY ACTION AND GRANTING
MOTIONS TO SEAL

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In this putative class action for violations of the California Uniform Trade Secrets Act and

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related claims, Defendants move to compel arbitration and to stay the action pending arbitration.

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Plaintiff Uptown Drug Company, Inc. (“Uptown”) opposes the motion. For the reasons set forth

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below, the motion to compel arbitration is GRANTED IN PART and DENIED IN PART and the

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motion to stay the action pending arbitration is GRANTED.
I.

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A.

BACKGROUND

The Parties and Claims

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Uptown provides pharmacy services to individuals who participate in certain group health

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plans. Compl. ¶¶ 1-2, 14. These group health plans provide to customers pharmacy benefits that

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are sponsored, administered, or insured by pharmacy benefit managers (“PBMs”). Id. ¶ 14.
CVS Caremark is a retail pharmacy chain that competes directly with Uptown.1 Id. ¶ 1.

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CVS Caremark merged with Caremark Rx, the second largest PBM in the country, in 2007. Id. As

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a PBM, Caremark Rx fills prescriptions, processes prescription drug claims, negotiates discounts

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Defendant CVS Caremark is the corporate parent of Defendant CVS Pharmacy, Inc, which is
the sole member of Defendant Caremark Rx, L.L.C. Mot. at 4, n. 4. Caremark Rx, L.L.C., in
turn, is the sole member of Caremark, L.L.C. and the sole member of CaremarkPCS, L.L.C. Id.

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with manufacturers, and performs other functions for PBM plan members. Id.
Uptown has a business relationship with Caremark Rx’s PBM branch because many of

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Uptown’s customers receive drug benefits under PBM prescription plans. Id. This relationship is

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governed by a provider agreement, which allows Uptown to fill prescriptions for participants in

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Caremark’s PBM plans at discounted prices and requires Uptown to disclose certain customer

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information to Caremark Rx whenever it submits claims for reimbursement.
Uptown has disclosed customer information to Caremark’s PBM operations “in confidence

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and solely for the purpose of adjudicating [] prescription claims.” Caremark Rx allegedly has

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disclosed this information without authorization to Caremark’s retail pharmacies, which compete

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directly with Uptown, for the purpose of marketing products and services to Uptown’s customers.

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United States District Court
Northern District of California

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Id. ¶¶ 4, 47, 81. These unauthorized disclosures, which allegedly contravene Caremark’s own

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internal policies and the Health Insurance Portability and Accountability Act, have resulted in

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increased revenues for Caremark’s retail pharmacies at the expense of Uptown and other non-CVS

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pharmacies. Id. ¶¶ 3-6, 63.
Uptown brings this action on its own behalf and on behalf of other similarly situated

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pharmacies in California against Defendants CVS Caremark, CVS Pharmacy, Caremark Rx, and

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Caremark, L.L.C. for (1) violations of California’s Uniform Trade Secrets Act (“UTSA”); (2)

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violations of the unlawful prong of California’s Unfair Competition Law (“UCL”), California

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Business and Professions Code section 17200; (3) violations of the unfair prong of the UCL; and

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(4) interference with prospective economic advantage (“IPEA”).2 The gravamen of the complaint

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is that Defendants’ unauthorized disclosure of non-CVS pharmacies’ customer information

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constitutes the misappropriation of trade secrets.

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//

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//

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//

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The putative class consists of “all retail pharmacies in California that provided confidential
patient information to CVS Caremark after March 22, 2007 for purposes of utilizing CVS
Caremark’s PBM services.” Compl. ¶ 69.
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B.

Provider Agreements and Manuals

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In 1995, Uptown entered into an agreement with PCS Health Systems (“the PCS Provider

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Agreement”), which is a PBM that ultimately became Caremark PCS Health in 2008 as a result of

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various acquisitions and mergers.3 Pagnillo Decl. ¶ 14 & Ex. A, ECF No. 18;4 Request for

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Judicial Notice (“RJN”), Ex. A, B., ECF No. 19. 5 The agreement allowed Uptown to be included

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in PCS Health’s PBM networks. See generally Pagnillo Decl., Ex. A.
PCS Health retained the right to amend the PCS Provider Agreement at any time as long as

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it gave notice to the pharmacy providers, including Uptown, no less than 30 days before enacting

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any amendment. Pagnillo Decl., Ex. A ¶ 1.3. The PCS Provider Agreement contained an
arbitration clause and incorporated by reference a PCS Manual. See Pagnillo Decl., Ex. A ¶ 9.5

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United States District Court
Northern District of California

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(arbitration clause); id. ¶¶ 1.3, 9.7 (provider manual).
The PCS Provider Agreement and the incorporated PCS Manual have been amended

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several times as a result of multiple mergers and acquisitions.6 Each time, PCS Health’s

