Welborn Clinic v. MedQuist Inc

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-1253
WELBORN CLINIC, an Indiana Business Trust doing
business as WELBORN CLINIC,
Plaintiff-Appellant,
v.
MEDQUIST, INCORPORATED,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Southern District of Indiana, Evansville Division.
No. EV 00-95-C-Y/H—Richard L. Young, Judge.
____________
ARGUED OCTOBER 31, 2001—DECIDED AUGUST 29, 2002
____________
Before BAUER, COFFEY, and DIANE P. WOOD, Circuit
Judges.
DIANE P. WOOD, Circuit Judge. Welborn Clinic entered
into a contract with MedQuist, Inc., under which MedQuist
agreed to perform medical transcription services for Wel-
born. Disputes quickly arose over the methods MedQuist
used to count the lines it transcribed for billing purposes.
Eventually, Welborn filed suit asserting breach of contract,
fraud, deceptive trade practices, and conversion. The dis-
trict court determined that all of Welborn’s claims were
2 No. 01-1253
subject to arbitration under the contract’s dispute resolu-
tion clause and dismissed the complaint. Because we find
that the narrow arbitration clause covers only some of
Welborn’s claims, we affirm in part and reverse the remain-
der of the district court’s judgment and remand for further
proceedings.
I
To create the medical records necessary for patient care,
a medical facility must transcribe the reports, notes, and
summaries dictated by health care professionals. In De-
cember 1998, Welborn, which historically had transcribed
in-house, entered into a written contract with The MRC
Group, Inc., under which MRC agreed to perform all tran-
scription services on behalf of Welborn at a charge of 13.2
cents per line transcribed. The form contract was supplied
by MRC. Under the heading “Payments and Charges” the
contract included § 3.5, labeled “Dispute Resolution,” which
provided in its entirety:
In the event that any invoice amount is disputed by
Client, Client shall deliver written notice of such dis-
puted amount to Vendor within ten (10) days of receipt
of the invoice by Client. In the absence of Client time-
ly providing said written notice, Client waives any right
to dispute said invoice in the future. Vendor shall
promptly deliver to Client any backup or other informa-
tion which supports the correctness of such disputed
amount. Upon receipt of such information, Client shall
have ten (10) days in which to examine such informa-
tion and to pay to Vendor any portion of such disputed
amount which Client, in its sole discretion, has deter-
mined to be substantiated. Thereafter, if any dispute
still remains with respect to any amount, Vendor and
Client shall immediately enter into good faith negotia-
tions to resolve it. In the event the parties are unable to
No. 01-1253 3
resolve such dispute within ten (10) days of entering
into negotiations, the dispute shall be settled by arbi-
tration in accordance with the commercial arbitration
rules of the American Arbitration Association. Such ar-
bitration shall be conducted in the State of Ohio. The
decision reached through arbitration shall be final and
binding on both parties.
Soon thereafter, MedQuist acquired MRC and succeeded to
all its rights and obligations under the contract.
MedQuist began performing under the contract on
March 23, 1999. Almost immediately, Welborn challenged
the methods MedQuist was using to count the number of
lines transcribed and to calculate its charges. Welborn
believed both that MedQuist was inflating its line count and
that it had misrepresented key elements of its counting and
billing practices before entering into the contract. This
prompted Welborn to initiate the dispute resolution proce-
dure by delivering written notice of its disputes to Med-
Quist and requesting backup information. MedQuist re-
fused to provide any backup. When Welborn subsequently
withheld payment of the disputed invoices in October 1999,
MedQuist stopped performing under the contract and re-
fused to return any medical records it had in its possession.
After several rounds of squabbling, Welborn exercised its
right to cancel the contract.
On May 3, 2000, Welborn filed a complaint in the district
court alleging breach of contract (Count I), fraud (Counts II,
III, and IV), deceptive trade practices (Count V), and con-
version (Count VI). It also sought declaratory relief requir-
ing MedQuist to return Welborn’s medical records. At a pre-
trial conference, MedQuist agreed to turn over those records
and then moved to dismiss the complaint and compel ar-
bitration. The district court granted MedQuist’s motion in
its entirety. Welborn appeals, claiming both that MedQuist
waived its right to arbitration through its pre-litigation
4 No. 01-1253
conduct and that some of Welborn’s claims are not subject
to the narrow arbitration provision.
