Lead Opinion
This case requires us to construe the scope of an arbitration clause in a commercial contract. Before doing so, we must determine whether two factually distinct injuries pleaded in the same causes of
Chelsea Family Pharmacy (“Chelsea”) is a local pharmacy serving rеtail customers. Medco Health Solutions, Inc. (“Medco”) is a third party prescription drug program administrator that manages pharmacy benefits programs; contracts with local pharmacies, including Chelsea, to fill program members’ prescriptions; and facilitates insurance reimbursement to the pharmacies. The agreement between the parties provides for arbitration of disputes “arising out of or relating to payments to [Chelsea] by Medco.” Medco contends, based on the language of the agreement, that separatе injuries alleged in the complaint cannot be treated separately for purposes of arbitration if they are styled as part of the same cause of action
Chelsea’s first claim, alleging inadequate reimbursement, relates to payments and thus must be arbitrated under the terms of the arbitration clause. Unlike the inadequate reimbursement injury, however, Medco’s operation of an allegedly anticompetitive mail order business cannot be said to arise out of or relate to payments, and Medco does not argue to the contrary. It instead аrgues that because both injuries are conflated within each of several causes of action in Chelsea’s complaint, they must stand or fall together. We reject this reasoning. Considering the claims independently, we conclude that the reimbursement claim is arbitrable but the mail order claim is not. Exercising jurisdiction under 9 U.S.C. § 16(a)(1)(A), we affirm in part and reverse in part.
I
In order to become a part of Medco’s network of pharmacies, Chelsea signed a written agreement dictating the terms of the parties’ relationship. Chelsea alleges this agreement unlawfully sets reimbursement rates below those prevailing in the marketplace. Moreover, Chelsea contends that the agreement illegally prevents Chelsea from competing with Medco’s mail order pharmacy. Under the terms of the agreement, Medco’s mail order service may offer more favorable dispensing rates than Chelsea is permitted to offer, and Medco is able to provide certain services that Chelsea is contractually barred from providing. In sum, Chelsea alleges that Medco possesses undue bargaining powеr, which it uses to undermine Chelsea’s ability to compete for the business of its own local customers.
Chelsea filed suit on its own behalf and for a putative class of all pharmacies in Oklahoma who have contractual agreements with Medco effective during the three years preceding filing of the amended complaint. In the complaint, Chelsea alleges the contract terms that set low
Chelsea and Medco’s agreement incorporates a Pharmacy Services Manual and several additional schedules. Those schedules set the “payment rates” governing reimbursement to Chelsea for services it provides to individual members of the various pharmacy networks in which Chelsea has agreed to participate. In the Pharmacy Services Manual is an arbitration clause stating:
Any controversy or claim arising out of or relating to payments to Pharmacy by Medco or audit issues, but not relating to termination of Pharmacy’s Agreement with Medco or Pharmacy’s Termination from Medco’s Networks, that are not settled by the parties will be determined by arbitration involving three arbitrators, venued in Bergen County, New Jersey, in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrators may be entеred in any court having jurisdiction thereof. Any award of the Arbitrators will include reasonable costs and reasonable attorney’s fees of the prevailing party. No award of the Arbitrators will prohibit Medco from exercising any rights Medco may have pursuant to its Agreement with Pharmacy or pursuant to law. No party will have a claim in arbitration or otherwise against the other for punitive or consequential damages or for loss of profits.
(Emphasis added). Based on that arbitration clause, Medco moved to stay the case in the district court and to compel arbitration under the Federal Arbitration Act (“FAA”), see 9 U.S.C. § 3, arguing that, based on Congress’s intent to favor arbitration, the phrase “relating to payments” should be read broadly to encompass any claim that has payment as a component. Medco further urged that the core of each of Chelsea’s claims was Medco’s alleged failure to reimburse at prevailing rates, and thus, each claim was “related to payments” by Medco to Chelsea.
In response to the motion to stay, Chelsea countered that the gravamen of its complaint was that Medco engaged in unfair and anticompetitive practices. It further argued that the arbitration provision was a narrow one and that the present dispute fell outside the scope of the clause.
On initial consideration, the magistrate judge issued a report and recommendation, concluded that Chelsea’s claims were not arbitrable under the parties’ contract, and recommended that the district court deny a stay. The report and recommendation employed the framework for determining whether a dispute falls within the scope of an arbitration clause articulated in Cummings v. FedEx Ground Package System, Inc.,
In its Opinion and Order, the district court also adhered to our Cummings framework and found that the arbitration provision was narrow and included some disputes that could arise between the parties yet excluded others. In adopting the magistrate judge’s report and recommendation, the court found that the clause was intended solely to resolve disputes over specific payments. On that basis, it concluded that the entirety of this dispute fell outside the scope of the clause and was not arbitrable.