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PCS Health Systems was owned by Rite Aid Corporation until it merged with Advance PCS,
L.P. in 2001. RJN, Ex. A, B., ECF No. 19. Advance PCS, L.P. ultimately became Caremark PCS
Health, L.L.C. in 2008. Id.
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Defendants’ motions to seal Exhibits A through F of the Pagnillo Declaration, ECF Nos. 17, 42,
are GRANTED, as Defendants have established that the confidential business information
contained in such documents is sealable.
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The Court takes judicial notice of the documents that Defendants filed with California’s
Secretary of State and Delaware’s Secretary of State for the purpose of effectuating the conversion
of Caremark Inc. into a limited liability company and the change of Advance PCS’s name to
Caremark PCS, ECF No. 19, because such documents can be accurately and readily determined
from sources whose accuracy cannot reasonably be questioned and no party questions their
authenticity. See Fed. R. Evid. 201.
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The PCS Provider Agreement was amended after PCS Health merged with Advance PCS, L.P. in
2000; the agreement became known as the “AdvancePCS Provider Agreement.” Pagnillo Decl. ¶¶
16-17 & Ex. B. The Advance PCS Provider Agreement was amended in 2004 when Caremark Rx
acquired AdvancePCS; the agreement became known as the “Caremark Provider Agreement.” Id.
¶ 20. Caremark has amended the Caremark Provider Agreement several times since 2004. Id. ¶¶
21-24 & Ex. D.
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successors provided advance notice to provider pharmacies of the amendments.7

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The current version of the PCS Provider Agreement and the incorporated PCS Manual is

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the Caremark Provider Agreement and the 2011 Caremark Provider Manual (“the 2011 Provider

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Manual”). The 2011 Provider Manual sets forth the rights and obligations of Uptown and

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Defendants with respect to Uptown’s participation in in the networks maintained by Caremark and

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its affiliates, as well as the terms and conditions for filling prescriptions, submitting claims for

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reimbursement, and receiving, sorting, and transmitting customer information. Pagnillo Decl., Ex.

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D at 13-20. Additionally, the 2011 Provider Manual includes provisions that clearly identify

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Caremark as the party that owns any customer data compiled, utilized, or transmitted in
accordance with the Caremark Provider Agreement. See, e.g., Pagnillo Decl., Ex. D at 48.

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Northern District of California

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(“Provider agrees that the information contained in the claims systems that was obtained by and

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through the administration and adjudication of a claim by Provider is the property of Caremark,

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and Provider agrees not to claim any right, title, or interest in said information. Caremark has the

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right to use, reproduce, and adapt any information or data obtained from Provider in any manner

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deemed appropriate, even if such use is outside the scope of the Provider Agreement, provided

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such use is in accordance with applicable Law.”); see also id. at 13-20, 38 (providing for the

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collection, maintenance, transmission, and use of data related to filling prescriptions).

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C.

The 2011 Provider Manual contains an arbitration clause under a section entitled

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The Arbitration Clause

“Miscellaneous.” Pagnillo Decl., Ex. D at 50. It provides that:

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Any and all disputes in connection with or arising out of the Provider
Agreement by the parties will be exclusively settled by arbitration before a
single arbitrator in accordance with the Rules of the American Arbitration
Association. The arbitrator must follow the rule of Law, and may only award
remedies provided for in the Provider Agreement. The award of the arbitrator will

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See Pagnillo Decl. ¶ 17 (notice of AdvancePCS Provider Agreement); id. ¶¶ 18-19 & Ex. C
(notice of the Caremark Provider Agreement); id. ¶ 21 (notice of 2004 Caremark Provider
Manual); id. ¶ 22 (notice of 2007 Caremark Provider Manual and notice that Caremark, Inc. and
CaremarkPCS became limited liability companies); id. ¶ 23 (notice of 2009 Caremark Provider
Manual); id. ¶ 24 & Ex. D (notice of 2011 Caremark Provider Manual).

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be final and binding on the parties, and judgment upon such award may be entered
in any court having jurisdiction thereof. Any such arbitration must be conducted in
Scottsdale, Arizona, and Provider agrees to such jurisdiction, unless otherwise
agreed to by the parties in writing. . . . Arbitration shall be the exclusive and
final remedy for any dispute between the parties in connection with or arising
out of the Provider Agreement; provided, however, that nothing in this
provision shall prevent either party from seeking injunctive relief for breach
of this Provider Agreement in any state or federal court of law. . . . The terms
of this Arbitration section apply notwithstanding any other provision in the
Provider Agreement.

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Id. (emphasis added).

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D.

Motion to Compel Arbitration

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Defendants argue that each of the claims in the complaint must be resolved through

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arbitration in accordance with the arbitration clause contained in the 2011 Provider Manual,
because such claims arise out of the Caremark Provider Agreement and the 2011 Provider Manual.

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United States District Court
Northern District of California

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ECF No. 18.
Uptown opposes the motion, arguing that (1) the arbitration clause is substantively and

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procedurally unconscionable and therefore is unenforceable; (2) none of the Defendants signed the

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original PCS Provider Agreement and therefore they cannot enforce it; (3) the arbitration clause

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was not incorporated into any Provider Agreement; and (4) the Court has jurisdiction to hear any

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claims for injunctive relief prior to deciding whether to compel arbitration. ECF No. 44.

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E.

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Jurisdiction
The Court has jurisdiction over this action under 28 U.S.C. § 1332(d)(2).
II.

