DocketNumber： No. S048811
Judges： Brown, Kennard, Mosk
Filed Date： 6/30/1997
Status： Precedential
Modified Date： 11/2/2024
In this case we consider the circumstances under which a court may deny a petition to compel arbitration because of the petitioner’s fraud in inducing the arbitration agreement or waiver of the arbitration agreement. Plaintiffs are family members and representatives of the estate of Wilfredo Engalla (hereafter sometimes the Engallas). Engalla was enrolled, through his place of employment, in a health plan operated by the Permanente Medical Group, Inc., Kaiser Foundation Hospitals, and the Kaiser Foundation Health Plan (hereafter Kaiser).
Prior to his death, Engalla was engaged in a medical malpractice dispute with Kaiser, which, according to the terms of Kaiser’s “Group Medical and Hospital Services Agreement” (Service Agreement), was submitted to arbitration. After attempting unsuccessfully to conclude the arbitration prior to Engalla’s death, the Engallas filed a malpractice action against Kaiser in superior court, and Kaiser filed a petition to compel arbitration pursuant to Code of Civil Procedure section 1281.2.
We conclude that there is indeed evidence to support the trial court’s initial findings that Kaiser engaged in fraudulent conduct justifying a denial of its petition to compel arbitration, but we further conclude that questions of fact remain to be resolved by the trial court before it can be determined whether Kaiser’s conduct was actually fraudulent. Similarly, there is a factual question as to whether Kaiser’s actions constituted a waiver of its right to compel arbitration. We accordingly reverse the judgment of the Court of Appeal and direct it to remand the case to the trial court for such factual determinations. As will appear, although we affirm the basic policy in favor of enforcement of arbitration agreements, the governing statutes place limits on the extent to which a party that has committed misfeasance in the performance of such an agreement may compel its enforcement.
Because the nature of this case cannot be appreciated without a detailed understanding of its factual context, these facts are set forth at length below.
Engalla immigrated to the United States in 1980, where he commenced employment with Oliver Tire & Rubber Company (hereafter Oliver Tire) as a certified public accountant. At that time, Engalla was invited to enroll himself and his immediate family in a health plan offered by Kaiser. Oliver Tire had offered its employees health care through Kaiser since 1976, and its plan was renewed annually thereafter. Engalla enrolled with Kaiser by signing an application form which stated, in relevant part: “I apply for health plan membership for the persons listed and agree that we shall abide by the provisions of the Service Agreement and health plan regulations. If the agreement so provides, any monetary claim asserted by a Member or the Member’s heirs or personnel [s/c] representative on account of bodily injury, mental disturbance or death must be submitted to binding arbitration instead of a court trial.”
A. The Underlying Medical Malpractice Claim.
In March 1986, Engalla presented himself to Kaiser’s Hayward facility complaining of a continuing cough and shortness of breath. Tests were administered, including radiologic examinations, and Kaiser’s radiologist noted abnormalities of his right lung. Previous radiologic studies performed by Kaiser in 1982 at the same Hayward facility had been inadvertently destroyed, but would otherwise have confirmed that the abnormal condition had only recently developed. In his notes from the 1986 examination, the radiologist recommended follow-up if the films could not be located, but none was ever performed. For several years thereafter, Engalla repeatedly presented Kaiser with complaints symptomatic of respiratory disease. On some occasions he was given an appointment with a physician, but on other occasions he was only permitted to see nurse practitioners. For years, he was given inhalation medication, but Kaiser failed to perform diagnostic tests that might have revealed the developing cancer. Instead, he was repeatedly diagnosed with common colds and allergies. X-rays taken in 1991 finally revealed adenocarcinoma of the lung, a type of lung cancer, but by then Engalla’s condition was inoperable.
B. The Arbitration Clause.
On or about May 31, 1991, Engalla and members of his immediate family served on Kaiser a written demand for arbitration of their claims that Kaiser
The Service Agreement further provides a broad statement governing its interpretation and, in that regard, states that Kaiser “is a named fiduciary to review claims under the Service Agreement.” The nature of the claims for which Kaiser promises to act as a fiduciary is not specified, but a review of the Service Agreement reveals that the term “claims” appears in section 8, entitled “Arbitration of Claims.”
The arbitration program is designed, written, mandated and administered by Kaiser. In regard to the latter, Kaiser collects funds from claimants and holds and disburses them as necessary to pay the neutral arbitrator and expenses approved by him or her. It monitors administrative matters pertinent to the progress of each case including, for example, the identity and dates of appointment of arbitrators. It does not, however, employ or contract with any independent person or entity to provide such administrative services, or any oversight or evaluation of the arbitration program or its performance. Rather, administrative functions are performed by outside counsel retained to defend Kaiser in an adversarial capacity.
The fact that Kaiser has designed and administers its arbitration program from an adversarial perspective is not disclosed to Kaiser members or
C. Processing of the Engallas’ Claim.
Kaiser received the Engallas’ May 31, 1991, demand for arbitration on June 5 or 6, approximately three business days after it was mailed by the Engallas’ counsel. In that demand letter, Rand explained the nature of the claim, advised Kaiser of Engalla’s terminal condition, and appealed to Kaiser to expedite the adjudication of the claim. Although he did not yet have a copy of the arbitration provision, Rand expressed an unqualified willingness to submit the matter to arbitration. At the same time, Rand indicated that he needed and was requesting a copy of the arbitration provision.
