Medicine Shoppe International, Inc. v. Edlucy, Inc. et al

Filing 64

MEMORANDUM AND ORDER IT IS HEREBY ORDERED that Medicine Shoppe Internationals Amended Motion to Stay Claims of Respondents in Pending Collective Arbitration and to Compel Individual Arbitrations Pursuant to Individual Agreements to Arbitrate i s DENIED. [Doc. 18] IT IS FURTHER ORDERED that respondents' Motion to Dismiss Amended Petition or Compel Arbitration is GRANTED. [Doc. 29] IT IS FURTHER ORDERED that Medicine Shoppe International shall proceed to arbitration with r espondents in Edlucy, Inc., et al. v. Medicine Shoppe International, Inc., AAA Case No. 58 114 Y 00293 11, and may arbitrate its objections to the collective arbitration therein. An appropriate order of dismissal will accompany this Memorandum and Order. Signed by Honorable Charles A. Shaw on 5/14/2012. (NCL)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION

MEDICINE SHOPPE INTERNATIONAL,
INC.,
Petitioner,
v.
EDLUCY, INC., et al.,
Respondents.

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No. 4:12-CV-161 CAS

MEMORANDUM AND ORDER
This diversity matter is before the Court on petitioner Medicine Shoppe International, Inc.’s
(“MSI”) Amended Motion to Stay Claims of Respondents in Pending Collective Arbitration and to
Compel Individual Arbitrations Pursuant to Individual Agreements to Arbitrate (“Motion to Stay
Claims and to Compel Individual Arbitrations”), and the respondents’ Motion to Dismiss Amended
Petition or Compel Arbitration. The motions are fully briefed and ready for decision. For the
following reasons, the Court will grant respondent’s Motion to Dismiss and deny MSI’s Amended
Motion to Stay and to Compel Individual Arbitrations.
Background
This action was filed by MSI under Section 4 of the Federal Arbitration Act (“FAA”), 9
U.S.C. § 4, against respondent Edlucy, Inc. and twenty-seven other individuals and entities that
operate Medicine Shoppe pharmacies pursuant to franchise agreements with MSI. In December
2011, Edlucy, Inc. and most of the other respondents (collectively “respondents”) filed a collective
arbitration claim with the American Arbitration Association (“AAA”) in a matter titled Edlucy, Inc.,

et al. v. Medicine Shoppe International, Inc., AAA Case No. 58 114 Y 00293 11.1 MSI seeks to stay
the respondents’ claims filed in the collective arbitration, and asks the Court to compel the
respondents to proceed with individual, bi-lateral arbitrations that it contends are required by the
terms of the parties’ franchise agreements. The respondents filed a motion to dismiss MSI’s Motion
to Stay Claims and to Compel Individual Arbitrations and, in the alternative, to compel MSI
pursuant to 9 U.S.C. § 4 to arbitrate its objections to the collective arbitration in the AAA matter.
The respondents argue that whether collective arbitration is permitted by the franchise agreement
is a question for the arbitrator to decide.
All but two of the respondents’ franchise agreements have a provision that states: “We both
hereby agree that arbitration shall be conducted on an individual, not a class-wide, basis.” The other
two franchise agreements are silent on this point.2 The issues presented in this case are, first,
whether the quoted language from the franchise agreements prohibits or permits a collective or joint
arbitration and, second, whether this Court has subject matter jurisdiction to decide the first issue,
i.e., whether the first issue is a gateway question of arbitrability for the Court to decide or a
procedural question for the arbitrator.
Discussion
Under the Federal Arbitration Act, 9 U.S.C. §§ 1–16, agreements to arbitrate “shall be valid,
irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation

1

The remaining respondents were joined in the AAA arbitration by amended arbitration
demands.
2