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LEGAL STANDARD

“With limited exceptions, the Federal Arbitration Act (FAA) governs the enforceability of

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arbitration agreements in contracts involving interstate commerce.” Kramer v. Toyota Motor

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Corp., 705 F.3d 1122, 1126 (9th Cir. 2013). The FAA “embodies the national policy favoring

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arbitration and places arbitration agreements on equal footing with all other contracts.” Buckeye

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Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006). It requires the enforcement of an

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arbitration clause in a contract unless grounds exist “at law or in equity for the revocation of any

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contract.” 9 U.S.C. § 2. An arbitration clause may be revoked by “generally applicable contract

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defenses, such as fraud, duress, or unconscionability.” Rent-A-Center, West, Inc. v. Jackson, 130

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S.Ct. 2772, 2776 (2010).
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A party bound by an arbitration clause may bring a petition in district court to compel

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arbitration. 9 U.S.C. § 4. When a party files such a petition, “the district court’s role is limited to

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determining whether a valid arbitration agreement exists and, if so, whether the agreement

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encompasses the dispute at issue. If the answer is yes to both questions, the court must enforce the

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agreement.” Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010, 1012 (9th Cir.

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2004). “[T]he party resisting arbitration bears the burden of proving that the claims at issue are

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unsuitable for arbitration.” Green Tree Fin. Corp. Alabama v. Randolph, 531 U.S. 79, 91 (2000).

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Where the claims alleged in a complaint are subject to arbitration, the Court may stay the action

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pending arbitration. 9 U.S.C. § 3.
III.

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United States District Court
Northern District of California

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A.

DISCUSSION

The Arbitration Clause is Valid and Enforceable Under the FAA

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The Court Must Decide Whether Arbitration Clause is Valid

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When a party to a contract challenges the validity of an arbitration clause, as opposed to

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the validity of the contract containing the arbitration clause as a whole, the court must determine

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whether the arbitration clause is valid and enforceable. Nagrampa v. MailCoups, Inc., 469 F.3d

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1257, 1263-64 (9th Cir. 2006) (holding that when a party challenges “not the invalidity of the

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contract as a whole, but rather the arbitration provision itself, then the federal courts must decide

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whether the arbitration provision is invalid and unenforceable under 9 U.S.C. § 2 of the FAA”).

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Here, Uptown challenges the validity of the arbitration clause in the 2011 Provider Manual

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on the ground that the clause is unconscionable. Because Uptown’s unconscionability challenge is

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to the arbitration clause and not to the 2011 Provider Manual as a whole, the Court, and not the

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arbitrator, must determine whether the arbitration clause is valid.

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2.

The Validity of the Arbitration Clause Is Governed by California Law

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When deciding whether an arbitration agreement is valid, courts “apply general state-law

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principles of contract interpretation, while giving due regard to the federal policy in favor of

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arbitration by resolving ambiguities as to the scope of arbitration in favor of arbitration.” Mundi

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v. Union Security Life Insur. Co., 555 F.3d 1042, 1043 (9th Cir. 2009) (citations and internal

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quotation marks omitted). A district court exercising diversity jurisdiction must apply the law of
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the state in which it sits when determining the validity of an arbitration clause. See Nagrampa.,

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469 F.3d at 1280 (holding that district courts in California exercising diversity jurisdiction over a

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contract dispute “must apply California law to determine whether the arbitration provision in the

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[]contract is unconscionable”). Where an arbitration agreement contains a choice-of-law clause, a

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district court must determine whether to enforce the law chosen by the parties based on the

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conflict-of-laws rules of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487,

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496 (1941).
Here, Defendants contend that the PCS Provider Agreement contains a choice-of-law

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provision requiring that the agreement be construed and enforced in accordance with Arizona law,
and they argue that the application of Arizona law is justified because the parties’ obligations

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United States District Court
Northern District of California

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under the Agreement are substantially performed in Arizona. See Supp. Pagnillo Decl. ¶ 6.

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Uptown opposes the application of Arizona law to the question of whether the arbitration

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agreement is valid and argues that California law should apply instead because neither the parties

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nor the transactions at issue in the complaint have a substantial relationship to Arizona.

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The Court concludes that it need not reach the question of whether the PCS Provider

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Agreement’s choice-of-law provision should be enforced because Defendants have not shown that

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the Caremark Provider Agreement, which is the current iteration of the PCS Provider Agreement,

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contains a choice-of-law provision. The choice-of-law provision cited by Defendants is contained

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in the 1995 PCS Provider Agreement, which has been amended multiple times since 1995.8

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Without any evidence showing that the choice-of-law provision in the 1995 PCS Provider

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Agreement continues to govern the parties’ contractual relationship, the Court cannot enforce that

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provision.9
Accordingly, because the Court has diversity jurisdiction over this action, California law

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The choice-of-law provision requires that the Agreement “be construed, governed and enforced
in accordance with the laws of the State of Arizona” unless applicable law mandates otherwise.
See Pagnillo Dec., Ex. A at § 9.4.
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As Plaintiff points out, the test for unconscionability is the same under either California or
Arizona law, so it does not appear that the choice-of-law provision would affect the outcome in
any event.
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governs the determination of whether the arbitration provision in the 2011 Provider Manual is

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unconscionable.