Medco appeals, bringing to us the contention that this case should be stayed pending arbitration under the FAA. Because the agreement between Chelsea and Medco is “a contract evidencing a transaction involving commerce,” the FAA governs whether particular disputes thereunder are arbitrable. 9 U.S.C. § 2. The sole issue presented is whether Chelsea’s claims fall within the scope of the arbitration agreement. See § 3.
A
In construing the scope of an arbitration agreement, we “classify the particular clause as either broad or narrow.” Cummings,
In the present case, we are presented an arbitration clause similar to that in Cummings. Chelsea and Medco have adopted an arbitration clause governing “[a]ny controversy or claim arising out of or relating tо payments to [Chelsea] by Medco or audit issues, but not relating to termination of [Chelsea]’s Agreement with Medco or [Chelsea]’s Termination from Medco’s Networks.” We recognize that this arbitration clause does not explicitly exclude all other disputes from arbitration as did that in Cummings. Nevertheless, it does exclude matters such as termination of the agreement
B
“Under a narrow arbitration clause, a dispute is subject to arbitration only if it relates to an issue that is on its face within the purview of the clause.... ” Id. A dispute is not subject to arbitration if it involves matters that are “collateral” to those covered by the clause. Id. But even narrow arbitration clauses must be interpreted under the “liberal federal poliсy favoring arbitration agreements.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
Chelsea raises three causes of action in its complaint: violation of Oklahoma’s Third Party Prescription Act, breach of contract, and unfair business practices. All allege the same two distinct harms.
Medco contends that each of these causes of action in the complaint is indivisible. Although Medco concedes that a court may determine that some claims in a complaint are arbitrable while others are not, it contends that such an approach is permissible only when applicability of the arbitration clause differs by cause of action in the complaint rather than by subject matter within each cause of action.
In order to determine whether a claim is arbitrable under the FAA, we evaluate the factual underpinnings of the complaint rather than merely considering the labels attached to each of the causes of action it contains.
While these authorities clearly require that we turn to the facts to determine which claims in a complaint must be arbitrated, they do not similarly insist that we do so in defining what claims the complaint alleges. To do otherwise, however, would undercut the policy of substance over form. Focusing on the facts rather than on a choice of legal labels prevents a creative and artful pleader from drafting around an otherwise-applicable arbitration clause. See Combined Energies v. CCI, Inc.,
Following the stated approach, we conclude that the various allegations in the complaint before us subdivide into distinct factual harms. It is of no moment that these distinct harms are not pleaded as separate causes of action in the complaint.
C
In examining the substance of Chelsea’s pleadings, we discern but two distinct claims: One relates to Medco’s reimbursement rates; the other to Medco’s allegedly
1
As for the first claim, the inadequacy of Medco’s reimbursement rates, we determine that it relates to an issue that is, on its face, within the purview of the arbitration clause. We acknowledge that although the clause has a narrow scope in the context of the overall agreement, it nonetheless is broadly inclusive when it comes to payments. The parties agreed to arbitrate “[a]ny controversy or сlaim arising out of or relating to payments to [Chelsea] by Medco.” (Emphasis added). The ordinary meaning of the phrase “relating to” is broad.
Because the arbitration clause sweeps broadly within the category of payment disputes, we disagree with the district court that this clause solely covers disputes over specific payments. We find no such limiting language on the face of the contract. Unlike the district court, we decline to read the explicit exclusion of unrelated topics from the scope of arbitration as narrowing the scope of the language regarding payments. Those exclusions influenced our first stage inquiry that this was a narrow agreement, but that conclusion does not trump our inquiry regarding the scope of the phrase “arising out of or related to payments.”
At bottom, Chelsea’s claim contesting the contractual reimbursement rates is an allegation that Medco is not paying Chelsea enough money to comply with applicable law. Contract terms governing reimbursement from Medco to Chelsea use the term “payment rate.” That Chelsea uses the term “reimbursement rate” in its pleadings rather than “payment rate” does not mask the true nature of the alleged injury. “Payments” is broad enough to include “reimbursements.” Thus, based on the plain language of the contract and the policy favoring arbitration, the alleged harm of inadequate reimbursement rates “relates to an issue that is on its face within the purview of the clause.” See Cummings,
2
We turn to the second alleged injury— the use of contractual restrictions that prevent Chelsea from competing with Medco’s mail order business. Chelsea alleges that Medco has violated the Third Party Prescription Act, breached contractual obligations, and engaged in unfair business practices “by placing restrictions on the manner in which [Chelsea] may engage in business and by allowing its own mail order pharmacy to compete against [Chel
Medco argues that the anticompetitive practices claim must be arbitrated becаuse it cannot be separated from the reimbursement rates claim. Because these are separate claims, as explained in greater detail above, they need not stand or fall together. Medco does not assert that the anticompetitive practices claim, in its own right, is arbitrable. For those reasons, we agree with the district court that this claim is not arbitrable.