The franchise agreements of respondents Edlucy, Inc. and Sheplee, Inc. call for arbitration
of “[a]ny controversy or claim arising out of or relating to [the] Agreement, or its interpretation or
enforcement,” to be held “in accordance with the rules then obtaining of the American Arbitration
Association.”
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of any contract.” 9 U.S.C. § 2. This statute manifests the strong federal policy favoring arbitration
and requires courts to enforce arbitration agreements according to their terms. AT & T Mobility
LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011). The Supreme Court has instructed that any
doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Moses
H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983).
“[W]hen deciding whether to compel arbitration, a court asks whether a valid agreement to
arbitrate exists, and if so, whether the dispute falls within the scope of that agreement.” Newspaper
Guild of St. Louis, Local 36047 v. St. Louis Post Dispatch, LLC, 641 F.3d 263, 266 (8th Cir.2011).
Here, neither party disputes that valid agreements to arbitrate exist, and MSI does not dispute that
the respondents’ claims fall within the scope of the arbitration clause in the agreements.
MSI argues that the respondents are parties to separate arbitration agreements which require
them to individually arbitrate any disputes with MSI. In support of its position, MSI states the
Supreme Court has held parties cannot be required to arbitrate their disputes in a manner that is not
authorized by the arbitration agreement, citing Volt Information Sciences, Inc. v. Board of Trustees
of Leland Stanford Junior University, 489 U.S. 468, 479 (1989), and that this principle extends to
arbitration provisions requiring that parties resolve their disputes on an individual basis, rather than
in a class-action proceeding, citing AT & T Mobility LLC, 131 S. Ct. 1740.
MSI acknowledges that the Supreme Court has not decided if a court or an arbitrator is the
appropriate decision-maker on the issue of whether an agreement permits class arbitration. StoltNielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010). MSI argues that Eighth Circuit
precedent indicates the question is for the Court rather than an arbitrator, relying on a recent district
court decision from Minnesota, Mork v. Loram Maintenance of Way, No. 11-2069, 2012 WL 38628,
at *2 (D. Minn. Jan. 9, 2012). In deciding Mork, the district court relied on Dominium Austin
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Partners, L.L.C. v. Emerson, 248 F.3d 720, 728-29 (8th Cir. 2001) (affirming district court’s order
compelling parties to submit their claims to arbitration as individuals rather than a class, where the
agreements made no provision for arbitration as a class); and Baesler v. Continental Grain Co., 900
F.2d 1193, 1195 (8th Cir. 1990) (holding that “absent a provision in an arbitration agreement
authorizing consolidation, a district court is without power to consolidate arbitration proceedings.”).
MSI also argues that whether a collective, consolidated or other group form of arbitration
is permitted under an arbitration agreement is the type of “gateway” issue the Supreme Court has
determined should be resolved by a court under Howsam v. Dean Witter Reynolds, Inc., 537 U.S.
79, 84 (2002), because it impacts the entire arbitration proceeding.
The respondents move to dismiss MSI’s petition pursuant to Rule 12(b)(1) for lack of subject
matter jurisdiction or, in the alternative, to compel MSI to arbitrate pursuant to 9 U.S.C. § 4, on two
grounds. First, respondents assert that whether the franchise agreements’ arbitration clause
authorizes joinder or collective arbitration is a question of procedure to be determined by an
arbitrator, and is not a gateway issue of arbitrability for the Court. Respondents argue the Eighth
Circuit has expressly held that the determination of whether an arbitration provision authorizes a
collective action is for an arbitrator, citing Avon Products, Inc. v. International Union United Auto
Workers of America, AFL-CIO, 386 F.2d 651, 658 (8th Cir. 1967) (holding that an arbitrator must
determine whether grievances are to be resolved in a single or in multiple proceedings under the
arbitration provision); and Delta Mine Holding Co. v. AFC Coal Properties, Inc., 280 F.3d 815, 823
(8th Cir. 2001) (stating that arbitrators’ decision to consolidate two separate arbitration proceedings
was “well within their procedural discretion.”).
Second, respondents argue it is not necessary for the Court to determine if the question
whether the agreements authorize a collective arbitration is a gateway question of arbitrability or
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a procedural question. Respondents contend that even if it is a question of arbitrability, the parties
agreed to submit questions of arbitrability to the arbitrator by incorporating the AAA’s Commercial
Arbitration Rules into their agreements, because the AAA’s Rules vest the arbitrator with the
authority to determine threshold questions of arbitrability. Respondents cite as support the Eighth
Circuit’s decisions in Fallo v. High-Tech Institute, 559 F.3d 874, 878 (8th Cir. 2009) (“[W]e
conclude that the arbitration provision’s incorporation of the AAA Rules, . . . constitutes a clear and
unmistakable expression of the parties’ intent to leave the question of arbitrability to an arbitrator.”);
and Green v. SuperShuttle International, Inc., 653 F.3d 766, 769 (8th Cir. 2011) (“By incorporating
the AAA Rules, the parties agreed to allow the arbitrator to determine threshold questions of
arbitrability.”) (citing Fallo, id.).
The Court does not believe the Eighth Circuit has had the opportunity to determinatively
interpret the issue presented in this case and, as a result, the precedent cited by the parties is not
controlling on the issue. In related cases, this Court recently held that the question whether MSI’s
franchise agreements permit a joint or collective arbitration is a procedural question for the
arbitrator, and granted the respondents’ motions to dismiss MSI’s petition seeking to compel
individual arbitrations in those cases. See Medicine Shoppe Int’l, Inc. v. Prescription Shoppes, LLC,
No. 4:12-CV-159 HEA, 2012 WL 1219438, at *2 (E.D. Mo. Apr. 10, 2012); Medicine Shoppe Int’l,
Inc. v. Bill’s Pills, Inc., No. 12-CV-158 AGF (E.D. Mo. May 11, 2012).3