II
Like any other contractual right, the right to arbitrate
a claim may be waived. Grumhaus v. Comerica Sec., Inc.,
223 F.3d 648, 650 (7th Cir. 2000). We will find waiver when
“based on all the circumstances, the party against whom
the waiver is to be enforced has acted inconsistently with
the right to arbitrate.” Id. at 650-51 (citations and internal
brackets omitted). Welborn contends that MedQuist has
waived its right to arbitrate through a series of delay tac-
tics and its refusal to participate in informal dispute res-
olution.
Welborn first claims that MedQuist’s delay tactics are a
form of foot-dragging that is inconsistent with the agree-
ment’s otherwise valid arbitration clause. A party may
waive its contractual right to arbitration either explicitly or
through an implicit course of conduct. Grumhaus, 223 F.3d
at 650; Hammes v. AAMCO Transmissions, Inc., 33 F.3d
774, 783 (7th Cir. 1994). Welborn argues that MedQuist’s
withholding of medical records, termination of service, and
rejection of attempts informally to negotiate the dispute
constitute implied waiver. The only two cases it cites for
this proposition, however, are Grumhaus and Hammes,
both of which involved situations where the party seeking
arbitration had originally filed suit in a judicial forum.
Grumhaus, 223 F.3d at 649; Hammes, 33 F.3d at 777. Liti-
gating a claim is clearly inconsistent with any perceived
right to arbitration; we do not want parties to forum shop,
taking a case to the courts and then, if things go poorly
there, abandoning their suit in favor of arbitration. But
MedQuist never sought to litigate this case in either state
or federal court, never resisted any demands by Welborn
to submit to arbitration, and moved to compel arbitra-
tion less than two months after the lawsuit was filed. Such
No. 01-1253 5
conduct seems entirely consistent with a firm commitment
to arbitrate.
It is true that lengthy delay can lead to an implicit waiver
of arbitration. Grumhaus, 223 F.3d at 651. But such delay
is normally evidenced by substantial participation in the
opposing party’s litigation. See Cabinetree of Wis. Ltd. v.
Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995)
(removal of case to federal court); St. Mary’s Med. Ctr. of
Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d
585, 587, 590-91 (7th Cir. 1992) (five months of discovery).
Here MedQuist moved to compel on June 23, 2000, less
than eight months after its initial demand for payment
was refused and less than eight weeks after the complaint
was filed. Self-help efforts, such as selling goods that
another party has refused, have also been found to be
consistent with a desire to arbitrate. Southwest Indus.
Import & Export, Inc. v. Wilmod Co., 524 F.2d 468, 470 (5th
Cir. 1975). This suggests that even strong-arm tactics like
the withholding of important medical records while de-
manding payment are not automatically enough to consti-
tute an implied waiver of the agreement’s arbitration
provision.
Welborn also argues that MedQuist’s failure to follow the
explicit steps of § 3.5 dictates that it cannot now move for
arbitration. Since MedQuist did not promptly deliver to
Welborn any backup information to support the correctness
of its disputed amounts or enter into good-faith negotiations
with Welborn, Welborn argues, it should not now be per-
mitted to jump ahead to arbitration, the final step in the
dispute resolution process.
The district court found that the other steps listed in § 3.5
were not conditions precedent to arbitration. As MedQuist
points out, breach of a contract containing an arbitration
clause does not amount to a waiver of arbitration. Local
Union No. 721, United Packinghouse, Food & Allied Work-
ers, AFL-CIO v. Needham Packing Co., 376 U.S. 247, 251
6 No. 01-1253
(1964). While it is certainly true that an ordinary breach
cannot constitute a rejection of arbitration, Needham and
its progeny do not speak to the specific situation where the
party seeking arbitration has allegedly breached a part of
the arbitration clause itself. One could at least argue that
when the party breaches that provision it is acting inconsis-
tently with its right to arbitrate and therefore cannot later
obligate the non-breaching party to arbitrate claims. In that
respect, the steps in § 3.5 could be viewed as similar to
steps in a labor grievance process, where unions and em-
ployers must either exhaust a complex range of internal
procedures or demonstrate the futility of such remedies
before either may seek third-party resolution. See, e.g.,
Clayton v. International Union, United Auto., Aerospace &
Agric. Implement Workers of Am., 451 U.S. 679, 686 (1981);
Hammer v. International Union, United Auto., Aerospace &
Agric. Implement Workers of Am., 178 F.3d 856, 858 (7th
Cir. 1999). Based on the pleadings, MedQuist here failed to
pursue any form of negotiation between the parties but
instead jumped straight to arbitration.