After hearing nothing for two weeks, Rand again wrote to Kaiser, repeated his agreement to arbitrate, and stressed the fact that “Mr. Engalla has very little time left in his life and I again urge you to assist me in expediting this matter for that reason.” Several days later, Kaiser’s in-house counsel, Cynthia Shiffrin, whose responsibility it was to monitor the Engallas’ file, responded to the claim by acknowledging receipt and providing a copy of the arbitration provision per Rand’s request. In turn, she requested $150, as required by the arbitration provision, as a deposit for half the expenses of the arbitration. Rand mailed the check the same day he received Shiffrin’s letter. Shiffrin also expressed her willingness to comply with the request to avoid delay, noting that she had arranged for “expedited copies” of Engalla’s medical records, and promising that outside counsel would contact Rand “in the near future with Kaiser’s designation of an arbitrator.”
D. Appointment of the Party Arbitrators.
In his May 31, 1991, demand letter, Rand requested that Kaiser’s counsel contact him at the earliest convenience “so we may choose arbitrators.” He
Although he had designated Ney as his party arbitrator, McComas had not actually contacted Ney beforehand to see if he was available. Instead, on the day he designated him, McComas wrote to Ney asking if he was available. In that letter, McComas advised Ney that the plaintiff was terminally ill, and that Rand had asked for an early arbitration date, but said that he had not responded to the request.
Although McComas was aware from the outset that Engalla was terminally ill and probably had only a few months to live, and claimed that he had “cooperated in the appointment of the party arbitrator very early in the case,” it was later revealed that he had been advised by Ney in July that Ney was unable to accept any further assignments to act as a party arbitrator until late November, over four months away. When the fact of Ney’s unavailability came to light on August 15, Rand made repeated requests that Kaiser appoint another arbitrator, but McComas refused. Rand also requested that Kaiser stipulate to a single neutral arbitrator, but that request was similarly refused. However, in late July, McComas did make arrangements for a backup arbitrator, Tom Watrous, who would step in if Ney was not available when the parties were ready to proceed with the arbitration hearing.
E. Negotiations for Appointment of Neutral Arbitrator and Hearing Date.
According to the Service Agreement, a neutral arbitrator is to be chosen by the two party arbitrators within thirty days of their selection, and the hearing is to be held “within a reasonable time thereafter.” Thus, pursuant to
Although the arbitration provision specifies that the two party arbitrators “shall” select a neutral arbitrator, in reality the selection is made by defense counsel after consultation with the Kaiser medical-legal department. Kaiser has never relinquished control over this selection decision. Indeed, in this case, McComas instructed Ney on who should be proposed and who was unacceptable. Thus, the timeliness of appointment of a neutral arbitrator depends upon cooperation and agreement by Kaiser and its counsel, as well as that of the claimants and their attorneys.
In the initial claim of May 31, 1991, Rand requested the immediate commencement of the process for selection of arbitrators. During the next few months, Rand wrote more than a dozen letters to the arbitrators and McComas asking that the selections be made. Only two weeks after serving his demand letter, Rand stated that he intended “to encourage both designated arbitrators to identify the third arbitrator at the earliest possible date.” On July 8, Rand suggested an agreement on the date for designation of experts, preferably in August, “and that we anticipate having the arbitration soon thereafter.” On July 18, Rand again wrote to McComas on the subject of scheduling the arbitration hearing, noting that he would be prepared to proceed by early September. On July 23, Rand wrote to both party arbitrators and McComas, again stressing the terminal condition of the plaintiff, his desire to hold the arbitration hearing in early September, and the urgent need to select the third, neutral arbitrator. Rand again wrote to the two party arbitrators on August 9, and again urged them to “select the third arbitrator as soon as possible.” The Engallas’ designated arbitrator, Peter Molligan, also attempted to push the defense into motion. On August 12, after trying at least three times to get Ney on the phone, Molligan finally wrote Ney about selecting the neutral arbitrator in order to “get this case moving.” A few days
During the week following August 15, 1991, the two party arbitrators exchanged six names. Rand also continued to press the issue of the unavailability of party arbitrator Ney, which he had just learned about, and repeated his request that the parties move toward a schedule that would allow the arbitration proceedings to begin in September. On August 30, having still heard nothing about the third arbitrator, Rand wrote to Judicial Arbitration and Mediation Services (JAMS) Judge Daniel Weinstein requesting proposals for judges who could be available for a hearing date “within the next several weeks.”
On September 3, Ney wrote to Molligan, rejecting as unacceptable Judge Francis Mayer, one of the “neutrals” Molligan had suggested. Apparently, this veto was exercised pursuant to McComas’s instructions. Ney expressed doubts about the availability of Molligan’s other two choices—retired Judge Fannin or Weinstein, although he had not checked with either judge—and pressed instead for one of his own choices. On September 5, while Molligan was out of town, Rand agreed to one of the suggestions, Judge Robert Cooney, on the condition that “he can be available to commence this matter this month.” If he was not available, Rand suggested two JAMS judges he knew to be available in September. Rand wrote to McComas again on September 18 and 25, literally begging for responses to his many suggestions for expediting the arbitration process.
Despite this additional prompting, McComas did not respond for almost three weeks and, when he finally wrote to Rand on September 24, he expressed uncertainty as to whether Judge Cooney had been agreed upon. Rand immediately responded on September 26 that Judge Cooney had been accepted and that he was only waiting for confirmation that the judge would be available “in the very near future.” Apparently, because Kaiser holds itself out as the program administrator, collects and disburses arbitrator fees and had, in fact, proposed Judge Cooney, Rand assumed Kaiser would handle the formal retention of Judge Cooney and pay a deposit on his fees. Kaiser takes the position that it is the claimant’s burden to move the case along, including making arrangements with the neutral arbitrator.