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In reaching its decision in Medicine Shoppe Int’l, Inc. v. Prescription Shoppes, LLC, No.
4:12-CV-159 HEA, this Court, Judge Autrey presiding, implicitly rejected the district court’s
decision in Mork v. Loram Maintenance of Way, Inc., No. 11-2069, 2012 WL 38628 (D. Minn. Jan.
9, 2012), relied on by MSI in its briefing in that case as well as this instant case. In Medicine
Shoppe Int’l, Inc. v. Bill’s Pills, Inc., No. 12-CV-158 AGF, Judge Fleissig declined to follow Mork
and distinguished it on the basis that it concerned a collective class action under the Fair Labor
Standards Act, implicating the Supreme Court’s holding in Stolt-Nielsen S.A. v. Animal Feeds Int’l
Corp., 130 S. Ct. 1758 (2010), that an arbitrator may not infer an implicit agreement for class-action
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In this case, the undersigned finds it is not necessary to reach that question, because the
parties clearly and unmistakably agreed the arbitrator can determine questions of arbitrability.
“Parties are free to agree to arbitrate threshold or ‘gateway’ questions of arbitrability.” Fox v.
Career Educ. Corp., 2012 WL 1205155, at *3 (E.D. Mo. Apr. 11, 2012) (citing Rent-A-Center,
West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010) (noting that this “reflects the fundamental
principle that arbitration is a matter of contract.”)).
In Fallo, 559 F.3d 874, there was a dispute as to whether students’ tort claims against a
vocational school were within the scope of an arbitration agreement contained in their enrollment
agreements. The district court held that it had the authority to determine the question of arbitrability
and that the arbitration provision did not cover the tort claims. The Eighth Circuit reversed, holding
that the issue must be resolved by reference to the parties’ agreement, and that the parties had agreed
questions of arbitrability were to be determined by an arbitrator.
The arbitration clause at issue in Fallo provided, “Any controversy or claim . . . shall be
settled by arbitration in accordance with the Commercial Rules of the American Arbitration