III
We must yet decide if the district court should stay the entirety of the proceedings pending arbitration or stay only that portion of the proceedings that is arbitrable. Stay оf the entire proceeding is appropriate when resolution of the arbitrable claim will have a preclusive effect on the nonarbitrable claim or when “the arbitrable claims predominate the lawsuit and the nonarbitrable claims are of questionable merit.” Riley Mfg.,
Because the two claims in this case are distinct and unrelated, Chelsea’s arbitrable illegal reimbursement claim cannot have a preclusive effect on the nonarbitrable mail order claim; one does not “predominate” over the other. This being the case, it would be inappropriate to stay the mail order claim pending resolution of the reimbursement rate claim.
IV
For the foregoing reasons, we AFFIRM the decision of the district court not to compel arbitration of Chelsea’s mail order business claim, REVERSE the decision not to compel arbitration of Chelsea’s inadequate reimbursement claim, and REMAND with instructions to STAY only the latter claim pending arbitration.
Notes
. Although the complaint labels the various causes of action as "counts,” we do not adopt that terminology.
. For reasons explained below, infra note 7, we use the shorthand "claim” in place of the lengthier "controversy or claim.”
. Title 9, section 3 of the United States Code provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, 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, providing the applicant for the stay is not in default in proceeding with such arbitration.
(Emphasis added).
. Excluding certain categories of disputes from arbitration is not alone dispositive of whether the clause is broad or narrow, but it is indicative of an agreement to limit arbitration to specific disputes.
. A fourth cause of action listed in the complaint seeks injunctive relief but raises no substantive allegations of harm other than by incorporating the previous allegations.
. At oral argument, however, Medco conceded that separating the injuries and compelling arbitration for the reimbursement claim but not the claim relating to the mail order business "is certainly one approach that one could take to this case.” Out of an abundance of caution, we nonetheless consider the arguments against this proposition presented in Medco’s briefs.
. Medco argues that a "controversy” is broader than a "claim" and that because the agreement between the parties assigns any "controversy or claim” relating to payments to arbitration, we must consider whether Chelsea's allegations of anticompetitive practices constitute part of the same "controversy” as its reimbursement allegations, even if these are not part of the same "claim.” This argument is foreclosed by P & P Industries, Inc. v. Sutter Corp.,
. Because we adopted the Second Circuit’s interpretive approach to narrow arbitration clauses in Cummings,
. Because "rеlating to” is broader than "arising out of,” we need not consider the scope of the phrase "arising out of” in isolation. See Coregis Ins. Co. v. Am. Health Found., Inc.,
Concurrence Opinion
concurring.
I am pleased to join Judge Lucero’s lucid opinion for the court. Its analysis is thorough and its result dictated by our precedent. I write separately only to question this business of classifying arbitration clauses as “broad” or “narrow.”
As the majority opinion notes, in Cummings v. FedEx Ground Package Sys., Inc.,
As a panel of this court we are bound to abide our precedent compelling this taxonomic task, but respectfully I question its appropriateness and utility. On the first of these scores, the relevant statute, the FAA, admits no distinction between “broad” and “narrow” clauses. All arbitration clauses, Congress has told us, are equally “valid, irrevocable, and enforceable.” 9 U.S.C. § 2. There is nothing in the language of the Act that suggests some clauses are more equal than others — a sort of four legs gоod, two legs bad. In Moses H. Cone Mem’l Hosp. v. Mercury Constr Corp.,
Not only is this categorization business and its resulting effect on the presumption of arbitration without a basis in the FAA or Supreme Court precedent, the utility of such an undertaking, аs the Seventh Circuit has observed, “is dubious at best.” Int’l Bhd of Elec. Workers v. Illinois Bell Tel. Co.,
Though the result in this case is the same whether or not we apply Cummings, and thus the judgment reached by the court today is surely right, it seems to me we have made more and needless work for ourselves in arbitration cases in having to peg clauses “broad” or “narrow.” Conventional tools of contract interpretation are sufficient to the task of deciding these cases, the only ones authorized by statute or the Supreme Court, and in no need of adornment.
