Articles / Alternative Dispute Resolution
 Sugartown Pediatrics, LLC v. Merck Sharp & Dohme Corp. (In re Rotavirus Vaccines Antitrust Litig.), 30 F.4th 148 (3d Cir. 2022)
In In re: Rota Virus Vaccines Antitrust Litigation, plaintiff medical practices filed a suit against Merck Sharp & Dohme Corp. alleging Merck’s vaccine bundling scheme was anti-competitive. Merck responded by filing a motion to compel arbitration which the district court denied under the summary judgment standard. The case proceeded to the Third Circuit Court of Appeals twice. The first time before the appellate court, the court vacated the summary judgment decision and held the district court should have allowed discovery on arbitrability. Following discovery, Merck renewed its motion to compel arbitration, and the plaintiffs cross-moved for summary judgment. The district court again denied the motion to compel arbitration and granted summary judgment for medical practices. The District Court found that the plaintiffs were not bound under an agency theory because they had not expressly authorized the Physician Buying Groups (PBGs) to enter into arbitration agreements. This decision led to Merck’s second appeal. The Third Circuit agreed with Merck and reversed, holding that the plaintiffs should have been compelled to arbitrate their claim.
There are two types of contracts at issue. Both are part of Merck’s loyalty program granting medical practices discounts when they buy sufficient vaccine quantities. The first type of contract was between Merck and the PBGs and entitled members of PBGs to discounts when they bought a large enough amount of their vaccines from Merck. These contracts included an arbitration provision. The second type of contract was between the PBGs and the medical practices and gave the medical practices discounts on Merck’s vaccines when they enrolled with the PBGs. The PBGs acted as a bridge between Merck and the medical practices in these contracts. The pediatrician medical practices were members of the PBGs and contracted with Merck but never signed the first type of contract with an arbitration clause.
The Appeals Court held that the Federal Arbitration Act “‘declare[s] a national policy favoring arbitration’ of claims that parties contract to settle in that manner.” Still, because arbitration is a matter of consent, “courts must be sure that the parties have agreed to arbitrate their claims. After all, ‘[a]rbitration is strictly a matter of consent.’” However, parties who are not signatories to a contract with an arbitration clause, “will be bound to an arbitration agreement . . . [when] ‘traditional principles of contract and agency law so require.” Therefore, the Appellate Court examined applicable agency and contract law and determined that the law governing the contract (Pennsylvania) provides that principles of agency will bind a non-signing party to an agreement to arbitrate.
The court found that “at least” one of the plaintiff medical practices, Schwartz, must arbitrate because they granted the PBGs actual authority to consent to the arbitration clause on their behalf. Under Pennsylvania law, three basic elements of agency must be met: “(1) the manifestation by the principal that the agent shall act for him, (2) the agent’s acceptance of the undertaking, and (3) the understanding of the parties that the principal is to be in control of the undertaking.”
The contract between Schwartz and the PBG satisfied the first two prongs because the agreement explicitly made the PBG the “non-exclusive agent to arrange for the purchase of goods and services,” which manifested Schwartz’s intent to have the PBG act as an agent. The PBG accepted the responsibility and acted on this authority when executing the loyalty contract with Merck that included the arbitration agreement. For the third prong, the court found that Schwartz exercised sufficient control over the PBG by circumscribing the PBG’s authority by making the PBG an agent for the limited purpose of vaccine purchases. Furthermore, the court found that even if the PBG did not notify Schwartz about the arbitration clause, that would be a failure to perform the duty, not evidence that an agency relationship does not exist holding the medical practices to the arbitration clause.
Next, the court found that Sugartown and Margiotti & Kroll’s contracts with the PBGs would have established actual authority if they had been signed earlier. Even so, the court did not need to determine if actual authority existed because it found that PBG had apparent authority to act on these parties’ behalf.
In Pennsylvania, apparent authority is established by showing “(1) limited authority given to the agent by the principal; and (2) conduct of the agent which demonstrates to the third-party the agent’s apparent authority to bind the principal.” Both prongs were met in this case because the medical practices confirmed the PBGs acted on their behalf in testimony. Third parties dealing with agents only need to exercise reasonable diligence to ascertain authority because an admitted agent is presumed to be acting within the scope of their authority, so Merck was justified in believing the PBGs were agents as they represented. Additionally, the medical practices confirmed Merck’s impression through their vaccine purchases.
Therefore, the court found that the district court erred in denying the motion to compel arbitration because the PBGs acted as agents of the medical practices when binding them to the arbitration agreements.
Nathan v. Fieger & Fieger, P.C. (In re Romanzi), 31 F.4th 367 (6th Cir. 2022)
In In re: Craig Steven Romanzi, Romanzi worked at the law firm Fieger & Fieger (the “Firm”) where he referred a lucrative personal injury case. Before the Firm settled the case, Romanzi left the Firm. The case settled for $11.9 million, and the attorney fees were “about $3.55 million” of which Romanzi was entitled to a third as the originating attorney, his “departure [from the Firm] notwithstanding.” However, before Romanzi could claim his share of the fee, his creditors forced him into an involuntary Ch. 7 bankruptcy and the Firm refused to pay Romanzi his share of the fee.
