Third Circuit Holds That Non-Signatory Medical Practices Were Bound by Arbitration Agreements Entered Into by Practices’ Purchasing Agents

In In re Rotavirus Vaccines Antitrust Litigation, Merck Sharp & Dohme Corp. secured a victory in the Third Circuit, which held in a precedential decision that the plaintiffs’ antitrust bundling claims must be arbitrated.

The medical practice plaintiffs contracted with “Physician Buying Groups” (PBGs) that arranged for the purchase of Merck’s vaccines at a discount through the drugmaker’s loyalty program. The matter involved two sets of contracts. The first set, between Merck and the PBGs, entitled participating PBG members to discounts if they purchased a threshold quantity of vaccines from Merck. These contracts contained an arbitration provision. The second set of contracts, between the PBGs and the medical practice plaintiffs, gave the plaintiffs discounts on Merck vaccines for enrolling in the PBGs. Thus, the PBGs operated as middlemen: the plaintiffs bought their vaccines directly from Merck but received discounts for belonging to PBGs. The plaintiffs were not parties to the contracts between Merck and the PBGs; as such, the plaintiffs did not sign on to the relevant arbitration provisions.

The District Court for the Eastern District of Pennsylvania held that the PBGs did not have authority to bind the plaintiffs to the arbitration agreements, in part because the plaintiffs were not aware of those agreements. Reversing, the Third Circuit held that the PBGs, as agents, had the power to bind the non-signatory plaintiffs. As the court noted, the authority to agree to arbitrate is “part and parcel of the agency relationship in commercial contexts.”

According to the court, plaintiff Schwartz Pediatrics is bound to arbitrate because it granted its PBG explicit authority to act as its non-exclusive agent for purchasing vaccines. Additionally, plaintiffs Sugartown Pediatrics and Margiotti & Knoll Pediatrics are bound by the agreements because their PBGs had apparent authority to act on their behalf. The court found that Merck was justified in believing the PBGs were their agents because the PBGs represented themselves as such in their contracts with Merck. And, by purchasing vaccines in accordance with the Merck-PBG contracts, the plaintiffs “confirmed the impression that the PBGs were acting as their agents.”

The court also noted that the plaintiffs’ lack of notice of the arbitration provisions is not relevant to the question whether an agency relationship exists. To the contrary, the notice issue is relevant only to the adequacy of the PBGs’ performance as agents. In other words, whether the PBGs adequately performed their roles as agents by notifying the pediatricians of the arbitration agreements is distinct from the “question whether an agency relationship existed in the first place.”

Because the PBGs had authority to bind the plaintiffs to the arbitration agreements, and because the plaintiffs’ antitrust claims “arise out of or relate to” the contracts between Merck and the PBGs, the plaintiffs must arbitrate their claims. Based on this ruling, firms should make it a point to know the terms of their agents’ contracts with third parties because they may unknowingly be bound by them.

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