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Prime Therapeutics LLC v. Omnicare, Inc.: US District Court : ARBITRATION | MEDIATION - 'manifest disregard' NOT reason to vacate arbitration award under FAA

Prime Therapeutics LLC,
Civ. No. 08-375 (RHK/JSM)
Omnicare, Inc.,
Bret A. Puls, Meghan M. Anzelc, Oppenheimer Wolff & Donnelly LLP, Minneapolis,
Minnesota, for Plaintiff.
Brian S. McGrath, Harvey Kurzweil, Urvashi Sen, Dewey & LeBoeuf LLP, New York,
New York, Matthew M. Walsh, Dewey & LeBoeuf LLP, Los Angeles, California,
Michael R. Gray, Daniel R. Shulman, Gray, Plant, Mooty, Mooty & Bennett, P.A.,
Minneapolis, Minnesota, for Defendant.
Prime Therapeutics LLC (Prime) seeks to vacate an arbitration award and
Omnicare, Inc. (Omnicare) seeks to confirm it. The arbitration involved a contract
dispute over the reimbursement of copayments on prescription drugs that were dispensed
under the federally funded Medicare Part D program. The arbitrator held that Prime
breached the agreement when it failed to reimburse Omnicare for these copayments. For
the reasons set forth below, the Court will deny Primes motion to vacate the arbitration
award and will grant Omnicares motion to confirm it.
Enacted in 1965, Medicare is a federally run health insurance program benefitting
primarily those who are 65 years of age and older. First Med. Health Plan, Inc. v. Vega-
Ramos, 479 F.3d 46, 48 (1st Cir. 2007) (citation omitted); see also Matthews v. Leavitt,
452 F.3d 145, 147 n.1 (2d Cir. 2006) (detailing Medicare coverage). In addition, [e]ach
state administers a Medicaid program (with substantial federal funding) to provide
medical coverage to its economically disadvantaged population. Id. In 2003, Congress
passed the Medicare Prescription Drug Improvement and Modernization Act, which
established a prescription drug benefit program under Medicare Part D to subsidize the
out-of-pocket prescription drug costs for individuals eligible for federal assistance. See
Pub. L. No. 108-173, 117 Stat. 2066 (2003) (Part D Plans). The Medicare Part D
program became effective on January 1, 2006, and is administered by the Centers for
Medicare and Medicaid Services (CMS). (McGrath Aff. Ex. A. at 3; see also 42
U.S.C. 1395w-101.)
Many enrollees in a Part D Plan are institutionalized dual eligibles, defined as
individuals who have Medicare Part D coverage for an entire month, have been
determined eligible by the State for full Medicaid benefits for the same month, and
have been inpatients in a nursing facility, with the stay paid for by Medicaid, throughout
the entire month. 42 C.F.R. 423.772, 423.782(a)(2)(ii); see also 42 U.S.C. 1396u-
5(c)(6), 1369u-5(a)(2). Their dual enrollment in Medicare and Medicaid exempts them
from the cost-sharing amounts such as copayments that would otherwise be payable by
beneficiaries under a Part D Plan. See 42 C.F.R. 423.782.
Various health-insurance companies contract with CMS to administer the Part D
Plans. (Pl.s Mem. at 1-2, 6-7.) CMS reimburses the sponsors of Part D Plans who, in
turn, pay the pharmacies for the amount of copayments not collected by them from
eligible beneficiaries. (Id. 2, 7-8.) Prime is a pharmacy-benefit manager that provides
administrative services in processing prescription claims on behalf of health-insurance
companies that sponsor the Part D Plans. (Id. at 4.) Omnicare is a pharmacy chain that
provides prescription medications to senior citizens in nursing homes and other long-term
care facilities. (Id.)