After almost two more weeks, McComas wrote again on October 7, this time claiming that “[t]o this date, neither you nor your clients have agreed to
Finally, on October 22, McComas wrote to say that he understood the Engallas had agreed to retain Judge Cooney as the neutral arbitrator, conditioned upon his availability, and that he had, therefore, instructed Ney to complete the retainer. By this time, 144 days—almost 3 months more than the 60 days for the selection of the arbitrators represented in the Service Agreement—had elapsed since the initial service of the claim. Engalla died the next day.
F. Historical Data re Speed of Kaiser Arbitrations.
Statistically, delays occur in 99 percent of all Kaiser medical malpractice arbitrations. An independent statistical analysis of Kaiser-provided data of arbitration between 1984 and 1986 reveals that in only 1 percent of all Kaiser cases is a neutral arbitrator appointed within the 60-day period provided by the arbitration provision. Only 3 percent of cases see a neutral arbitrator appointed within 180 days. On average, it has taken 674 days for the appointment of a neutral arbitrator. For claimants whose cases were resolved by settlement or after a hearing, the time required to appoint a neutral arbitrator consumed more than half the total time for resolution. Furthermore, because the arbitration provision of the Service Agreement does not clearly establish a time frame for a hearing (it must be within a “reasonable time” after appointment of the neutral arbitrator), and because Kaiser claims it has no obligation to participate in a hearing until it deems itself ready, there tend to be significant additional delays after appointment of the neutral arbitrator. Thus, on average, it takes 863 days—almost V-h years—to reach a hearing in a Kaiser arbitration. The depositions of Scott
G. Deposition Scheduling During the Aborted Arbitration Proceedings.
In proceedings parallel to his efforts to complete appointments of the arbitrators, Rand began attempts to conduct discovery immediately after filing his demand for arbitration. On June 14, 1991, he wrote to Kaiser stating his desire to complete Engalla’s deposition “on the earliest date permitted by law,” and his willingness to schedule it for a mutually convenient time. McComas promptly responded to that request by noticing the depositions of all the Engallas for November 18, 1991—a date more than five months down the road—despite Rand’s admonition that Engalla “had very little time left in his life.” On June 26, Rand notified McComas that his proposed dates were unacceptable, and suggested that Engalla’s deposition be taken “much earlier than you have noticed [because his] developing condition may not permit a full deposition on November 18.” Rand again indicated his willingness to find mutually agreeable dates. He also requested the depositions of involved doctors “in the near future.”
When McComas did not respond for almost two weeks, Rand noticed Engalla’s deposition for August 9. In a letter accompanying that notice, Rand repeated his request for deposition of the doctors “this month” (July), proposed an agreement to designate experts in August, and offered to set dates for the other Engalla claimants at McComas’s “earliest convenience.” After the location was changed for medical reasons, Rand proceeded with Engalla’s deposition on August 9, over Kaiser’s objection that it had not been given any prior opportunity to conduct a discovery deposition. The August 9 deposition of Engalla, noticed and taken by Rand, was to be the only deposition that would be accomplished in the arbitration phase of this case.
Rand’s efforts to schedule depositions of the involved doctors and nurses continued to founder. He initially requested dates for the depositions of the treating physicians on June 26, and did so again on July 8. In his June 26 request, and in each subsequent request, Rand offered to schedule the depositions at times—even after hours or on weekends—that would be convenient for Kaiser. He finally set them by notice of July 18. On July 24, McComas’s secretary called Rand to request that they be taken off calendar. Rand responded that he would cooperate, but only if alternative dates could be established. No alternative dates were ever proposed by Kaiser, and the witnesses did not attend their scheduled depositions. McComas failed to
As McComas subsequently admitted in a sworn declaration, the reason for the delays in scheduling depositions was that he “did not obtain all of the significant advice from [his] principal outside medical experts until early October, 1991 [and it] was for [that] reason that [he] never suggested deposition dates . . . before the fourth week of October.”
H. Termination of the Prior Arbitration.
Immediately upon learning of Engalla’s death on October 23, Rand notified McComas of that fact and asked him to stipulate that Kaiser would not capitalize on the delays that had plagued the arbitration. Specifically, Rand explained that under the case of Atkins v. Strayhorn (1990) 223 Cal.App.3d 1380 [273 Cal.Rptr. 231], the limitation of $250,000 on noneconomic damages under Civil Code section 3333.2 for a medical malpractice suit is applied separately to the claims of a patient and his spouse who simultaneously claims loss of consortium. Because Mrs. Engalla had made such a claim, Atkins authorized a total claim for noneconomic damages of $500,000. However, upon the passing of Engalla, the case of Yates v. Pollock (1987) 194 Cal.App.3d 195 [239 Cal.Rptr. 383], required merger of the widow’s loss of consortium claim into an indivisible claim for wrongful death, which warrants only a single general damage claim limited to $250,000. Rand’s request for a stipulation to override the effect of Yates was refused. At that point, Rand notified McComas that the Engallas refused to continue with the arbitration.