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Under California law, “unconscionability has both a procedural and a substantive element,

Uptown Has Not Shown that the Arbitration Clause is Unconscionable

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the former focusing on oppression or surprise due to unequal bargaining power, the latter on

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overly harsh or one-sided results.” Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d

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669, 690 (Cal. 2000) (citation and internal quotation marks omitted). Procedural and substantive

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unconscionability “must both be present in order for a court to exercise its discretion to refuse to

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enforce a contract or clause under the doctrine of unconscionability. But they need not be present
in the same degree.” Id. (internal citation omitted). “In other words, the more substantively

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Northern District of California

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oppressive the contract term, the less evidence of procedural unconscionability is required to come

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to the conclusion that the term is unenforceable, and vice versa.” Id.

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Here, Uptown provides no evidence to establish that the arbitration clause is procedurally

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unconscionable. Accordingly, Uptown’s unconscionability challenge to the validity of the

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arbitration clause fails.

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a.

Procedural Unconscionability

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The “[p]rocedural unconscionability analysis focuses on oppression or surprise.”

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Nagrampa., 469 F.3d at 1280 (citation and internal quotation marks omitted). “Oppression arises

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from an inequality of bargaining power that results in no real negotiation and an absence of

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meaningful choice,” while “[s]urprise involves the extent to which the supposedly agreed-upon

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terms are hidden in a prolix printed form drafted by the party seeking to enforce them.” Id.

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(citation omitted).

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Here, Uptown argues that the arbitration clause is procedurally unconscionable on the

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grounds that (1) “every retail pharmacy must do business with CVS Caremark’s PBM business,”

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as “CVS Caremark is the largest provider of prescriptions and related health services in the

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nation”; (2) Caremark presented the arbitration clause to Uptown on a take-it-or-leave-it basis

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without providing Uptown any opportunity to negotiate it; (3) Caremark reserved the right to

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unilaterally modify the terms of the arbitration clause; (4) the arbitration clause is in the “middle
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of a 217-page document” and does not contain an opt-out clause or an explanation of the rights

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that Uptown gave up in light of the arbitration clause. Mot. at 9-10.
The Court concludes that Uptown has failed to show that the arbitration clause is

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procedurally unconscionable.
First, Uptown’s unconscionability arguments focus on Caremark and on the amendments

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that Caremark and its affiliates have made to the Caremark Provider Agreement and the Caremark

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Provider Manual. Uptown ignores, however, that an arbitration clause has been a part of

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Uptown’s contractual relationship with PCS Health and its successors continually for the last

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eighteen years. Indeed, the 1995 PCS Provider Agreement, which was drafted and implemented

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by a non-Caremark entity, contained provisions that are nearly identical to the ones Uptown now

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United States District Court
Northern District of California

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finds objectionable in the 2011 Provider Manual, namely an arbitration provision without an

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express opt-out clause and provisions that allow PCS Health to unilaterally amend the Agreement

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at any time as long as it gives advance notice to the provider pharmacies.10 Pagnillo Decl., Ex. A

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¶¶ 1.3, 9.5. Uptown provides no evidence to establish either the existence of a power imbalance

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between Uptown and PCS Health or that Uptown lacked any meaningful choice when it decided to

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enter into a contract containing an arbitration clause with PCS Health in 1995.
Second, Uptown’s unconscionability challenges to the Caremark Provider Agreement and

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the 2011 Provider Manual are conclusory and unsupported by the evidence before the Court.

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Uptown complains of Caremark’s superior bargaining power but it provides no evidence to show

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that the realities of the industry in which it operates compel it to do business with Caremark on

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Caremark’s terms. The only fact that Uptown has offered on this issue is that Caremark is the

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largest PBM in the country. There is no evidence regarding Caremark’s market share, the

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existence and market share of competitors, the existence of alternative retail partners, or the other

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mechanisms, if any, by which patients choose a pharmacy. Without such information, the Court

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cannot conclude, solely on the basis of Caremark’s being the largest PBM, that there was no real

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negotiation or that Uptown had no meaningful choice. At best, Caremark’s leadership position

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Both of these provisions were written in plain language and in conspicuous typeface and can be
readily found in the 12-page PCS Provider Agreement.
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may explain why Uptown wanted to do business with Caremark, but it does not compel the

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conclusion that Uptown had to do business with Caremark.

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Uptown also argues that the arbitration clause in the 2011 Provider Manual is

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unconscionable because Caremark presented it to Uptown on a take-it-or-leave it basis and

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because Caremark reserved the right to unilaterally modify the clause. This argument is

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unpersuasive, given that Caremark complied with its contractual obligation to give advance notice

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to Uptown each time it amended the Caremark Provider Agreement. See Pagnillo Decl. ¶¶ 16-24;

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Supp. Pagnillo Decl. ¶¶ 4-5. The purpose of the advance-notice requirement presumably was to

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give provider pharmacies an opportunity to exit their contractual relationship with Caremark if
they objected to the proposed amendments. Also, Uptown has submitted no evidence to show that

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Northern District of California

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it could not have negotiated to alter the terms of the proposed amendments, or that it could not

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have terminated its business relationship with Caremark and established a relationship with an

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alternative partner in the event that Caremark refused to negotiate.