In the labor context, Congress has voiced a strong prefer-
ence for non-judicial resolution of employment disputes.
Clayton, 451 U.S. at 686. Here too it has expressed through
the Federal Arbitration Act a strong presumption in favor
of alternative dispute resolution. Green Tree Fin. Corp. v.
Randolph, 531 U.S. 79, 89 (2000). In a close case, this may
make all the difference. Outside the union context, we have
found no federal cases addressing this problem. Under Indi-
ana law, which both parties quote and which they appar-
ently agree should cover contract interpretation issues, par-
ties to an arbitration agreement may make the right to
seek arbitration subject to a condition precedent. Chester-
field Mgmt., Inc. v. Cook, 655 N.E.2d 98, 102 (Ind. Ct. App.
1995). If there is a condition precedent, it must be met
before a court may compel arbitration. On the other hand,
a party cannot avoid arbitration because of the other party’s
No. 01-1253 7
failure to comply with the negotiation steps of a grievance
procedure as long as that other party acted in good faith to
preserve its right to arbitration. St. John Sanitary Dist. v.
Town of Schererville, 621 N.E.2d 1160, 1163 (Ind. Ct. App.
1993). In St. John, the party resisting arbitration argued
that its opponent had failed to meet the technical require-
ments of an arbitration provision by failing to bargain, to
provide written demand for arbitration within specified
time limits, or to supply the names of arbitrators. The court
construed the agreement in favor of arbitration, finding
that the defendant need only act in good faith in moving for
arbitration; the failure to meet time limits or other techni-
cal provisions would not forfeit the right. Id. at 1163-64.
Based on Indiana law and the general presumption in
favor of arbitration, we find that the time limits and re-
quirements to provide backup in this case were not condi-
tions precedent to MedQuist’s contractual right to compel
arbitration and that MedQuist has not waived this right.
Indeed, the purpose of § 3.5 is undoubtedly to encourage
successful negotiations so that neither litigation nor arbi-
tration will be necessary, not to prefer the courts to an ar-
bitrator if informal discussions break down.
III
As noted above, § 3.5 provides for the arbitration of dis-
putes over “any invoice amount.” The district court ordered
all of Welborn’s claims to arbitration because it believed
that the entirety of Welborn’s complaint was founded on an
invoice dispute. Welborn, however, contends that the dis-
trict court read the agreement’s dispute resolution provision
too broadly and should not have submitted some of its
claims to arbitration. It specifically contends that Count I
(breach of contract), Count IV (constructive fraud), Count V
(deceptive trade practices), and Count VI (conversion) are
8 No. 01-1253
not covered by § 3.5 and must be considered by the district
court.
Whether an issue is subject to arbitration is a simple
matter of contract interpretation. Kiefer Specialty Floor-
ing, Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7th Cir. 1999).
If the contract is ambiguous, “doubts concerning the scope
of arbitrable issues should be resolved in favor of arbitra-
tion.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 24-25 (1983); Miller v. Flume, 139 F.3d 1130,
1136 (7th Cir. 1998). Therefore, a court should compel arbi-
tration “unless it may be said with positive assurance that
the arbitration clause is not susceptible of an interpretation
that covers the asserted dispute.” United Steelworkers of
Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83
(1960). Despite this strong pro-arbitration tilt, agreements
must not be construed so broadly as to force arbitration of
claims that the parties never agreed to submit to arbitra-
tion. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
943 (1995); AGCO Corp. v. Anglin, 216 F.3d 589, 593 (7th
Cir. 2000)
The district court accepted MedQuist’s contention that the
entire controversy is simply a glorified billing dispute and
that all of Welborn’s claims “arise out of” the “core allega-
tion” that MedQuist has been overcharging the amounts on
its invoices. Thus, whether Welborn wishes to put one label
or six on its claim, the court concluded that it is all part of
the same dispute and therefore arbitrable in its entirety.
