Wellpoint Health Networks Inco v. John Hancock Life Insurance (U

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-2283
W ELLP OINT, INC., W ELLP OINT H EALTH
N ETWORKS INC., and U NICARE L IFE & H EALTH
INSURANCE C OMPANY,
Petitioners-Appellees,
v.
JOHN H ANCOCK L IFE INSURANCE C OMPANY,
Respondent-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 943—Ruben Castillo, Judge.
A RGUED F EBRUARY 11, 2009—D ECIDED A UGUST 7, 2009
Before B AUER, R IPPLE, and W OOD , Circuit Judges.
W OOD , Circuit Judge. This case requires us to decide
how deeply into the arbitral process a court should insert
itself, once the proceeding is underway. Petitioner Well-
Point Health Networks and affiliated companies (col-
lectively, “WellPoint”) prevailed in an arbitration pro-
2 No. 08-2283
ceeding and later petitioned the district court for con-
firmation of the award. The district court obliged, and
now John Hancock Life Insurance Company, the losing
party, has appealed. Before the district court and here,
Hancock complains that the panel of arbitrators ex-
ceeded its authority by accepting the resignation of one
arbitrator and subsequently filling that vacancy in a
manner not specified in the arbitration agreement. This
means, in Hancock’s view, that the arbitration panel
had no power to render a decision on the merits and its
decision should be vacated pursuant to § 10(a)(4) of the
Federal Arbitration Act (“FAA” or “the Act”). 9 U.S.C.
§ 10(a)(4). The district court was unpersuaded and held
that the replacement method chosen by the panel was
consistent with the general intent of the parties as ex-
pressed in their agreement. We affirm.
I
In October 1996, WellPoint agreed to purchase various
Group Business Operations of Hancock (“GBO Transac-
tion”). The GBO Transaction was facilitated by a compli-
cated web of contracts consisting primarily of a Purchase
and Sale Agreement (“PSA”), a Coinsurance Agreement,
and an Administration Agreement (collectively, the “GBO
Transaction Agreements”). Each of the GBO Transaction
Agreements contained an express provision mandating
that any dispute be resolved through binding arbitration.
Regrettably, a dispute did arise. It had to do with Well-
Point’s obligations under three loss-producing books of
insurance business: (1) Fiduciary Administration Services
No. 08-2283 3
Company (“FASCO Business”); (2) James E. Hackett
Reinsurance Corporation (“Hackett Business”); and (3) JEH
Re Underwriting Management Bermuda Ltd. (“Bermuda
Business”). Basically, the question was whether, as part
of the GBO Transaction, WellPoint was obligated to
make certain payments to Hancock.
WellPoint filed a demand for arbitration on October 16,
2002, asking the arbitrators (1) to compel Hancock to
disclose certain information about the three contested
books of business and (2) to declare WellPoint’s rights
and obligations under the GBO Transaction Agreements.
On November 27, 2002, Hancock filed a counter-demand
for arbitration, seeking $42.4 million that it claimed
WellPoint owed it under the GBO Transaction Agree-
ments. Within 20 days after service of the arbitration
demand, as the agreement required, each party ap-
pointed its own arbitrator: WellPoint appointed David J.
Nichols, and Hancock appointed Donald DeCarlo. The
arbitration agreement then stipulated that the two ap-
pointed arbitrators should agree on a third, “Umpire”
arbitrator. If they could not agree, then the arbitration
agreement designated the Denver office of the American
Arbitration Association (“AAA”) as the party that was to
appoint the Umpire. The latter option proved to be neces-
sary when the party-arbitrators could not settle on the
last member of the panel. On August 5, 2003, the AAA
appointed Richard S. Bakka as the Umpire.
The arbitration was scheduled to take place in
March 2006. During the two-year period leading up to
the hearing, the parties conducted extensive discovery,
4 No. 08-2283
including the depositions of 29 witnesses and the ex-
change of numerous documents. Several times, the
panel was called upon to resolve discovery disputes and
various other procedural issues. Problems arose, however,
when, in July 2005, Hancock sent WellPoint a letter
stating that it was increasing its damages demand
more than tenfold, from the original $42.4 million to
$464.6 million. Three weeks later, presumably in
response to this escalation, WellPoint obtained new
counsel, replacing White & Case with LeBoeuf, Lamb,
Greene & MacRae LLP. At the same time, for reasons
not apparent from the record, WellPoint requested that
Nichols resign as its party-arbitrator. Hancock objected to
this request, but after WellPoint confirmed that it was
committed to the March 2006 arbitration date, Nichols
formally asked the panel to authorize his withdrawal.
