OptumRx’s ‘Draconian’ Arbitration May Halt $1 Billion in Claims

Roughly $1 billion in claims from hundreds of independent pharmacies are on the line as a California court considers whether pharmacy benefit manager OptumRx Inc. can dramatically limit its legal exposure with one of big business’s favorite tools: limited arbitration.

California’s Court of Appeal, Fourth District is deciding whether the pharmacies can break out of a binding arbitration agreement and challenge Optum’s drug sales reimbursement levels in open California state court. If not, the bulk of nearly 1,000 pharmacies’ claims nationwide will likely vanish because Optum’s terms make arbitration too expensive and unworkable for small businesses to push for more cash, the plaintiffs say.

“If you structure arbitration to make it uneconomical, inefficient and slow, so that none of the attributes of arbitration come into play, then it’s unconscionable and no court should enforce it.” Mark Cuker, the plaintiffs’ lawyer, said in an interview.

The fight highlights how arbitration can disadvantage groups of small business plaintiffs by providing big businesses a shield against their claims. Created to quickly and cheaply resolve commercial disputes out of court, arbitration can also create power imbalances—especially for small firms facing hurdles to discovery or collective action they say are necessary to make their cases.

“They built into their business model a bulletproof vest to keep them from being held accountable,” Cuker, of counsel at Jacobs Law Group PC, said. “That’s what the arbitration clause is.”

$100,000 Per Arbitration

Optum, a subsidiary of UnitedHealth Group Inc., didn’t respond to an interview request for this story. However, it has argued in court filings and during oral arguments that the pharmacies have already earned $70 million from drug sales made under their current contract, so challenging the agreement now wouldn’t be fair.

The company also argues that such a challenge would fly in the face of decades of court precedent upholding federal and state law preference for arbitration. At its best, arbitration can relieve court dockets by sending disputes to private resolution panels, and reduce litigation costs and length by narrowing discovery.

The question is: how narrow can an arbitration provision go before courts say the terms are “unconscionable” and can’t be upheld?

The Optum contract limits discovery to five interrogatories, five document requests and no depositions; requires a panel of three arbitrators with 10 years of health care law experience each; demands that the issue of whether the arbitration provision is legal must also be arbitrated; and, since the terms forbid classes in arbitration, requires each pharmacy bring its case alone, without benefiting from any precedent if a prior pharmacy wins.

The result is a process that costs each pharmacy more than $100,000 per arbitration with scant ability to build a case netting that much in recoveries.

The issue of fairness in arbitration has been debated for decades, with bills routinely filed in Congress seeking to rejigger the system, said Kristen Blankley, a University of Nebraska College of Law professor and arbitration expert. However, the proposals have mostly failed to win support while venues as high as the US Supreme Court have upheld arbitration clauses in contexts from business franchisee claims to employment litigation.

But the high-cost and low-discovery provisions in the Optum agreement could be considered “draconian,” Blankley said. These outliers could give courts pause when reviewing their agreements.

“The OptumRx discovery procedures are bare bones,” Blankley said. “These seem like complicated transactions that would require significantly more discovery than allowed.”

Cases Move to California

Cuker, on behalf of the pharmacies, and Optum have been in court battles across the country for the better part of the decade, with the tide forcing most cases to California.

The two sides are currently tied up in federal litigation in Pennsylvania, and state court litigation in Wisconsin. And in recent months Florida courts have ruled for the pharmacy benefit manager, saying Optum can compel pharmacies to arbitrate in California.

Initially the pharmacies had success in California, winning a ruling that the arbitration provision couldn’t be enforced against a group of 22 independent pharmacies. Then Optum changed its provision, updating it with a “delegation clause” that limits the issue of whether the arbitration agreement was lawful and enforceable to arbitration as well.

Optum won on a subsequent motion to compel arbitration, setting up the high-stakes California state court appeal. The company pointed to a lower court ruling that it has the right in its contract to update its contract terms based on the broader deal signed by pharmacy services administration organizations.

Those groups, Optum said, bargained with the strength of thousands of pharmacies behind them and inked a deal allowing Optum to change the terms—including the terms of the arbitration provision.

“The one-sentence delegation clause is clear and unmistakable, and the trial court broke no new ground by enforcing it,” Optum said in a brief filed with the court by its attorneys at Gibson, Dunn & Crutcher LLP. “OptumRx bargained for expeditious dispute resolution, but the Pharmacies have done nothing but make dispute resolution as costly and time-consuming as possible.”

Cuker in an April oral argument before California’s Court of Appeal said the added clause changed “the rules in the middle of the game.”

Associate Justice Maurice Sanchez suggested in the oral argument that judges could use their “blue pencil” power to slightly modify the terms of the agreement—for example, by requiring the same three-arbitrator panel to hear each individual arbitration.

Optum’s lawyer, Michael Holecek of Gibson, Dunn & Crutcher, agreed with Sanchez but pushed against the possibility of any broader revisions, such as the removal of the agreement’s nonjoinder provision.

Facing hundreds of pharmacies in a single arbitration would prejudice the benefit manager because it would have less opportunity for discovery and no avenue to appeal, Holecek argued.

Cuker said in an interview that judicial intervention is needed to redirect the money flowing to industry middlemen that he said should stay with pharmacies.

“Integrated into their business model is a draconian arbitration clause that makes them unaccountable,” he said. “It’s heads-I-win-tails-you-lose.”

The case is Odedra Enters., Inc. v. OptumRx, Cal. Ct. App., 4th Dist., No. G062698, 4/16/24.