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Uptown further contends that the arbitration clause in the 2011 Provider Manual is

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unconscionable because it “lurks unremarkably in the middle of a 217-page document” and does

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not contain an express opt-out clause or an explanation of the rights that Uptown would give up in

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light of the arbitration clause. This argument is unconvincing for two reasons. First, upon review

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of the 2011 Provider Manual, the Court cannot conclude that the arbitration clause is

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“unremarkable” or hidden or that it does not contain an explanation of the implications of its

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existence. While Uptown is correct in noting that the 2011 Provider Manual is more than 200

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pages, the Manual contains a very thorough table of contents that very clearly states that the

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arbitration clause at issue is located on pages 49 and 50 of the Manual. The arbitration clause

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itself in written in reasonably sized text and in plain language and explains that “[a]rbitration shall

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be the exclusive and final remedy for any dispute between the parties in connection with or arising

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out of the Provider Agreement; provided, however, that nothing in this provision shall prevent

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either party from seeking injunctive relief for breach of this Provider Agreement in any state or

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federal court of law.” Pagnillo Decl., Ex. D at 50. Second, while Uptown is correct that the

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arbitration clause does not contain an express “opt-out” clause, Uptown has not shown that the
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advance-notice requirement for proposed amendments discussed above is not the functional

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equivalent of an opt-out clause.

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Finally, the authorities that Uptown cites in support of its procedural unconscionability

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arguments are not on point, because they deal with situations involving unsophisticated

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individuals who were presented with take-it-or-leave-it contracts by parties who had

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overwhelming bargaining power. See, e.g., Bowlin v. Goodwill Indus. of Greater E. Bay, Inc., 12-

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cv-01593 NC, 2013 WL 269131, at *4 (N.D. Cal. Jan. 24, 2013) (finding procedural

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unconscionability because individual employee was presented with a form contract and was

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denied the opportunity to negotiate the contract’s terms by his employer); Sparks v. Vista Del Mar
Child & Family Servs., 207 Cal. App. 4th 1511, 1523 (Cal. Ct. App. 2012) (finding procedural

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United States District Court
Northern District of California

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unconscionability because individual employee was presented with an arbitration provision buried

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in an employee handbook); Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1284 (9th Cir. 2006)

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(finding minimal procedural unconscionability because franchisor presented a contract to an

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unsophisticated first-time franchisee on a take-it-or-leave-it basis and franchisor had

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“overwhelming” bargaining power). The agreement here involves two business entities, and

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Uptown provides no evidence to show that it was in any way unsophisticated or that PCS Health

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or its successors, including Caremark, had overwhelming relative bargaining power.
b.

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Substantive Unconscionability

Because Uptown has not shown that the arbitration clause is procedurally unconscionable

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to any degree, the court need not inquire into whether the agreement is substantively

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unconscionable, as both procedural and substantive unconscionability must be established for an

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unconscionability challenge to succeed. See Kilgore v. KeyBank, Nat. Ass’n, 673 F.3d 947, 964

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(9th Cir. 2012) (“Because we hold that the arbitration clause in the parties’ contract is not

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procedurally unconscionable, we need not address whether the terms of that clause are

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substantively unconscionable.”).

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4.

The Arbitration Clause Can Be Enforced Against Uptown
a.

Caremark, L.L.C. Is the Successor to PCS Health

Uptown argues that the arbitration clause cannot be enforced against it because Defendants
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have not shown that Caremark, L.L.C. is a successor to PCS Health with respect to the 1995 PCS

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Provider Agreement.

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The evidence submitted by Defendants shows (1) that PCS Health was owned by Rite Aid
Corporation until it merged with Advance PCS, L.P. in 2001, and that Advance PCS, L.P.

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ultimately became Caremark PCS Health, L.L.C. in 2008, RJN, Ex. A, B., ECF No. 19; (2) that

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Caremark, Inc. and Caremark PCS, Inc. amended the AdvancePCS Provider Agreement, which

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was the immediate successor to the 1995 PCS Provider Agreement, after Caremark Rx acquired

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Advance PCS in 2004, Pagnillo Decl. ¶¶ 18, 22 & Ex. C; and (3) that Caremark gave notice to

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Uptown that the resulting Caremark Provider Agreement was with Caremark Inc. and Caremark

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PCS, Inc., which ultimately became Caremark, L.L.C. and Caremark PCS, L.L.C., respectively.

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United States District Court
Northern District of California

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Pagnillo Decl. ¶¶ 14-24 & Ex. C.

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Based on this evidence, the Court concludes that both Caremark, L.L.C. and Caremark

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PCS, L.L.C. are successors to PCS Health with respect to the 1995 PCS Provider Agreement and

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that these entities can enforce the Agreement.

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b.

The Provider Manuals Were Incorporated into the Provider
Agreements

Uptown argues that the arbitration clause at issue cannot be enforced against it because

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“there is no provision that clearly purports to incorporate any ‘Caremark Provider Manual’ into the

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Provider Agreement, and Defendants have not submitted any evidence that an original ‘PCS

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Manual’ existed in the first place that could have subsequently been amended.” Opp’n at 13.