I. Commencement of Court Proceedings.
On February 21, 1992, the Engallas filed their complaint in Alameda Superior Court. They alleged, in addition to the underlying malpractice claim, fraud as a defense to enforcement of the arbitration provision of the Service Agreement (hereafter arbitration agreement) and as the basis of an affirmative claim for damages, as well as various other claims related to the
Upon remand, the Engallas immediately filed a motion to compel discovery they had served prior to Kaiser’s removal effort. Kaiser responded with a petition to compel arbitration and stay the court action. The parties thereafter briefed both the discovery and arbitration motions, and the trial court heard lengthy argument and took the matters under submission. On September 29, 1992, the court issued an order continuing the matter for 90 days to permit the Engallas to make their “best showing with respect to the evidentiary grounds that exist to warrant removal of this case from the arbitration process.” Discovery rulings were made only with respect to discovery that specifically pertained to the arbitration (as opposed to the medical malpractice) issues.
The parties embarked upon a course of discovery which was limited in light of the summary nature of the petition Kaiser had filed. The Engallas ultimately had five months to complete discovery, during which time thirteen motions were filed and more than a dozen depositions were taken.
The parties then submitted further briefs in connection with Kaiser’s petition to compel arbitration. The Engallas also moved for summary adjudication of issues, asking for a judicial determination, pursuant to section 437c, subdivision (f), that Kaiser owed them certain duties. This motion was subsequently dismissed without prejudice based on certain technical defects. The Engallas also filed a discovery motion to obtain assertedly privileged documents.
After a hearing the trial court issued its order denying Kaiser’s petition after making specific findings of fact on the issue of fraud both “in the inducement” and “in the application” of the arbitration agreement. The court further found that the arbitration agreement, as applied, was overbroad, unconscionable and a violation of public policy, inasmuch as Kaiser was arguing that the agreement could not be avoided on grounds of fraudulent inducement. The court further found that equitable considerations peculiar to this case required the invalidation of the arbitration provision.
The Court of Appeal reversed. It rejected the claim that Kaiser had defrauded the Engallas, finding inter alia that Kaiser’s contractual representation of a 60-day time limit for the selection of arbitrators was not “a representation of fact or a promise by Kaiser because appointment of the neutral arbitrator requires the cooperation of and mutual agreement of the parties.” (Original italics.) The court further concluded there was no evidence of actual reliance on these representations nor evidence that the Engallas would have been any better off had their claims been submitted for judicial resolution rather than arbitration. The court also found that the availability of section 1281.6, which permits one of the parties to petition the court to appoint an arbitrator when the parties fail to agree on one, undermined the Engallas’ claim that Kaiser’s alleged deliberate delay in selecting arbitrators was a ground for avoiding the arbitration agreement. The court further rejected the claim that Kaiser’s special relationship as Engalla’s insurer or as a fiduciary in the administration of his health plan created any special duty to disclose the workings of its arbitration program. Finally, the court held the Engallas’ waiver and unconscionability claims to be without merit. We granted review.
II. Procedural Issues
Before proceeding to the merits, we must address certain procedural and threshold matters. As both parties concede, California law is expressly incorporated into the arbitration agreement in question, and governs the adjudication of any disputes arising from that agreement. (Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 476 [109 S.Ct. 1248, 1254, 103 L.Ed.2d 488].) California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323 [197
The nature of the proceeding to resolve a petition to compel arbitration under California law was recently explained by this court in Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394 [58 Cal.Rptr.2d 875, 926 P.2d 1061] (Rosenthal). As we explain in that case, sections 1281.2 and 1290.2 create a summary proceeding for resolving these petitions. (14 Cal.4th at p. 413.) The petitioner bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence, and a party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense. (Ibid.) In these summary proceedings, the trial court sits as a trier of fact, weighing all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the court’s discretion, to reach a final determination. (Id. at pp. 413-414.) No jury trial is available for a petition to compel arbitration. (Id. at p. 413.)
Although the record is not entirely clear on this point, it appears that the trial court in this case, as in Rosenthal (see Rosenthal, supra, 14 Cal.4th at p. 414), incorrectly treated Kaiser’s petition to compel arbitration as a type of summary judgment motion, in which it was obliged to determine only that there was a legitimate factual dispute among the parties and not to resolve that dispute. The court stated at the conclusion of its ruling on the petition to compel; “In summary, the Plaintiffs have made a substantive challenge to the arbitration clause and have presented facts tending to show that they were victims of fraud in the inducement and application of the arbitration clause. How a trier of fact will ultimately decide the issues is not for this court to decide. However, given the seriousness of the allegations, the showing of a factual basis for those claims, and the finality of arbitration even in the face of apparent legal error [citation], the strong policy favoring arbitration is outweighed by the law and facts in support of Plaintiffs’ position.” (Italics added.) To judge from remarks made by the trial court during the hearing on the petition to compel, the court appears to have followed the reasoning of Rowland v. Paine Webber Inc. (1992) 4 Cal.App.4th 279, 285-286 [6 Cal.Rptr.2d 20], that a court must only determine whether “there are any facts supporting the allegations of fraudulent inducement.” Toward the end of the hearing on the petition to compel, the trial court again alluded to cases “that have . . . talked in terms of the burden being akin to a burden on a summary judgment motion.” Moreover,
III. Fraud in the Inducement of the Arbitration Agreement
The Engallas claim fraud in the inducement of the arbitration agreement and therefore that “[gjrounds exist for the revocation of the agreement” within the meaning of section 1281.2, subdivision (b). As has been pointed out, the “revocation of a contract” referred to in section 1281.2 is something of a misnomer. “Offers are ‘revoked.’ [Citation.] Contracts are extinguished by rescission.” (Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 1996) ^ 5.111, p. 5-31, italics omitted.) We construe section 1281.2, subdivision (b), to mean that the petition to compel arbitration is not to be granted when there are grounds for rescinding the agreement. Fraud is one of the grounds on which a contract can be rescinded. (Civ. Code, § 1689, subd. (b)(1).) In order to defeat a petition to compel arbitration, the parties opposing a petition to compel must show that the asserted fraud claim goes specifically “ ‘to the “making” of the agreement to arbitrate,’ ” rather than to the making of the contract in general. (Rosenthal, supra, 14 Cal.4th at p. 415.) In the present case, the Engallas do allege, and seek to show, fraud in the making of the arbitration agreement.