In 2005, Prime and Omnicare entered into a Pharmacy Network Agreement
(the Agreement). (Doc No. 1 Ex. A.) The parties agreed to comply with all Part D
Rules in connection with fulfilling their respective obligations. (Id. 5.1.) Under the
Agreement, Omnicare is required to check with Prime via an on-line system to determine
if the individual for whom a prescription is being sought is enrolled under the Part D Plan
with Prime and has been identified by CMS as dual-eligible and therefore exempt from
having to make a copayment. (Id. 2.5, 2.8.) Prime advises Omnicare via the on-line
system as to whether it should charge and collect a copayment. (Id. 3.) But, in the
event Omnicare believes that an individual is or may be eligible for a copayment subsidy,
Section 2.5(b) permits Omnicare not to collect a copayment from the individual and to
submit a claim for reimbursement after the individual is determined to be eligible for the
subsidy. The Agreement also precludes Omnicare from charging an enrollee of the Part
D Plan for products or services that are the responsibility of the Part D Plan Sponsor.
(Id. 5.3(d).) Finally, if the parties are unable to resolve any dispute arising under the
terms of the Agreement, either party may submit the dispute to binding arbitration . . .
[and] [t]he arbitrator may determine all questions of law . . . [and] has the right to grant
permanent and interim damages or injunctive relief . . . . (Id. 7.1(b).)
The roll out of the Medicare Part D program was not without operational
problems. (Pl.s Mem. at 9.) Eligibility data from CMS was not always current and
consequently would incorrectly reflect that an individual owed a copayment. (Id.)
CMS encouraged the pharmacies to fill the prescriptions if the pharmacy believed the
individual was eligible. (McGrath Aff. Ex. A at 5.) In 2006, CMS issued instructions to
all Part D sponsors for reconciling low-income subsidy status and implementing a Best
Available Evidence (BAE) policy. (Id.)
With respect to the claims in this arbitration, Prime advised Omnicare that the
individuals were ineligible based on the data it had from CMS. (Id. at 3-4.) Omnicare,
however, believed that the individuals were eligible and went ahead and dispensed the
prescription drug without charging a copayment. (Id.) It then submitted these claims to
Prime for reimbursement. (Id.) Prime refused to reimburse Omnicare, arguing that
Omnicare must support its claim for reimbursement with BAE. (Id.) In May 2007,
Omnicare filed a demand for arbitration. (Id. at 1.)
The arbitrator determined that [a]though it is Primes right and responsibility to
initially determine eligibility, Omni has the responsibility under the Agreement not to
collect the co-pays in spite of Primes denial of eligibility if Omni knows that the enrollee
is or may be eligible. (Id. at 9.) He explained that pending the claim that is,
creating receivables rather than charging the patients was Omnicares way of informing
Prime that it knew that the individual is or may be eligible for not having to pay a
copayment. (Id.) He also found that the Agreement did not require Omnicare to provide
BAE to Prime in order for Omnicare to be entitled to reimbursement of the copayments.
(Id. at 9-11.) Instead, he determined that the sponsors of the Part D Plans, in this case
Prime, had the responsibility to provide BAE to CMS. (Id.) Accordingly, he concluded
that Prime breached the Agreement and ordered Prime to reimburse 4,281 in
copayments to Omnicare. (Id. at 8-9, 12.) 1
The parties cross motions to confirm and vacate the arbitration award followed.
The Agreement in this case is governed by the Federal Arbitration Act (the
FAA), 9 U.S.C. 1 et seq. Under the FAA, a court must confirm an arbitration award,
except in the following narrow circumstances:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or
either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone
the hearing, upon sufficient cause shown, or in refusing to hear evidence
pertinent and material to the controversy; or of any other misbehavior by
which the rights of any party have been prejudiced; or
(4) 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.
1 If CMS ultimately determined that an individual was not eligible then Prime could seek
reimbursement from the beneficiary. (4/24/08 Tr. at 19-20.)
9 U.S.C. 9-10(a). This Courts review of an arbitration award is very limited and the
arbitrators decision is entitled to an extraordinary level of deference. Stark v.