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“Under California law, for one document to incorporate another document by reference,

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[t]he reference to the incorporated document must be clear and unequivocal and the terms of the

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incorporated document must be known or easily available to the contracting parties.” Cariaga v.

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Local No. 1184 Laborers Int’l Union of N. Am., 154 F.3d 1072, 1074 (9th Cir. 1998) (citation and

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internal quotation marks omitted).

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Here, Defendants have submitted evidence showing that the PCS Manual was clearly and

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unequivocally incorporated into the original 1995 PCS Provider Agreement. See Pagnillo Decl.,

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Ex. A ¶ 9.7 (providing that the “Entire Agreement” consists of “[t]his Agreement, its schedules,
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and the PCS Manual . . .”) (emphasis added). Defendants also have shown that the Caremark

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Provider Manual, which is an amended version of the PCS Manual, also was clearly and

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unequivocally incorporated into the Caremark Provider Agreement and that Caremark sent copies

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of the Caremark Provider Manual to Uptown. See Supp. Pagnillo Decl., Ex. F (letter clarifying

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that Caremark Provider Agreement “includes the Caremark provider Manual”); see also Pagnillo

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Decl. ¶¶ 21-24 (declaring that Caremark sent to pharmacy providers various versions of the

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Caremark Provider Manual).
c.

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9

Nonparties Can Compel Arbitration under California Law

Uptown argues that Defendants CVS Caremark, CVS Pharmacy, and Caremark Rx cannot
enforce the arbitration clause at issue with respect to the claims that Uptown has asserted against

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United States District Court
Northern District of California

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them because they are not signatories to any of the Provider Agreements. Defendants counter that,

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under the doctrine of equitable estoppel, each of them can compel the arbitration of Uptown’s

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claims even though Caremark, L.L.C is the only Defendant who is a party to the 2011 Provider

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Manual.

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“Generally, the contractual right to compel arbitration may not be invoked by one who is

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not a party to the agreement and does not otherwise possess the right to compel arbitration.”

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Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1126 (9th Cir. 2013) (citation and internal

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quotation marks omitted). Yet, “[t]he United States Supreme Court has held that a litigant who is

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not a party to an arbitration agreement may invoke arbitration under the FAA if the relevant state

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contract law allows the litigant to enforce the agreement.” Id. at 1128 (citation omitted).

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Under California law, “where a nonsignatory seeks to enforce an arbitration clause, the

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doctrine of equitable estoppel applies in two circumstances: (1) when a signatory must rely on the

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terms of the written agreement in asserting its claims against the nonsignatory or the claims are

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intimately founded in and intertwined with the underlying contract, and (2) when the signatory

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alleges substantially interdependent and concerted misconduct by the nonsignatory and another

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signatory and the allegations of interdependent misconduct [are] founded in or intimately

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connected with the obligations of the underlying agreement.” Id. at 1128-29 (internal citations and

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quotation marks omitted).11 The underlying purpose of the doctrine of equitable estoppel is to

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“preclude[] a party from claiming the benefits of a contract while simultaneously attempting to

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avoid the burdens that contract imposes.” Mundi, 555 F.3d at 1045 (citation and internal

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quotation marks omitted).
Here, the application of equitable estoppel is justified with respect to three out of the four

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claims asserted in the complaint.
Uptown’s claims for (1) violations of the UTSA, (2) violations of the unlawful prong of

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the UCL, and (3) IPEA, are founded and intertwined with the Caremark Provider Agreement.

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Each of these claims is predicated on Defendants’ alleged misappropriation of the customer
information that Uptown disclosed to Caremark by virtue of Uptown’s inclusion in Caremark’s

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United States District Court
Northern District of California

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PBM networks.12 Uptown’s inclusion in Caremark’s PBM networks, in turn, is governed by the

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Caremark Provider Agreement. The terms of the Caremark Provider Agreement expressly

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addresses the use, dissemination, and ownership of the customer information that Defendants

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allegedly misappropriated. See, e.g., Pagnillo Decl., Ex. D at 48 (“Provider agrees that the

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information contained in the claims systems that was obtained by and through the administration

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and adjudication of a claim by Provider is the property of Caremark, and Provider agrees not to

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claim any right, title, or interest in said information. Caremark has the right to use, reproduce, and

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adapt any information or data obtained from Provider in any manner deemed appropriate, even if

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such use is outside the scope of the Provider Agreement, provided such use is in accordance with

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The Court applies California law to the equitable estoppel issue because this action invokes the
Court’s diversity jurisdiction, and, as discussed above, Defendants have not shown that the
operative Caremark Provider Agreement contains a choice-of-law provision. Moreover, Plaintiff
and Defendants all agree that the Court should apply the test set forth in Kramer v. Toyota Motor
Corp., 705 F.3d 1122 (9th Cir. 2013).
12