arbitration because “class-action arbitration changes the nature of the arbitration to such a degree
that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to
an arbitrator.” Slip op. at 4 (citing Stolt-Nielsen at 1775). Judge Fleissig also declined to find the
Eighth Circuit’s Dominium Austin Partners decision controlling, because
there is nothing in the Dominium case, on which the Mork decision relies, to suggest
that the parties in that case raised the question of who should decide (whether the
court or the arbitrators) whether class arbitration was permissible. The Eighth
Circuit Court of Appeals merely found that the lower court “did not err by
compelling appellants to submit their claims to arbitration as individuals.”
Dominium, 248 F.3d at 728-29. Neither the Mork case nor the Dominium case
requires this Court to determine the issue of whether arbitration may proceed on a
consolidated basis.”
Slip op. at 7. The Court agrees with Judge Fleissig’s reasoning.
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Association (“AAA”).” Id. at 876. The Eighth Circuit held that this clause incorporated the AAA’s
Rules, including Rule 7(a), which expressly gives an arbitrator the power to rule on his or her own
jurisdiction. Id. The Eighth Circuit concluded that incorporation of the AAA’s Rules was a “clear
and unmistakable expression of the parties’ intent to reserve the question of arbitrability for the
arbitrator and not the court.” Id. at 878. See also Green v. Supershuttle International, Inc., 653 F.3d
766, 768-69 (8th Cir. 2011) (holding that arbitration clause stating, “Any controversy…shall be
submitted to the AAA…in accordance with its commercial rules,” evidenced the parties’ agreement
to “allow the arbitrator to determine threshold questions of arbitrability.”).
The arbitration clause at issue here is functionally equivalent to those in Green and Fallo and
states in pertinent part, “[A]ll controversies, disputes or claims . . . shall be heard by one arbitrator
in accordance with the then current Commercial Arbitration Rules of the AAA.” See, e.g., Amended
Petition [Doc. 21], Ex. B at Ex. 31, § 14(G). Thus, the clause incorporates the AAA’s Rules. The
current version of AAA Rule 7(a) provides arbitrators with the authority to determine their own
jurisdiction.4 Thus, the Court finds the parties clearly and unmistakably agreed to submit all
questions of arbitrability to an arbitrator.

4

The AAA Commercial Rules provide in pertinent part:

R-7. Jurisdiction
(a) 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.
American Arbitration Association, http://www.adr.org/aaa (then follow “Rules & Procedures”
hyperlink; then follow “Rules” hyperlink; then follow “Commercial Arbitration Rules and Mediation
Procedures (including Procedures for Large, Complex Commercial Disputes)” hyperlink (last visited
May 10, 2012).
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MSI’s arguments to the contrary are not persuasive. First, MSI notes that the arbitration
clause incorporating the AAA’s Rules provide that those Rules will apply “except as otherwise
provided in this Agreement,” and points out that the clauses then expressly state arbitration must be
conducted “on an individual, not a class-wide, basis.” MSI contends that as a result of this language,
the Rules do not vest in the arbitrator the power to interpret the requirement that the respondents
arbitrate on an individual basis.
MSI fails to acknowledge that the arbitration clause goes on to provide that the arbitrator
“shall apply the rules of evidence and discovery which are applicable to like controversies heard in
the United States District Court for the Eastern District of Missouri[.]” In another provision, the
arbitration clause states that the Federal Rules of Evidence and the Federal Rules of Civil Procedure
relating to discovery shall apply, and that Rule 13 of the Federal Rules shall apply with respect to
compulsory counterclaims. These appear to be the only exceptions to the applicability of the AAA’s
Rules found in the franchise agreements. These exceptions have no bearing on the applicability of
Rule 7(a) and, therefore, on the question whether the parties agreed to submit questions of
arbitrability to the arbitrator.
MSI’s argument that an arbitrator is without power to determine whether a collective
arbitration may be allowed because the arbitration clause states that arbitration must be conducted
“on an individual, not a class-wide, basis” is unpersuasive. Whether this provision may be construed
to prohibit or permit joinder or collective arbitration is a matter of contract interpretation. As in
Fallo and Green, the parties agreed to submit such questions of contract interpretation, whether
deemed “procedural” or “arbitral,” to an arbitrator. It is for the arbitrator to determine whether the
clause is properly construed to prohibit or permit collective arbitration.