On September 3, 2005, the panel accepted his resigna-
tion and notified the parties of its decision by email,
stating that “[t]he remanents [sic] of the Panel will await
WellPoint’s advancing of a candidate for disclosure in
accord with the affirmed ‘vetting.’ ” WellPoint proposed
two separate replacement arbitrators, but Hancock ob-
jected to both of them.
In an effort to resolve the impasse, Hancock’s party-
arbitrator, DeCarlo, suggested that the remaining panel
members propose three replacement arbitrators from
which WellPoint could chose. WellPoint initially rejected
this idea, while Hancock appeared to support it.
Hancock’s counsel even stated at one point that he
“believe[d] there is case law that will support this . . . .”
After further discussions, WellPoint acquiesced and, after
No. 08-2283 5
the panel suggested several replacement candidates, it
selected Norman Krivosha, a retired Chief Justice of the
Nebraska Supreme Court who also had served as an
officer of a life insurance company. The panel then asked
the parties to work together to vet Krivosha so that the
arbitration could proceed. On October 20, 2005, the panel
members, the parties, and Krivosha accordingly held a
teleconference. The following day Hancock renewed its
objections to Nichols’s resignation but agreed that
Krivosha met the prerequisites for service as WellPoint’s
party arbitrator. Thereafter, the Umpire sent an email to
the parties stating that “Judge Krivosha is now ‘gainfully
employed’ and the Panel is ‘duly constituted.’ ”
With the panel in place, the arbitration proceeded as
scheduled. It was conducted in two phases. Phase I oc-
curred in March 2006 and addressed issues relating
to liability and the categories of potential damages. Follow-
ing the Phase I hearing, the panel issued a determina-
tion concluding that WellPoint had assumed 100 percent
of the Hackett Business and 100 percent of the FASCO
business, but that it had not purchased the Bermuda
Business. Hancock’s party-arbitrator dissented from
the part of the determination that concluded that
WellPoint was not liable for the Bermuda Business.
Phase II of the arbitration took place in February 2007
and was limited to the quantification of damages. On
April 23, 2007, the panel issued an award directing Well-
Point to pay Hancock $26 million in damages. (At the
request of the parties, this was revised slightly on May 21,
2007, to $26.4 million), plus $2.9 million in “offsetting
balances and interest assessments.” WellPoint then filed
6 No. 08-2283
a petition in the district court seeking confirmation of
the award; Hancock in turn filed a cross-petition to
vacate the panel’s award, claiming, as it does before this
court, that the panel was not selected in accordance
with the arbitration agreement.
The district court confirmed the award. It understood
the issue to be “whether the panel has authority to render
an award when an arbitrator has been duly selected by
a party but subsequently withdraws, and the arbitration
agreement does not expressly provide for this contin-
gency.” The court concluded that the arbitration award
required only that arbitration proceed before a panel
comprised of one arbitrator chosen by each party and
one neutral arbitrator and, because that is what occurred,
the panel was properly constituted and the award
should be affirmed. The court rejected WellPoint’s alter-
native argument that Hancock waived its challenge to
the composition of the panel, given its failure to contest
Krishova’s appointment immediately, as permitted by
§ 5 of the FAA.
II
To the extent that an appeal from the district court’s
decision to affirm an arbitration award raises cognizable
issues of law, the applicable standard of review is de novo.
Prostyakov v. Masco Corp., 513 F.3d 716, 723 (7th Cir. 2009).
Once these predicate legal issues are resolved, however,
there is very little scope for challenge, as we will not set
aside an arbitral award “so long as the arbitrator inter-
preted the parties’ agreement at all.” Id. (citations omitted).
No. 08-2283 7
On appeal, Hancock continues to insist that the arbitra-
tion award must be vacated under 9 U.S.C. § 10(a)(4)
because the panel exceeded its authority when it
accepted Nichols’s resignation, permitted WellPoint to
choose a replacement, and appointed Krivosha. It refers
to the reconstituted panel consisting of Bakka, DeCarlo,
and Krivosha as the “Disputed Panel” and asserts that
this panel “had no legal authority to render a binding
award. . . . The Arbitration Agreement does not permit
either party to remove an arbitrator or to appoint a re-
placement. . . . [and] the District Court . . . misconstrued
the Arbitration Agreement in a way that significantly
departed from the intent of the parties . . . .”