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See, e.g.,Compl. ¶ 81 (UTSA claim) (“Such misappropriation of plaintiff’s and Class members’
trade secrets and confidential patent/customer information violates the UTSA.”); id. ¶ 85
(Unlawful UCL claim) (“Defendants have violated § 17200’s prohibition against engaging in
‘unlawful’ acts or practices by, as alleged above, misappropriating plaintiff’s and Class members’
trade secrets . . . in violation of UTSA”); id. ¶¶ 104-105 (IPEA claim) (“In misappropriating
plaintiff’s and Class members’ proprietary information and data for its financial gain . . .
Defendants . . . disrupted the existing or prospective relationship between plaintiff and Class
members and defendants’ beneficiaries.”).
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applicable Law.”); see also id. at 13-20, 38 (providing for the collection, maintenance,

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transmission, and use of data related to filling prescriptions and submitting claims for

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reimbursement).
To prevail on a claim for misappropriation of trade secrets, a plaintiff must prove: “(1) the

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existence of a trade secret, and (2) misappropriation of the trade secret.” See AccuImage

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Diagnostics Corp v. Terarecon, Inc., 260 F. Supp. 2d 941, 950 (N.D. Cal. 2003) (citing Cal. Civ.

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Code § 3426.1(b)). Misappropriation is defined in part as the “[d]isclosure or use of a trade secret

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of another without express or implied consent by a person who . . . [a]t the time of disclosure or

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use, knew or had reason to know that his or her knowledge of the trade secret was . . . [a]cquired

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under circumstances giving rise to a duty to maintain its secrecy or limit its use.” See Cal. Civ.

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Northern District of California

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Code § 3426.1(b)(2). Here, to prevail on each of the misappropriation-based claims, Uptown will

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have to prove that Caremark disclosed the customer data at issue without authorization despite

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knowing that it had a duty to maintain the data’s secrecy or to limit its use. The question of

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whether Caremark was to any extent barred from disclosing or using Uptown’s customer data

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must be answered by looking at the terms of the Caremark Provider Agreement, because that

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contract explicitly governs the collection and use of such information and because it provides the

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underlying basis for Uptown’s disclosure of such information. Uptown must establish that

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Caremark’s use of that information exceeded the scope of use permitted under the Provider

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Agreement. As Uptown’s misappropriation claims are “intimately founded and intertwined with

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the underlying contract obligations,” and because Uptown alleges that Defendants acted in concert

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in misappropriating Uptown’s customer data, the application of equitable estoppel is justified with

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respect to these claims.13 Kramer, 705 F.3d at 1129 (citation omitted). Accordingly, nonsignatory

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Defendants may compel the arbitration of these claims.
Uptown does not dispute that the Caremark Provider Agreement governs its inclusion in

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Uptown alleges that Defendants engaged in substantially concerted misconduct when they
misappropriated the customer data at issue for their own financial gain. See, e.g., Compl. ¶ 82
(UTSA claim) (“Defendants’ conduct discussed above proximately caused and is causing
damage”); id. ¶ 86 (Unlawful UCL claim) (“Defendants have violated § 17200”); id. ¶ 99 (IPEA
claim) (“Defendants interfered with an actual prospective economic relationship”).
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Caremark’s PBM networks. Instead, Uptown argues that all of its claims are independent of the

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Caremark Provider Agreement because it “never mentions the Provider Manual or any of its

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provisions in the Complaint, and never mentions the Provider Agreement other than to disavow

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the notion that Plaintiff’s claims arise thereunder.” Opp’n at 19. That Uptown never refers to the

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Caremark Provider Agreement by name in the complaint is not dispositive of the question of

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whether Uptown’s claims are intertwined with the Agreement, because the complaint is replete

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with implicit references to that contract.14 Moreover, the dependent relationship between

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Uptown’s misappropriation claims and the Provider Agreement is evident from the simple fact

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that, absent the Provider Agreement, Uptown would have no claims against Defendants with

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respect to the customer information at issue, because in that scenario, Uptown would not have

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Northern District of California

1

been required to disclose such information to Defendants.
In contrast, Uptown’s claim for violations of the unfair prong of the UCL is not founded or

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intimately intertwined with the Caremark Provider Agreement. This claim is premised on

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Defendants’ exclusion of Uptown and the putative class members from certain Maintenance

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Choice networks that Caremark’s PBM branch established with third-party insurers and plan

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sponsors. Compl. ¶¶ 53-65. As a result of this alleged exclusion, Uptown and the putative class

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members have allegedly suffered monetary losses because they cannot provide pharmacy services

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to the members of such networks. Id. Defendants contend that this claim arises out of the

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Caremark Provider Agreement because a provision in the Agreement states that Caremark “may

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make available to Provider the opportunity to participate in Caremark or Plan Sponsor Networks.”

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See Pagnillo Decl., Ex. D at 21; Mot. at 12. Because this provision does not create any rights or

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duties with respect to the Maintenance Choice networks, the Court cannot conclude that Uptown’s

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See, e.g., Compl. ¶ 14 (“Uptown Drug is a qualified provider under defendants’ various
pharmacy benefit management programs.”); id. ¶ 27 (“In order to adjudicate the patient’s claim,
CVS Caremark requires that the retail pharmacy supply several pieces of information to CVS
Caremark . . . for claims processing”); id. ¶ 43 (“Plaintiff’s and Class members’ pharmacy patient
lists, including the demographic information and prescription history of each patient, are
proprietary and confidential. Plaintiff and Class Members only disclose such information to CVS
Caremark’s PBM operation for the purpose of claims adjudication, and the Pharmacy Services
segment is required to keep such information confidential, and to use it only for the authorized
purpose of pharmacy benefits management.”).
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claim has any significant foundation in that provision or in the Agreement as a whole.

