Antitrust Law Daily Mandatory arbitration provision in contact between Merck and PBGs does not apply to pediatrician plaintiffs
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Thursday, January 24, 2019

Mandatory arbitration provision in contact between Merck and PBGs does not apply to pediatrician plaintiffs

By Robert B. Barnett Jr., J.D.

A mandatory arbitration provision in a contract between Merck and a Physician Buying Group (PBG) did not bind two pediatric practices that were suing Merck for drug-related antitrust violations, even though the practices obtained the drugs from the PBG, because the pediatric practices did not sign the contract, did not agree to be bound by its terms, and did not have an agency relationship with the PBG.

Two pediatric practices that sued Merck for antitrust violations involving the sale of Merck’s rotavirus vaccines were not bound by the mandatory arbitration provisions in Merck’s contracts with the Physician Buying Groups (PBGs) from whom the pediatricians obtained the drugs, the Philadelphia federal district court has ruled. The pediatricians were not signatories to those contracts, and none of the conditions for binding a party to a contract it did not sign existed in this case (In re Rotavirus Vaccines Antitrust Litigation, January 23, 2019, Joyner, J.)

Sugartown Pediatrics, LLC, and Schwartz Pediatrics S.C. file a putative class action antitrust suit against Merck, alleging that Merck illegally used its dominant market power to overcharge purchasers for its rotavirus vaccines. At one point, according to the complaint, Merck held 100% of the market for its RotaTeq Rotavirus vaccine. When GlaxoSmithKline entered the market with Rotarix, rather than lower its price to compete with Rotarix, Merck imposed "bundled loyalty conditions" in its buying contracts with PBGs to maintain its monopoly position. Merck bundled RotaTeq with its other pediatric vaccines, in effect telling PBGs that, if they wanted the other vaccines, they had to buy RotaTeq. The pediatricians, who bought their drugs from a PBG, allege that this anticompetitive conduct caused them to pay inflated prices over the years for rotavirus vaccines. Merck filed a motion to stay the proceedings and to compel the pediatric practices to arbitration on the theory that the pediatricians were bound by a mandatory arbitration provision contained in the contracts between Merck and the PBG.

Mandatory arbitration. Although the mandatory arbitration provision in the contract between Merck and the PBG appears to be valid and binding, the two pediatric practices were not parties to the contract and never signed it. As a result, the court said, they never expressly agreed to arbitration and were not bound by the terms of the contract between Merck and the PBG.

Exceptions. As with most rules, exceptions to this one exist, which allow a non-signatory to be bound by an agreement between others. Five theories for incorporating a non-signatory exist: (1) incorporation by reference, (2) assumption, (3) agency, (4) veil-piercing/alter ego, and (5) estoppel. In this case, the only two theories that could apply were agency and estoppel.

Agency. Under Pennsylvania law, the court ruled, the two pediatric practices were not agents of the PBG. They never granted the PBG authority to act on their behalf, either expressly or impliedly. Also, while Merck’s contract with the PBGs clearly evinced a desire that providers that bought drugs from the PBG be bound by the terms of the agreement, that desire did not create an agency relationship. Furthermore, the pediatric practices never consented to or had knowledge that, by becoming PBG members, they were giving the PBG authority to enter into an agreement with Merck to arbitrate. No parent-subsidiary, ownership, or other similar relationship existed between the two pediatric practices and the contract signatories. As a result, the agency theory failed.

Estoppel. Estoppel can exist when either (1) the non-signatory knowingly exploits the agreement to its benefit or (2) an obvious and close nexus exists between the non-signatory and the signatories. Under these facts, neither theory could be supported. No evidence existed that any knowing exploitation occurred. In addition, no showing of relatedness or congruence could be shown, the court said. No evidence existed of any relationship between the non-signatory and the signatories other than the fact that the pediatricians joined the PBG to obtain the required drugs. This fact did not justify the estoppel theory or otherwise impose any of the contact conditions on the pediatricians. As a result, the estoppel theory also failed.

The court, therefore, denied Merck’s motion to compel arbitration and to stay the proceedings.

This case is No. 2:18-cv-01734-JCJ.

Attorneys: Bart D. Cohen (Nussbaum Law Group PC) and Daniel J. Walker (Berger Montague PC) for Sugartown Pediatrics, LLC. Daniel H. Silverman (Cohen Milstein Sellers & Toll PLLC) for Schwartz Pediatrics S.C. Joshua H. Grabar (Grabar Law Office) for Margiotti & Kroll Pediatrics, PC. Ashley E. Bass (Covington & Burling LLP) for Merck Sharp & Dohme Corp.

Companies: Sugartown Pediatrics, LLC; Schwartz Pediatrics S.C.; Margiotti & Kroll Pediatrics, PC; Merck Sharp & Dohme Corp

MainStory: TopStory Antitrust PennsylvaniaNews

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