In turning to the contract we are required to interpret, we
agree with Welborn that the arbitration language in § 3.5
is far narrower than that at issue in all of the cases men-
tioned above and cited by MedQuist. In each of those deci-
sions, the contract in question contained a very broad,
standard arbitration clause, similar to that recommended
by the American Arbitration Association, requiring that “all
controversies and claims” either “arising out of” or “relating
No. 01-1253 9
to” the contract would be settled by arbitration. See, e.g.,
Kiefer, 174 F.3d at 909; Matthews v. Rollins Hudig Hall Co.,
72 F.3d 50, 54 (7th Cir. 1995). Under these circumstances,
we have naturally been willing to read these admittedly
expansive clauses quite broadly to include all manner of
claims tangentially related to the agreement, including
claims of fraud, misrepresentation, and other torts involv-
ing both contract formation and performance. Kiefer, 174
F.3d at 909-10.
The arbitration clause here does not provide for the
resolution of all controversies and claims relating to the
contract; indeed, it does not even provide for the resolution
of all controversies and claims relating to or arising out of
billing, the interpretation the district court appears to have
accepted. Instead, the provision is buried near the end of a
section labeled “Payments and Charges.” That portion of
the contract establishes the rates MedQuist will charge,
prohibits price increases for the first two years, provides for
billing twice per month, and sets out terms of payment.
After all this comes the provision dealing with disputed “in-
voice amounts.” It states that if, after attempts at negotia-
tion have failed, “any dispute still remains with respect to
any amount . . . the dispute shall be settled by arbitration.”
Other parts of the contract, discussing matters such as
turnaround time and quality assurance standards, provide
that if disputes under those sections are not resolved, either
party may cancel the agreement, but these sections make
no mention of arbitration. See §§ 1.2, 5.6.
While the strong presumption in favor of arbitration com-
pels us to construe § 3.5 broadly, we cannot push it as far as
MedQuist would prefer while still making sense of the
agreement. The parties here did not—either intentionally
or through carelessness—employ the nearly universal lan-
guage recommended by the American Arbitration Associa-
tion and referred to in countless court decisions that would
obviously have encompassed all of Welborn’s claims in this
10 No. 01-1253
case, since all of them arise out of or relate to the contract.
Instead, the parties restricted the use of arbitration to the
narrow question of the amount of money Welborn owes
MedQuist under the invoices. Cf. Bradford Scott-Data Corp.
v. Physician Computer Network, Inc., 136 F.3d 1156, 1158
(7th Cir. 1998) (contrasting narrowness of provision requir-
ing arbitration of “any payment dispute” with expansive
“arising out of or relating to” language). To hold, as Med-
Quist urges, that any issue tangentially related to billing
must be arbitrated would do violence to the contract lan-
guage by leaving the words “invoice amount” devoid of
meaning. If the parties intended to arbitrate all claims “re-
lated to” or even “arising out of” invoice disputes, then why
not simply say that? While arbitration should decide such
questions as the definition of a transcription line and how
much Welborn is obligated to pay under the agreement
itself, any claims accusing MedQuist of conduct that would
be actionable independent of the amount Welborn owes
MedQuist may proceed in a judicial forum.
Under this standard, some of Welborn’s claims are clearly
arbitrable and must be stayed. For example, Counts II and
III allege that MedQuist committed fraud (in the induce-
ment and in the factum) through various misrepresenta-
tions of the number of lines it had transcribed and the in-
tentional billing of Welborn for a substantially greater
amount. To prevail on either of these claims Welborn must
demonstrate that MedQuist overbilled it, and therefore it
must win, if anywhere, at arbitration. Similarly, to the ex-
tent Count I alleges that MedQuist breached the contract
through overcharging, that claim too is arbitrable.
However, Welborn has also alleged in Count I that Med-
Quist breached the contract by stopping service, failing to
meet turnaround times, and retaining untranscribed dic-
tation. Such actions would violate MedQuist’s delivery ob-
ligations under § 1.2, a section of the agreement that has
absolutely nothing to do with invoice amounts and makes
No. 01-1253 11
no mention of arbitration. It is true that MedQuist’s defense
might be that it only stopped service because Welborn
stopped payment, but looking only at the complaint, the
amount of the invoice is not in dispute and the claim is not
subject to arbitration.