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Accordingly, nonsignatory Defendants may not compel the arbitration of this claim.

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B.

The Arbitration Clause Encompasses Uptown’s Misappropriation-Based Claims
“Under established law, [t]he question whether the parties have submitted a particular

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5

dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination

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[u]nless the parties clearly and unmistakably provide otherwise.”15 In re Van Dusen, 654 F.3d

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838, 843 (9th Cir. 2011) (citations and internal quotation marks omitted). To fall within the scope

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of an arbitration clause, a claim need only “touch matters covered by the contract containing the

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arbitration clause and all doubts are to be resolved in favor of arbitrability.” Simula, Inc. v.

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Autoliv, Inc., 175 F.3d 716, 721 (9th Cir. 1999) (citation omitted).
Here, the arbitration clause provides that “[a]ny and all disputes in connection with or

United States District Court
Northern District of California

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arising out of the Provider Agreement by the parties will be exclusively settled by arbitration . . .”

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Pagnillo Decl., Ex. D at 50.

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As discussed above, Uptown’s misappropriation-based claims are founded on the

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Caremark Provider Agreement. As such, they arise out of the Provider Agreement and thus fall

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within the scope of the arbitration clause. For this reason, and because each of the Defendants

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may move to compel the arbitration of these claims regardless of whether they signed the

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Agreement, Defendants’ motion to compel the arbitration of these claims is GRANTED.
In contrast, Uptown’s claim under the unfair prong of the UCL does not touch matters

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covered by the Provider Agreement and therefore falls outside of the arbitration clause. For this

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reason, and because nonsignatory Defendants cannot compel the arbitration of this claim,

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Defendants’ motion to compel arbitration of this claim is DENIED.

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C.

The Action is Stayed Pending Arbitration
The FAA provides that “upon any issue referable to arbitration under an agreement in

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Defendants argue that the parties delegated the question of arbitrability to the arbitrator by
expressly incorporating the rules of the American Arbitration Association in the arbitration clause.
Mot. at 10. Because the Ninth Circuit has not addressed in a published opinion the question of
whether such incorporation is sufficient to submit the question of arbitrability to the arbitrator, and
because there is disagreement among the lower courts on this issue, the Court concludes that the
question of arbitrability in this case is for judicial determination.
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writing for such arbitration, the court in which the suit is pending, upon being satisfied that the

2

issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall

3

on application of one of the parties stay the trial of the action until such arbitration has been had in

4

accordance with the terms of the agreement[.]” 9 U.S.C. § 3.
Defendants move to stay the litigation of any claims that the Court finds unsuitable for

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6

arbitration until the arbitration of all other claims is completed.

7

Uptown opposes Defendants’ request and urges the Court to “maintain its jurisdiction over

8

this case in order to consider requests for injunctive relief, even over those claims which the Court

9

may find are suitable for arbitration.” Opp’n at 24.
Having concluded that all misappropriation-based claims are subject to arbitration, the

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United States District Court
Northern District of California

10

Court finds that a stay of the remaining claim for violations of the unfair prong of the UCL is

12

warranted. See Kilgore, 673 F.3d at 955 (“The federal case must be stayed while the parties

13

proceed to arbitration.”).
The Court will not consider Uptown’s requests for injunctive relief at this time, as such

14
15

requests are wholly derivative of the claims asserted in the complaint and thus are subject to the

16

same arbitration analysis and conclusions as the claims from which they stem.16 See Compl. ¶¶

17

109-115 (requesting permanent injunction (1) requiring Defendants to admit Uptown and the

18

putative class members into the Maintenance Choice networks; and (2) barring Defendants from

19

disclosing or otherwise using Uptown’s customer information except for the purpose of

20

adjudicating Uptown’s benefit claims). Consequently, all requests for injunctive relief that derive

21

from Uptown’s misappropriation-based claims must be resolved through arbitration, and the

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request for injunctive relief in connection with the remaining UCL claim is stayed pending

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arbitration.

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///

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The arbitration clause contains an exception, which provides that that “nothing in this provision
shall prevent either party from seeking injunctive relief for breach of this Provider Agreement in
any state or federal court.” Pagnillo Dec., Ex. D at 50. Uptown’s requests for injunctive relief do
not fall within this exception to arbitration, because the injunctive relief that Uptown seeks is not
meant to address any breaches of the Provider Agreement.
18

IV.

1
2

CONCLUSION

Defendants’ motion to compel arbitration is granted in part and denied in part. The motion

3

is granted with respect to Uptown’s claims for (1) violations of the UTSA, (2) violations of the

4

unlawful prong of the UCL, and (3) interference with prospective economic advantage. The

5

motion is denied with respect to Uptown’s claim for violations of the unfair prong of the UCL.

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This action is stayed pending the completion of arbitration.

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8

IT IS SO ORDERED.
Dated: July 22, 2013

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10

United States District Court
Northern District of California

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______________________________________
JON S. TIGAR
United States District Judge

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