This argument invites us to consult the relevant contrac-
tual language. Section 15.3 of the arbitration agreement
(which itself is in the PSA) specifies the process by which
arbitrators are to be selected, as well as the requisite
qualifications of the arbitrators:
Appointment of Arbitrators. A panel of three
(3) arbitrators will decide any dispute or difference
between the parties. All arbitrators must be (a) disin-
terested officers or retired officers of life insurance
or life reinsurance companies other than the parties
to this Agreement or their Affiliates, or (b) disinter-
ested persons of comparable experience. Each of the
parties agrees to appoint one of the arbitrators. In
the event that either party should fail to appoint
its arbitrator within twenty (20) Business Days fol-
lowing receipt of the notice demanding arbitration set
forth in Section 15.2 hereof, the party demanding such
8 No. 08-2283
arbitration may appoint the second arbitrator before
entering upon arbitration. The two party-appointed
arbitrators shall select a third arbitrator. In the event
that the two party-appointed arbitrators shall not
be able to agree on the choice of the third arbitrator
within twenty (20) Business Days following their
appointment, the parties may agree on a third arbitra-
tor within the next twenty (20) Business Days, and if
they have not then so agreed, the Denver, Colorado
office of the American Arbitration Association shall,
at the request of either party, appoint as such third
arbitrator a person who meets the qualifications
specified in the second sentence of this Section 15.3.
Hancock asserts that because the arbitration agreement
does not expressly address the process for replacing a
panel member, the entire arbitration process must begin
anew. This, it maintains, is the general rule whenever
a vacancy is created before a full and final award has
been entered and the arbitration agreement has not antici-
pated the precise situation that arose. See Marine Prods.
Export Corp. v. M.T. Globe Galaxy, 977 F.2d 66, 68 (2d
Cir. 1992) (addressing the problem of the death of one
arbitrator of a three-member panel prior to the rendering
of an award). Hancock contends that because the panel
failed to comply with this alleged general rule, the panel’s
merits award was beyond its power and must be vacated.
We find no such inflexible and wasteful rule in the law
of arbitration. To the contrary, the FAA itself sets forth a
rule that applies to the mid-stream loss of an arbitrator.
That rule is found in § 5 of the statute, which provides
as follows:
No. 08-2283 9
Section 5. Appointment of arbitrators or umpire
If in the agreement provision be made for a method
of naming or appointing an arbitrator or arbitrators
or an umpire, such method shall be followed; but
if no method be provided therein, or if a method
be provided and any party thereto shall fail to avail
himself of such method, or if for any other reason
there shall be a lapse in the naming of an
arbitrator . . . or in filling a vacancy, then upon the
application of either party to the controversy the
court shall designate and appoint an arbitrator . . .
who shall act under the said agreement with the
same force and effect as if he or they had been
specifically named therein . . . .
9 U.S.C. § 5 (emphasis added). Section 5 anticipates the
problem of a vacancy after the arbitration is underway,
and it also anticipates the possibility that the parties
may not have set forth a method for filling that vacancy.
In such a case, either party may ask the district court
to appoint a new arbitrator. The Marine Products court
did not discuss § 5 in its brief opinion. That section
would never have any room to operate, however, if every
time an unanticipated vacancy occurred, the clock were
automatically set back to zero.
In our view, it would be inconsistent with the purpose
of the FAA, which is designed to facilitate efficient resolu-
tion of commercial disputes, to permit a party like
Hancock to sit silently by while a substitute arbitrator is
selected according to the procedure proposed by its own
representative on the panel, and then raise an objection
10 No. 08-2283
to the process only after it has lost before the panel and it
is attempting to oppose confirmation of the award. Han-
cock side-steps the incongruity of this outcome. In its
view, the FAA (wisely or otherwise) provides two
avenues by which a party contesting the appointment of
an arbitrator may seek relief: § 5, which a party can
invoke immediately after the contested arbitrator ap-
pointment, or § 10(a)(4), which a party can invoke fol-
lowing the conclusion of the arbitration on the merits.