Similarly, Count VI alleges that MedQuist unlawfully
retained medical records that are the property of Welborn
and temporarily converted them to its own use. These
allegations state a valid claim under Indiana law. Comput-
ers Unlimited, Inc. v. Midwest Data Sys., Inc., 657 N.E.2d
165, 171 (Ind. Ct. App. 1995). Indeed, unless MedQuist is
entitled to some kind of common law or statutory lien over
medical records, its refusal to return the records in its
possession could violate the law even if its bills were en-
tirely accurate and are ruled enforceable by the arbitrator.
While MedQuist’s conduct certainly arose out of a dispute
over “invoice amounts,” the claim itself is not an invoice
dispute and therefore cannot be compelled to arbitration.
In Count V, Welborn complains that MedQuist violated
the Indiana Deceptive Consumer Sales Act. Ind. Code §§ 24-
5-0.5-1, et seq. The Act prohibits a vendor from falsely rep-
resenting that a transaction has certain characteristics or
will provide the purchaser with specific price advantages.
Id. § 24-5-0.5-3(a). The complaint alleges that MedQuist’s
misrepresentation of its method for counting transcribed
lines constituted an act of deception which violated the
Act. If MedQuist did make such misrepresentations, the
fact that it then accurately billed on its invoices in accor-
dance with the terms of the contract is irrelevant. MedQuist
cites to cases indicating that claims of fraud in making a
contract may be subject to arbitration, see Kroll v Doctor’s
Assocs., Inc., 3 F.3d 1167, 1170 (7th Cir. 1993); Sweet
Dreams Unlimited, Inc. v. Dial-A-Mattress Int’l, Ltd., 1 F.3d
639, 643 (7th Cir. 1993), but that is not the point. An alle-
gation of fraud in making or inducing an agreement clearly
“relates to” that agreement and can be encompassed by a
12 No. 01-1253
broad arbitration clause. But as this narrow clause has no
“relates to” or even “arising out of” language, the district
court is free to proceed to the merits (which seem dubious
to us, though we make no ruling on the point, as the Act’s
provisions apparently apply only to individual consumers,
see Classic Car Centre, Inc. v. Haire Mach. Corp., 580
N.E.2d 722, 723 (Ind. Ct. App. 1991)).
Finally, Count IV alleges that MedQuist constructively
defrauded Welborn through its misrepresentation of the
amount it charged for its services. Welborn alleges that this
misrepresentation caused it to abandon in-house transcrip-
tion and permitted MedQuist to overcharge. Constructive
fraud in Indiana is a theory used to abate the purchase
price of a valid contract where one party, by means of the
contract, has obtained an unconscionable advantage over
the other. See Stoll v. Grimm, 681 N.E.2d 749, 757 (Ind. Ct.
App. 1997). Whether MedQuist’s bills were inflated or not
is thus irrelevant. What matters for our purposes is that
the misrepresentations put MedQuist in a position where
it could later force Welborn to retain its services. Because
the claim again deals with matters relating to billing but
not to invoice disputes themselves, Count IV as well is not
within the scope of the arbitration clause.
IV
Finally, MedQuist argues that Welborn’s surviving fraud
claims should be dismissed for failure to plead with the
specificity required by Rule 9(b), which provides that, “In all
averments of fraud or mistake, the circumstances constitut-
ing fraud or mistake shall be stated with particularity.”
While this point was raised below, the district court did not
rule on it because it dismissed the complaint for other
reasons. The district court will have numerous other
matters to sort out and may wish to stay its proceedings
pending resolution of the invoice disputes being sent to
No. 01-1253 13
arbitration. Furthermore, Welborn still has the right under
Rule 15 to replead its complaint with greater specificity
(since MedQuist has yet to file a responsive pleading), even
in the event of dismissal. For these reasons, we decline to
address this dispute and leave it to the district court to
consider on remand.
MedQuist’s motion to strike the reply brief is denied. The
district court’s order compelling arbitration of Counts II and
III and the portion of Count I alleging breach through over-
charging is AFFIRMED. As for the remainder of Count I and
Counts IV, V, and VI, the judgment is REVERSED and the
case is REMANDED for further proceedings.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-97-C-006—8-29-02