The Engallas claim
Here the Engallas claim (1) that Kaiser misrepresented its arbitration agreement in that it entered into the agreement knowing that, at the very least, there was a likelihood its agents would breach the part of the agreement providing for the timely appointment of arbitrators and the expeditious progress towards an arbitration hearing; (2) that Kaiser employed the above misrepresentation in order to induce reliance on the part of Engalla and his employer; (3) that Engalla relied on these misrepresentations to his detriment. The trial court found evidence supporting those claims. We examine each of these claims in turn.
First, evidence of misrepresentation is plain. “[F]alse representations made recklessly and without regard for their truth in order to induce action by another are the equivalent of misrepresentations knowingly and intentionally uttered.” (Yellow Creek Logging Corp. v. Dare (1963) 216 Cal.App.2d 50, 55 [30 Cal.Rptr. 629].) As recounted above, section 8.B. of the arbitration agreement provides that party arbitrators “shall” be chosen within 30 days and neutral arbitrators within 60 days, and that the arbitration hearing “shall” be held “within a reasonable time thereafter.” Although Kaiser correctly argues that these contractual representations did not bind it to appoint a neutral arbitrator within 60 days, since the appointment of that arbitrator is a bilateral decision that depends on agreements of the parties, Kaiser’s contractual representations were at the very least commitments to exercise good faith and reasonable diligence to have the arbitrators appointed within the specified time. This good faith duty is underscored by Kaiser’s contractual assumption of the duty to administer the health service plan as a fiduciary.
Here there are facts to support the Engallas’ allegation that Kaiser entered into the arbitration agreement with knowledge that it would not comply with its own contractual timelines, or with at least a reckless indifference as to whether its agents would use reasonable diligence and good faith to comply with them. As discussed, a survey of Kaiser arbitrations between 1984 and
Kaiser now argues that most of these delays were caused by the claimants themselves and their attorneys, who procrastinated in the selection of a neutral arbitrator. But Kaiser’s counterexplanation is without any statistical support, and is based solely on anecdotal evidence related by Kaiser officials. Moreover, the explanation appears implausible in view of the sheer pervasiveness of the delays. While it is theoretically possible that 99 percent of plaintiffs’ attorneys did not seek a rapid arbitration, a more reasonable inference, in light of common experience, is that in at least some cases Kaiser’s defense attorneys were partly or wholly responsible for the delays, and Kaiser’s former general counsel conceded as much in deposition testimony. It is, after all, the defense which often benefits from delay, thereby preserving the status quo to its advantage until the time when memories fade and claims are abandoned. Indeed, the present case illustrates why Kaiser’s counsel may sometimes find it advantageous to delay the selection of a neutral arbitrator. There is also evidence that Kaiser kept extensive records on the arbitrators it had used, and may have delayed the selection process in order to ensure that it would obtain the arbitrators it thought would best serve its interests. Thus, it is a reasonable inference from the documentary record before us that Kaiser’s contractual representations of expeditiousness were made with knowledge of their likely falsity, and in fact concealed an unofficial policy or practice of delay.
The systemwide nature of Kaiser’s delay comes into clearer focus when it is contrasted with other arbitration systems. As the Engallas point out, many large institutional users of arbitration, including most health maintenance organizations (HMO’s), avoid the potential problems of delay in the selection of arbitrators by contracting with neutral third party organizations, such as the American Arbitration Association (AAA). These organizations will then assume responsibility for administering the claim from the time the arbitration demand is filed, and will ensure the arbitrator or arbitrators are
A fraudulent state of mind includes not only knowledge of falsity of the misrepresentation but also an “ ‘intent to . . . induce reliance’ ” on it. (Lazar v. Superior Court, supra, 12 Cal.4th at p. 638.) It can be reasonably inferred in the present case that these misrepresentations of expeditiousness, which are found not only in the contract but in newsletters periodically sent to subscribers touting the virtues of the Kaiser arbitration program, were made by Kaiser to encourage these subscribers to believe that its program would function efficiently. One such newsletter stated: “In the jury trial system, a malpractice complaint takes at least three years—and frequently longer—to reach court and a typical trial lasts ten to fourteen days. Arbitration proceedings don’t involve a judge or jury; can be concluded in several months time, and a typical hearing lasts only two days.” (Italics added.) Such statements can plausibly be viewed as reflecting Kaiser’s intent to induce subscription or renewal of subscription in Kaiser’s health services plan by misrepresenting the actual workings of its arbitration program.