Sandberg, Phoenix & Von Gontard, 381 F.3d 793, 798 (8th Cir. 2004) (explaining that an
arbitration award must be confirmed even if a court is convinced that the arbitrator
committed a serious error, so long as the arbitrator is even arguably construing or
applying the contract and acting within his authority); Bhd. of Maint. of Way Employees
v. Terminal R.R. Assn, 307 F.3d 737, 739 (8th Cir. 2002) (noting that a courts scope
of review of the arbitration award itself is among the narrowest known to the law).
Prime seeks to vacate the arbitration award on the following grounds:
(1) the arbitrator exceeded his authority by making determinations exclusively reserved
for CMS, (2) the arbitrator ignored the plain and unambiguous language of the
Agreement, and (3) the arbitrators decision was in manifest disregard of the law.2
Primes first argument that the arbitrator exceeded his authority is the only one that
arguably falls within the FAA. See 9 U.S.C. 10(a)(4). In addition to the grounds
enumerated in the FAA, the Eighth Circuit has recognized two extremely narrow extrastatutory
grounds for vacating an arbitration award: (1) where the award is either
completely irrational or (2) it manifests a disregard of the law. Hoffman v. Cargill, Inc.,
236 F.3d 458, 461 (8th Cir. 2001). But, as Omnicare points out in its brief, the Supreme
2 Prime also argues that the arbitration award violates public policy because the arbitrator failed
to follow federal law and that the award exposes Prime to potential government action for noncompliance
with Part D and its rules, regulations, and guidance. (See Pl.s Mem. at 25-32.) The
Court finds that these extra-statutory grounds are without merit.
Court recently held that Section 10 of the FAA provides the exclusive grounds for
vacating an arbitration award. (Def.s Oppn Mem. at 5-6 (citing Hall Street Assocs.,
L.L.C. v. Mattel, Inc., Civ. No. 06-989, __ U.S. __, 2008 WL 762537 at *4 (March 25,
2008)).) Prime, however, argues that the Supreme Court did not overrule judiciallycreated
grounds for vacating an arbitration award. (Pl.s Reply Mem. at 3-4.)
I. The Hall Street Decision
The dispute in Hall Street arose out of a lease between Hall Street Associates,
L.L.C. (Hall Street), the landlord, and Mattel, Inc. (Mattel), the tenant, for
commercial property. Hall Street, 2008 WL 762537, at *2. The property was used as a
manufacturing site and the lease provided that the tenant would indemnify the landlord
for any costs resulting from the failure to follow environmental laws while using the
premises. Id. Mattel gave notice of termination when it discovered that well water on the
property was contaminated. Id. at *3. Hall Street filed suit claiming that Mattel was
required to indemnify Hall Street for actions relating to the condition of the property,
including water contamination. Id. The United States District Court for the District of
Oregon found that Mattel had a right to terminate the lease. Id. The parties then
proposed to arbitrate a claim that the lease required Mattel to indemnify Hall Street for
the costs of cleaning up the lease site. Id. The court approved the arbitration agreement,
which included a provision requiring the court to vacate, modify, or correct any award:
(i) where the arbitrators findings of facts are not supported by substantial evidence, or
(ii) where the arbitrators conclusions of law are erroneous. Id.
The arbitrator ruled in favor of Mattel and found that no indemnification was due
because the lease obligation to follow all applicable federal, state, and local
environmental laws did not require compliance with the testing requirements of the
Oregon Drinking Water Quality Act (Oregon Act); that Act the arbitrator characterized as
dealing with human health as distinct from environmental contamination. Id. Hall
Street moved to vacate, modify, or correct the arbitrators decision on the ground that it
was legal error when the arbitrator failed to consider the Oregon Act as an applicable
environmental law. Id. The district court agreed; it granted Hall Streets motion to
vacate the award and remanded the matter to the arbitrator. Id.