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Next, MSI argues that the Eighth Circuit’s decision in Green supports its position that a court
rather than an arbitrator should make the threshold determination regarding whether arbitration
should proceed on a collective or individual basis. MSI asserts that on the central issue presented
in Green, the Court affirmed the district court’s decision granting the defendant’s motion to compel
arbitration and enforcing the class action waivers in the parties’ agreement, thereby requiring
individual arbitrations.
In Green, the Eighth Circuit held that because the arbitration clause at issue incorporated the
AAA’s Rules, the parties agreed to submit questions of arbitrability to an arbitrator. Green, 653
F.3d at 769. As a result, the district court properly granted the defendant’s motion to compel
arbitration of the parties’ dispute as to whether the FAA’s transportation worker exemption applied
– which was an issue of arbitrability. Id. This aspect of Green clearly supports the conclusion that
questions of arbitrability are for an arbitrator to decide in this case.
As stated by MSI, the Eighth Circuit also affirmed the district court’s order enforcing the
class action waivers in the parties’ agreements. Id. The plaintiffs in Green had made a state-law
based challenge to the enforceability of the class action waivers. It is significant that apparently
neither party chose to enforce their agreement to submit questions of arbitrability to an arbitrator
regarding the dispute about the enforcement of the class action waivers, but rather consented to the
district court’s jurisdiction on that issue. On appeal, the plaintiffs argued that the class action
waivers were unenforceable under state law and, in the alternative, that the district court should have
left the question for the arbitrator to decide. The Eighth Circuit held that plaintiffs’ state-law
challenge was preempted by the FAA under the Supreme Court’s decision in AT & T Mobility LLC,
131 S. Ct. at 1753, and did not address the plaintiffs’ alternative argument. Thus, the Eighth Circuit
in Green did not have the opportunity to speak directly on the question presented by this case.
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The instant case is distinguishable from Green on several grounds. Here, the respondents
seek to enforce the parties’ agreement to have questions of arbitrability resolved by an arbitrator,
they do not challenge the class action waiver in the agreements based on state law or otherwise, and
they have not filed a class-wide arbitration. Further, unlike the plaintiffs’ argument in Green, the
respondents’ argument that the question whether the agreement permits joint or collective arbitration
is for an arbitrator has not been squarely rejected by the Supreme Court as a matter of law. MSI’s
assertion that Green supports its position is therefore unconvincing.
Conclusion
For the foregoing reasons, the Court finds that valid agreements to arbitrate exist, the
respondents’ claims fall within the scope of the arbitration clause in the agreements, and the parties
clearly and unmistakably agreed to submit questions of arbitrability to an arbitrator. As a result, the
Court lacks subject matter jurisdiction over MSI’s Amended Petition to stay the respondents’ claims
in the pending collective arbitration and to compel individual arbitrations. Accordingly, the Court
will deny MSI’s Amended Motion to Stay Claims of Respondents in Pending Collective Arbitration
and to Compel Individual Arbitrations. The respondents’ Motion to Dismiss Amended Petition or
Compel Arbitration will be granted, and MSI will be ordered to participate in the arbitration
proceedings in Edlucy, Inc., et al. v. Medicine Shoppe International, Inc., AAA Case No. 58 114 Y
00293 11. As a result, it is not necessary for the Court to address respondents’ additional arguments
for dismissal under Rule 12(b)(6).5

5

The Court notes that no party has requested this case to be stayed pending the completion
of arbitration. See 9 U.S.C. § 3 (stating that district court “shall on application of one of the parties
stay the trial of the action until such arbitration has been had in accordance with the terms of the
agreement[.]”).
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Accordingly,
IT IS HEREBY ORDERED that Medicine Shoppe International’s Amended Motion to Stay
Claims of Respondents in Pending Collective Arbitration and to Compel Individual Arbitrations
Pursuant to Individual Agreements to Arbitrate is DENIED. [Doc. 18]
IT IS FURTHER ORDERED that respondents’ Motion to Dismiss Amended Petition or
Compel Arbitration is GRANTED. [Doc. 29]
IT IS FURTHER ORDERED that Medicine Shoppe International shall proceed to
arbitration with respondents in Edlucy, Inc., et al. v. Medicine Shoppe International, Inc., AAA
Case No. 58 114 Y 00293 11, and may arbitrate its objections to the collective arbitration therein.
An appropriate order of dismissal will accompany this Memorandum and Order.

CHARLES A. SHAW
UNITED STATES DISTRICT JUDGE

Dated this 14th day of May, 2012.

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