Kaiser also claims that the Engallas failed to demonstrate actual reliance on its misrepresentations. Actual reliance occurs when a misrepresentation is “ ‘an immediate cause of [a plaintiff’s] conduct, which alters his legal relations,’ ” and when, absent such representation, “ ‘he would not, in all reasonable probability, have entered into the contract or other transaction.’ ” (Spinks v. Clark (1905) 147 Cal. 439, 444 [82 P. 45]; see also 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 711 at p. 810.) “It is not . . . necessary that [a plaintiff’s] reliance upon the truth of the
Moreover, a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material. (Vasquez v. Superior Court (1971) 4 Cal.3d 800, 814 [94 Cal.Rptr. 796, 484 P.2d 964, 53 A.L.R.3d 513]; see also 12 Williston on Contracts (3d ed. 1970) § 1515, p. 480; Rest.2d, Contracts, § 167.) A misrepresentation is judged to be “material” if “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question” (Rest.2d Torts, § 538, subd. (2)(a); see also Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 188, fn. 5 [183 Cal.Rptr. 881]), and as such materiality is generally a question of fact unless the “fact misrepresented is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it.” (Rest.2d Torts, § 538, com. e, p. 82.) Thus, the Engallas need only make a showing that the misrepresentations were material, and that therefore a reasonable trier of fact could infer reliance from such misrepresentations, in order to survive this summary-judgment-like proceeding, absent evidence conclusively rebutting reliance. (Cf. Security Pac. Nat. Bank v. Associated Motor Sales (1980) 106 Cal.App.3d 171, 179-180 [165 Cal.Rptr. 38] [presumption which shifts the burden of proving evidence entitles plaintiff to summary judgment if defendant fails to produce evidence to rebut the presumption].)
In the present case, our assessment of the materiality of representations is somewhat complicated by the fact that the primary decision maker responsible for selecting the Kaiser health plan was not Engalla himself but his employer, Oliver Tire. The evidence shows that Engalla had little if any cognizance of the arbitration agreement, and that the form he signed to enroll in Kaiser merely stated that members’ claims must be submitted to arbitration “[i]f the [health services plan] agreement so provides.” On the other hand, Oliver Tire and its personnel employees were obviously aware of the arbitration provision and were responsible for scrutinizing the details of the health services plan before offering it to the company’s employees. But this complication does not alter fundamentally our analysis of materiality. As we have recognized, an employer that negotiates group medical benefits for its employees acts as an agent for those employees during the period of negotiation. (Madden, supra, 17 Cal.3d at pp. 705-706 & fn. 5.) An agency relationship is a fiduciary one, obliging the agent to act in the interest of the principal. (See Fischer v. Machado (1996) 50 Cal.App.4th 1069, 1072 [58 Cal.Rptr.2d 213].) Accordingly, a material representation in this case is one
Applying these principles to the present case, we conclude that Kaiser’s representations of expeditiousness in the arbitration agreement were not “so obviously unimportant” as to render them immaterial as a matter of law. We have recognized that expeditiousness is commonly regarded as one of the primary advantages of arbitration. “ ‘[T]he parties to an arbitral agreement knowingly take the risks of error of fact or law committed by the arbitrators ... in order to obtain speedy decisions by experts in the field whose practical experience and worldly reasoning will be accepted as correct by other experts.’ ” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 12 [10 Cal.Rptr.2d 183, 832 P.2d 899], italics added.) We have accordingly rejected, as a general proposition, the claim that arbitration agreements between an HMO and its participants are inherently one-sided in favor of the former. “The speed and economy of arbitration, in contrast to the expense and delay of a jury trial, could prove helpful to all parties . . . .” (Madden, supra, 17 Cal.3d at p. 711.) The explicit and implicit representations contained in Kaiser’s arbitration agreement serve to confirm to the reasonable potential subscriber that Kaiser has an efficient system of arbitration, in which what is lost in terms of jury trial rights would be gained in part by a swifter resolution of the dispute. If it is indeed the case that these representations were false, and concealed an arbitration process in which substantial delay was the rule and timeliness the rare exception, then we cannot say these misrepresentations were so trivial that they would not have influenced a reasonable employer’s decision as to which among the many competing employee health plans it would choose for its employees.
Kaiser argues to the contrary that the existence of section 1281.6 negates any possible materiality that its misrepresentation of expeditiousness may have had. That section states in pertinent part that in the absence of an agreed method of appointing an arbitrator, “or if the agreed method fails or for any reason cannot be followed ... the court, on petition of a party to the arbitration agreement, shall appoint the arbitrator.” (Ibid.) But the mere fact
Nor is there any evidence to conclusively rebut the inference of Oliver Tire’s reliance on Kaiser’s representations of expeditiousness. Kaiser claims to the contrary that the company paid scant attention to the arbitration clause, focusing in particular on the statement of Theodomeir Roy, a personnel officer with Oliver Tire who advised the company in its selection of employee health plans, that he “would not be concerned if [the plan] didn’t [have an arbitration clause]. And in fact if it did, as it has here, [we] sort of look with favor on it, thinking that it was an expeditious way to resolve disputes.” Yet although Roy may have been indifferent to whether arbitration or some other effective dispute resolution mechanism was available, the evidence suggests he would have looked unfavorably on a system such as Kaiser is alleged to have actually had, which delayed the resolution of claims, required constant action by the claimant, and failed to adhere to its own contractual terms. There is therefore sufficient evidence to support the claim that Oliver Tire actually relied on Kaiser’s misrepresentations.