Nathan, the Trustee of Romanzi’s bankruptcy estate, thereupon commenced adversary proceedings against the Firm to recover Romanzi’s 1/3 of the legal fee from the settlement alleging that the Firm breached its contract and also that Romanzi was entitled to the fee pursuant to the doctrine of quantum meruit. The bankruptcy court allowed Nathan’s claims to proceed to trial. Before trial, all parties (seeking to avoid a jury trial) “agreed to submit to [the dispute to] arbitration and abide by a panel’s ‘brief reasoned decision’”. Two of the three arbitrators found for the Trustee in “a single paragraph decision.”
“[W]hile certainly brief, [the Firm argued that the award] was not reasoned to the Firm’s satisfaction. The district court agreed and remanded to the arbitrators for clarification rather than vacating the award. On remand, the panel asked for submissions from both parties, which the Trustee provided; the Firm refused to participate at all. The arbitrators’ subsequent supplemental award, approved by the district court, awarded the Trustee the fees owed to Romanzi, plus interest.
The Firm appealed, arguing that: (1) the remand was inappropriate, and the award should have been vacated, (2) the arbitrator’s decision on remand was barred by the doctrine of functus officio, and (3) the supplemental award should also be vacated. The court found the Firm’s arguments unpersuasive, holding that no grounds for vacating arbitral decisions apply and that the remand was appropriate under the clarification exception to functus officio. Therefore, the court affirmed the judgment of the district court and bankruptcy court.
For the Firm’s first challenge, the court reasoned that the clearest argument would be under §10(a)(4) of the Federal Arbitration Act (“FAA”): “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” The court summarized the Firm’s argument on this point as follows: “Because the parties bargained for a “brief reasoned decision,” and the arbitrators delivered something else, the Firm asserts that they exceeded their powers.”
The Appellate Court rejected this argument, finding that the arbitrators did not exceed their authority: “The text of the original award was . . . within the limit set by’ the arbitrators’ powers, so it did not exceed them. The issue is simply that more was required of the panel.”
As this court has explained, “if the district court were correct in its conclusion that [the] Arbitrator … failed to explain his award, the proper remedy would have been a remand to the same arbitrator for clarification.” [citation omitted] That principle makes sense. The proper remedy for falling short of the level of explanation agreed to by the parties is remanding back to the panel, rather than starting from scratch.
Turning to the argument that the award should be vacated for “manifest disregard of the law,”
This test, we have said, is part and parcel of the statutory prohibition against the arbitrators’ “exceed[ing] their powers,” because “[a]rbitrators do not exceed their authority unless they display a manifest disregard of the law.” [citation omitted] But the outrageous circumstances required for this court to find manifest disregard are clearly not met here. [citation omitted] (“An arbitration panel acts with manifest disregard if ‘(1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrators refused to heed that legal principle.’ ” [citation omitted] (“A mere error in interpretation or application of the law is insufficient. … Rather, the decision must fly in the face of clearly established legal precedent.” [citation omitted] (“[A]llegations of errors in interpretation … fail[ ] to prove that the arbitrators displayed a manifest disregard of the law.”).
For the Firm’s second challenge, the court found that the doctrine of functus officio has many exceptions, including the clarification-completion exception.
In this court’s words, “[c]ourts usually remand to the original arbitrator for clarification of an ambiguous award when the award fails to address a contingency that later arises or when the award is susceptible to more than one interpretation”; remand is also appropriate based on “a failure fully to explain an award”—provided that “the parties’ agreement imposed a duty of explanation on the arbitrator.” [citation omitted]
Hence, the district court’s decision to remand to the original arbitrators and the arbitrator’s request for supplemental submissions fell under this exception. Specifically, the parties contracted for a “brief reasoned decision,” so the proper remedy was remanding to the original arbitrators because the reasoning behind the decision and not just the result required clarification. Then, the arbitrators’ requests for additional information from the parties did not violate the doctrine because the order requested a clarification, including a discussion of both parties’ claims and the justification for the award. So the court found it was appropriate to ask for an explanation of claims and defenses not to reconsider the merits but to reach the “brief reasoned decision.”
Lastly, the Appellate Court rejected the Firm’s argument that the supplemental award should be vacated for violating FAA §10(a). § 10(a) of the FAA permits vacatur when 1) the award was procured by corruption, fraud, or undue means; 2) there was evident partiality or corruption in the arbitrators; 3) the arbitrators were guilty of misconduct in refusing to postpone the hearing or hear evidence or otherwise prejudiced the rights of a party; and 4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
For factors (1) and (2), “the Firm argue[d] that the panel’s soliciting findings from both parties, but only receiving submissions from the Trustee, constituted ex parte contact that ‘raises a presumption that the arbitration award was procured by fraud, corruption, or other undue means.’” The Appellate Court firmly rejected this argument, holding that “because notice, not participation, is the touchstone of ex parte contact, the Firm cannot refuse to respond to emails on which it was copied and later claim that those communications were made ex parte.”
Concerning factors (3) and (4), the court found that for the same reasons expressed with respect to the functus officio claim, the arbitrators’ actions did not reopen the merits and they did not constitute misconduct or exceed the scope of the remand instructions. Further, the Appellate Court held: “Generously construed, the Firm’s § 10(a)(3)-(4) argument is that the arbitrators’ actions on remand were so one-sided as to require vacating. The failure with which the Firm takes issue, then, is its own refusal to provide a summary of its arguments when the arbitrators requested that it do so. It cannot now twist its actions into misconduct on the part of the arbitrators.”
Concluding: “[w]e will not punish the district court for criticizing the arbitrators’ taciturnity, nor the arbitrators for explaining themselves more fully on remand.”
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September 2022