On remand, the arbitrator ruled in favor of Hall Street. Both sides sought review
of the arbitrators second award. Id. The district court largely upheld the award. Id. The
Ninth Circuit, however, vacated the district courts decision and remanded with
instructions to confirm the original award unless the district court determined that the
award should be vacated or modified under the limited grounds provided in the FAA. Id.
at *3-4. The district court again ruled in favor of Hall Street and vacated the arbitration
award, finding that the arbitrators decision rested on an implausible interpretation of the
lease and thus exceed the arbitrators powers, in violation of Section 10 of the FAA. Id.
at *4. Mattel appealed and the Ninth Circuit again reversed, holding that implausibility is
not a valid ground for vacating or correcting an award under Section 10 or Section 11 of
the FAA. Id. The Supreme Court then granted Hall Streets petition for review to decide
whether the grounds for vacatur and modification provided by Sections 10 and 11 of the
FAA are exclusive. Id.
In a 6-3 decision, the Supreme Court held that Sections 10 and 11 of the FAA
provide the exclusive grounds for vacating and modifying an arbitration award.3 Id. In
so holding, it rejected Hall Streets arguments that the statutory grounds for vacating or
modifying an arbitration award were not exclusive. Id. at *5. Hall Street first argued that
expandable judicial review has been recognized since Wilko v. Swan, 346 U.S. 427
(1953). In Wilko, the Supreme Court held that the [p]ower to vacate an [arbitration]
award is limited, and that the interpretations of the law by the arbitrators in contrast to
manifest disregard [of the law] are not subject, in the federal courts, to judicial review for
error in interpretation. Id. at 436. Hall Street interpreted this language as recognizing
manifest disregard of the law as a further ground for vacatur on top of those listed in
Section 10. Hall Street, 2008 WL 762537, at *5. The Supreme Court disagreed, noting
that [q]uite apart from its leap from a supposed judicial expansion by interpretation to a
private expansion by contract, Hall Street overlooks the fact that the statement it relies on
expressly rejects just what Hall Street asks for here, general review for an arbitrators
legal errors. Id. The Court also observed the vagueness of Wilkos phrasing: Was
manifest disregard meant to be a new ground for review, or simply a collective
reference to the grounds in Section 10 of the FAA, or shorthand for Sections 10(a)(3) or
10(a)(4), the subsections authorizing vacatur when arbitrators were guilty of
misconduct or exceeded their powers? Id. It concluded that Wilko did not create
grounds for vacatur separate and apart from Section 10 of the FAA. Id.
3 Although the Supreme Court agreed with the Ninth Circuit that the FAAs grounds for vacating
and modifying arbitration awards are exclusive, it vacated the judgment and remanded for
consideration of other issues. See Hall Street, 2008 WL 762537, at *2, *9.
The Supreme Court also rejected Hall Streets argument that the parties
contractual standard of review should apply because the FAA is designed to enforce
contractual agreements. Id. at *6. The Court explained that although there is a general
policy of treating arbitration agreements as enforceable . . . the FAA has textual features
at odds with enforcing a contract to expand judicial review following the arbitration. Id.
Even assuming Sections 10 and 11 could be supplemented to some extent, the Supreme
Court concluded that it would stretch basic interpretive principles to expand the stated
grounds to the point of evidentiary and legal review generally. Id. It found that
expansion would be inconsistent with the language of Section 9 of the FAA, which states
that a court must grant an application for an order confirming an arbitration award
unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11
of this title. Id. Notably, the Supreme Court emphasized that there is no hint of
flexibility in this language: courts are directed that they must confirm an award
unless it is vacated or modified as prescribed by Sections 10 and 11. Id.
II. Impact of the Hall Street Decision
The Supreme Court has made clear that Sections 10 and 11 of the FAA provide
the exclusive grounds for vacating and modifying an arbitration award. It is also clear
from Hall Street that parties cannot contractually alter the FAAs grounds for vacating or
modifying arbitration awards. In other words, parties cannot contractually agree to
expand the scope of judicial review to give courts the power to vacate an arbitration
award due to the arbitrators manifest disregard of the law in a proceeding governed by
the FAA. But does this suggest that courts can no longer vacate an arbitration award
based on judicially-created grounds such as manifest disregard of the law? After Hall
Street, this Court believes the answer to that question is yes. It would be somewhat
inconsistent to say that the parties cannot contractually alter the FAAs exclusive grounds
for vacating or modifying an arbitration award, but then allow the courts to alter the
exclusive grounds by creating extra-statutory bases for vacating or modifying an award.