We turn then to the question of injury. A defrauded party has the right to rescind a contract, even without a showing of pecuniary damages, on establishing that fraudulent contractual promises inducing reliance have been breached. (See Earl v. Saks & Co. (1951) 36 Cal.2d 602, 611 [226 P.2d 340]; see also Calamari & Perillo, The Law of Contracts (3d ed. 1987) § 9.16, p. 360; Rest. 2d, Contracts, § 164, com. c, pp. 446-447.) The rule derives from the basic principle that a contracting party has a right to what it contracted for, and so has the right “to rescind where he obtained] something substantially different from that which he [is] led to expect.” (Earl v. Saks & Co., supra, 36 Cal.2d at p. 612.) It follows that a defrauded party does not have to show pecuniary damages in order to defeat a petition to compel arbitration. Of course, the Engallas cannot defeat a
To be sure, the mere fact that the selection of arbitrators extended beyond their 30- and 60-day deadlines does not by itself establish that Kaiser breached its arbitration agreement. It is, after all, the malpractice claimant in arbitration, like the plaintiff in litigation, who bears the primary responsibility of exercising diligence in order to advance progress towards the resolution of its claim (see Burgess v. Kaiser Foundation Hospitals (1993) 16 Cal.App.4th 1077, 1081-1082 [20 Cal.Rptr.2d 488]), and Kaiser is under no obligation to press for appointment of arbitrators when a claimant is himself dilatory. Nor is the contract breached when delay in the selection of arbitrators is the result of reasonable disagreements over arbitrator selection. Nonetheless, as explained above, Kaiser, by agreeing to 30- and 60-day periods for the appointment of arbitrators, committed itself to cooperate with reasonable diligence and good faith in the process of appointing the arbitrators within the specified times. (See Frey & Horgan Corp. v. Superior Court (1936) 5 Cal.2d 401, 404 [55 P.2d 203].) Here, there is strong evidence that, despite a high degree of diligence on the part of Engalla’s counsel in attempting to obtain the timely appointment of arbitrators, Kaiser lacked either reasonable diligence or good faith, or both, in cooperating on these timely appointments. Instead, the evidence shows that it engaged in a course of nonresponse and delay and added extracontractual conditions to the arbitration selection process, such as the requirement that the claimant name a party arbitrator first. Thus, strong evidence supports the conclusion that Kaiser did not fulfill its contractual obligations in this case to appoint arbitrators in a timely manner.
Nor does the presence of section 1281.6 excuse Kaiser’s alleged misfeasance, as Kaiser contends. That section, as explained above, provides a statutory method for resolving breakdowns in the arbitrator selection process, and states in pertinent part that in the absence of an agreed method of appointing an arbitrator, “or if the agreed method fails or for any reason cannot be followed ... the court, on petition of a party to the arbitration agreement, shall appoint the arbitrator.” Kaiser contends that section 1281.6 is implicitly incorporated into the contract, which specifies that California law be followed. Yet the availability of section 1281.6 does not absolve
Of course, when a delay in the selection of arbitrators is the result of a reasonable and good faith disagreement between parties, or of some other reasonable cause, the remedy for such delay may indeed be a section 1281.6 petition rather than the abandonment of the arbitration agreement. But a party that imposes and administers its own arbitration program, that fraudulently misrepresents the speed of the arbitrator selection process so as to induce reliance, and that in fact engages in conduct forcing substantial delay, may not then compel arbitration by contending that the other party failed to resort to the court by filing a section 1281.6 petition.
In sum, we conclude there is evidence to support the Engallas’ claims that Kaiser fraudulently induced Engalla to enter the arbitration agreement in that it misrepresented the speed of its arbitration program, a misrepresentation on which Engalla’s employer relied by selecting Kaiser’s health plan for its employees, and that the Engallas suffered delay in the resolution of its malpractice dispute as a result of that reliance, despite Engalla’s own reasonable diligence. The trial court, on remand, must resolve conflicting factual evidence
The Engallas also claim the petition to compel arbitration should be denied on grounds of waiver. For reasons discussed below, we conclude that their waiver claims may have merit, but that the question of waiver must be determined by the trial court on remand.
Section 1281.2, subdivision (a), provides that a trial court shall refuse to compel arbitration if it determines that “[t]he right to compel arbitration has been waived by the petitioner.” The Engallas argue that Kaiser’s various dilatory actions constituted a waiver of its right to compel arbitration.
As a threshold matter, Kaiser argues that this waiver claim should be resolved by an arbitrator rather than by the court. Kaiser asserts that “arbitrators have exclusive jurisdiction to decide not only the substantive merits of a controversy but also any procedural disputes that precede the arbitration hearing,” and that the Engallas’ waiver claim is such a “procedural” dispute. In support of this assertion, it cites John Wiley & Sons v. Livingston (1964) 376 U.S. 543, 556-558 [84 S.Ct. 909, 917-919,11 L.Ed.2d 898]. That case is inapposite. There the court considered an arbitration agreement that was part of the grievance machinery established by a labor management contract. There was no question that the parties had a valid and enforceable arbitration agreement, and no claim that the agreement had been waived. The court held rather that the question whether the parties had properly exhausted their remedies in the preliminary stages of the grievance process prior to invoking their right to arbitration—that is, whether a party’s arbitration rights were invoked prematurely—was for the arbitrator to decide. (Id. at pp. 557-558 [84 S.Ct. at pp. 918-919].) “Once it is determined, . . . that the parties are obligated to submit the subject matter of a dispute to arbitration, ‘procedural’ questions which grow out of the dispute and bear on its final disposition should be left to the arbitrator.” (Id. at p. 557 [84 S.Ct. at p. 918].) Here, the question is different and more fundamental—whether Kaiser, by its delay or by other acts or omissions, has in fact waived its right to compel arbitration. Section 1281.2, subdivision (a), gives the trial court jurisdiction to decide this question when petitioned to compel arbitration.