The latter section authorizes the court to vacate an
arbitral award “where the arbitrators exceeded their
powers, or so imperfectly executed them that a mutual,
final, and definite award upon the subject matter sub-
mitted was not made.” 9 U.S.C. § 10(a)(4).
What Hancock fails to appreciate, however, is that this
approach does not give full effect to each part of the
statute. If the statute were read to permit an objecting
party to take a “wait and see” approach, no one would
ever have an incentive to use § 5. Instead, each party
could hold back and await the outcome of the proceed-
ing. If that outcome were to its liking, then it would
defend the substitution; if that outcome were not to its
liking, then it could attack the method either the court
or the parties used to nominate the new arbitrator. More-
over, if there really were a general rule that substitutions
are forbidden once the arbitration is underway (as long
as the agreement is silent), then there would never be a
case in which a court could fill a vacancy upon the ap-
plication of a party. We decline to read the FAA in a
way that effectively deletes this part of § 5, nor will we
interpret it as creating a “heads I win, tails you lose”
system.
No. 08-2283 11
This is not to say that in all cases a party who fails to
challenge an arbitrator appointment at the § 5 stage
forfeits that challenge for § 10 purposes. There may be
some situations where a motion under § 5 cannot address
the problem; in addition, there may be times when a party
can show good cause to overcome a forfeiture of the § 5
process and can raise its objections at the § 10(a)(4)
stage. We leave for another day, however, any further
speculation about what might justify bypassing § 5,
given the fact that this case is so far from any plausible
scenario. Hancock’s equivocal behavior—starting with
the fact that the substitution procedure actually used
was proposed by DeCarlo, its own party-arbitrator,
continuing with its legal argument supporting DeCarlo’s
suggestion, and ending with its acknowledgment that
Krivosha met the qualifications required in the agree-
ment—coupled with its decision to wait until the arbitra-
tion was concluded, was a “transparent attempt to pre-
serve a threshold procedural issue in case . . . [it] eventu-
ally lost the arbitration on the merits.” Dow Corning Corp.
v. Safety National Cas. Corp., 335 F.3d 742, 748-49 (8th
Cir. 2003). Nothing in the FAA requires us to endorse
this behavior.
Taking another tack, Hancock also argues that a re-
quirement that a party bring a challenge to an arbitrator
appointment at the interlocutory stage conflicts with this
court’s decision in Tamari v. Conrad, 552 F.2d 778 (7th Cir.
1977), and encourages parties to bring interlocutory
appeals during arbitration proceedings. It thus suggests
that use of § 5 would be even less efficient than the tactic
it has chosen. Neither of these arguments is persuasive.
12 No. 08-2283
The decision in Tamari related not to forfeiture under § 5
of the FAA, but to arbitral immunity in cases where
the authority of an arbitrator to resolve a dispute is chal-
lenged. Id. at 780. Tamari has nothing to do with § 5 and
thus has no bearing on the question before us.
Similarly misplaced is Hancock’s assertion that an
interpretation of the FAA that requires parties to contest
arbitrator appointment at the time of that appointment
undermines efficiency. Hancock raises the specter of
endless interlocutory appeals, which would delay the
arbitration and excessively involve the judiciary in the
process. What Hancock fails to acknowledge, however,
is that § 5 is limited to arbitral appointments. And while
an interlocutory motion to challenge an appointment
does temporarily affect the arbitration, it is far less
efficient for the court to hold at the § 10 stage that the
appointment was improper. In fact, if anything risks too
much judicial involvement, it is Hancock’s proposed
system, under which judges would second-guess the
arbitral panel’s own approach toward solving an
interim procedural issue.
Section 5 of the FAA expressly gave the district court
the authority to resolve any issue about the way the
parties handled a vacancy on the arbitral panel. Hancock’s
failure to use that tool, under the circumstances of this
case, resulted in its forfeiture of this challenge. No “reser-
vation of right” to challenge the issue on appeal absolves
Hancock from this requirement. We add, for the sake
of completeness, that Hancock’s own participation in the
substitution process should estop it from complaining
No. 08-2283 13
now about it, and so even if we thought that § 5 could
be bypassed (which we do not), this would not be an
appropriate case for relief.
Because no other issues raised in this appeal warrant
further discussion, we A FFIRM the judgment of the
district court.
8-7-09