As the Supreme Court explained:
Instead of fighting the text, it makes more sense to see the three provisions,
9-11, as substantiating a national policy favoring arbitration with just the
limited review needed to maintain arbitrations essential virtue of resolving
disputes straightaway. Any other reading opens the door to the full-bore
legal and evidentiary appeals that can rende[r] informal arbitration merely a
prelude to a more cumbersome and time-consuming judicial review
process, and bring arbitration theory to grief in post-arbitration process.
Id. at *7 (internal quotations and citations omitted). Although Hall Street argued that
parties will flee from arbitration if expanded review is not open to them, the Court
concluded that whatever the consequences of our holding, the statutory text gives us no
business to expand the statutory grounds. Id.
Therefore, this Courts review of a motion to vacate or modify an arbitration
award is limited to the exclusive grounds listed in Sections 10 and 11 of the FAA.
Because Primes first argument that the arbitrator exceeded his authority is the only
one that falls within the FAA, see 9 U.S.C. 10(a)(4), it need not address Primes extrastatutory
grounds for vacating the arbitration award that the arbitrator ignored the plain
and unambiguous language of the Agreement and that the arbitrators decision was in
manifest disregard of the law.
III. The arbitrator did not exceed his authority
Prime contends the arbitrator exceeded his authority when he invaded CMSs
exclusive authority to determine eligibility for copayment subsidies. The Court
disagrees. The scope of an arbitrators authority is defined by the Agreement providing
for arbitration. E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 289 (2002). In
determining whether an arbitrator has exceeded his authority, the agreement must be
broadly construed with all doubts being resolved in favor of the arbitrators authority.
United Food & Commercial Workers, Local No. 88 v. Shop N Save Warehouse Foods,
Inc., 113 F.3d 893, 895 (8th Cir. 1997).
Here, the parties agreed to submit their dispute to binding arbitration. Notably, the
arbitrator had the power to determine all questions of law and grant damages or
injunctive relief. The Court finds that the arbitrator did not exceed his broad grant of
authority in deciding this dispute because his decision encompassed issues properly
submitted to arbitration pursuant to the parties Agreement. He reviewed the parties
prehearing briefs, conducted a two-day hearing, considered the parties posthearing
briefs, and reopened the hearing for the purpose of permitting Omnicare an opportunity to
clarify its damages claim. The arbitrator issued his decision and concluded that Prime
breached the Agreement when it failed to pay Omnicare for the copayments. He did not
make any eligibility determinations, but merely found that Omnicare met its burden of
showing that the individuals are or may be eligible for the subsidies. Accordingly, the
arbitrator rendered an award of damages in the amount of 4,281. Each of these
determinations was within the scope of his authority.
Arbitration is not a perfect system of justice, nor [is it] designed to be.
Hoffman, 236 F.3d at 462. Rather, it is designed primarily to avoid the complex, timeconsuming
and costly alternative of litigation. Id. Here, the parties agreed to resolve
their dispute through binding arbitration and [a] restrictive standard of review is
necessary to preserve these benefits and to prevent arbitration from becoming a
preliminary step to judicial resolution. Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d
1250, 1254 (7th Cir. 1994) (citation omitted). Having entered such a contract, both
parties must subsequently abide by the rules to which [they] agreed. Hoffman, 236 F.3d
at 463 (citation omitted). Because the Court concludes that Prime has failed to establish
grounds for vacating the arbitration award, it must be confirmed. See 9 U.S.C. 9.
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
ORDERED that Primes Motion to Vacate the Arbitration Award (Doc. No. 14) is
DENIED, and Omnicares Motion to Confirm the Arbitration Award (Doc. No. 10) is
Date: May 21, 2008
s/Richard H. Kyle
United States District Judge


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