Turning to the substance of the waiver claim, we have explained that the term “waiver” has a number of meanings in statute and case law.
As we explained in Davis, the question of waiver is one of fact, and an appellate court’s function is to review a trial court’s findings regarding waiver to determine whether these are supported by substantial evidence. The trial court in this case made no findings regarding the Engallas’ waiver claim, focusing instead on their fraud claim, which has therefore been our primary focus as well. Given the summary-judgment-like posture
We emphasize, as we explained in our discussion of fraud, that the delay must be substantial, unreasonable, and in spite of the claimant’s own reasonable diligence. When delay in choosing arbitrators is the result of reasonable and good faith disagreements between the parties, the remedy for such delay is a petition to the court to choose arbitrators under section 1281.6, rather than evasion of the contractual agreement to arbitrate. The burden is on the one opposing the arbitration agreement to prove to the trial court that the other party’s dilatory conduct rises to such a level of misfeasance as to constitute a waiver (see Rosenthal, supra, 14 Cal.4th at p. 413), and such waiver “is not to be lightly inferred” (Davis, supra, 25 Cal.3d at p. 426). In this case, there is ample evidence that the claimant was diligent in seeking Kaiser’s cooperation, and instead suffered from Kaiser’s delay, a delay which was unreasonable or in bad faith. We leave it to the trial court to determine on remand whether waiver of the right to compel arbitration has in fact occurred.
V. Unconscionability
We turn then to the Engallas’ unconscionability argument. We have required that “contractual arrangement[s] for the nonjudicial resolution of disputes” must possess “ ‘minimum levels of integrity.’ ” (Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 827 [171 Cal.Rptr. 604, 623 P.2d 165].) Thus, in Graham v. Scissor-Tail, Inc., we held that an arbitration agreement that called for the selection of an arbitrator affiliated with one of the parties to the contract was unconscionable. (Ibid.) In addition to the general doctrine of unconscionability derived from contract law, HMO’s such as Kaiser are regulated by the Knox-Keene Health Care Service Plan Act, which provides among other things that all contracts made in connection with a health service plan be “fair, reasonable, and consistent with the objectives” of that statute. (Health & Saf. Code, § 1367, subd. (h).) HMO’s are therefore especially obligated not to impose contracts on their subscribers that are one-sided and lacking in fundamental fairness.
In determining whether a contract term is unconscionable, we first consider whether the contract between Kaiser and Engalla was one of adhesion. (See Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at p. 817.) In Madden,
The present agreement, which was also offered to Engalla on a “take it or leave it” basis, has more of the characteristics of an adhesion contract than the one considered in Madden. First, although Oliver Tire is a corporation of considerable size, it has had only a small number of employees enrolled in Kaiser, and did not have the strength to bargain with Kaiser to alter the terms of the contract. Second, Engalla did have one other health plan from which to choose, but not several plans as was the case in Madden. Finally, unlike in Madden, the Engallas do not claim that the arbitration clause itself is unconscionable, but that the arbitration program Kaiser established was biased against them.
Nonetheless, although the present contract has some of the attributes of adhesion, it did not, on its face, lack “ ‘minimum levels of integrity.’ ” (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at p. 827.) The unfairness that is the substance of the Engallas’ unconscionability argument comes essentially to this: The Engallas contend that Kaiser has established a system of arbitration inherently unfair to claimants, because the method of selecting neutral arbitrators is biased. They claim that Kaiser has an unfair advantage as a “repeat player” in arbitration, possessing information on arbitrators that the Engallas themselves lacked. They also argue that Kaiser, under its arbitration system, has sought to maximize this advantage by reserving for itself an unlimited right to veto arbitrators proposed by the other party. This method is in contrast to arbitration programs run by neutral, third party arbitration organizations such as the AAA, which give parties a very limited ability to veto arbitrators from its preselected panels.
Yet none of these features of Kaiser’s arbitration program renders the arbitration agreement per se unconscionable. As noted above, section 1281.6
VI. Conclusion and Disposition
For the foregoing reasons, the judgment of the Court of Appeal is reversed with directions to remand the case for proceedings consistent with this opinion.
George, C. J., Baxter, J., Werdegar, J., and Chin, J., concurred.
All further statutory references are to the Code of Civil Procedure unless otherwise indicated.
Part I of this opinion has been adapted from the Court of Appeal opinion, with some modifications.
The relevant portions of the Kaiser arbitration provision, found in section 8.B. of the Service Agreement, are as follows: “Within 30 days after initial service on a Respondent, Claimant and Respondent each shall designate an arbitrator and give written notice of such designation to the other, and Claimant shall forward $150, made payable to Kaiser Foundation Health Plan Arbitration Account, to Kaiser Foundation Health Plan. . . . This $150 will be deposited with Respondent’s $150 in a special account maintained by Bank of America National Trust and Savings Association [and will] . . . provide the initial funds to pay the fees of the neutral arbitrator and expenses of arbitration as approved by him or her ... . Within 30 days after these notices have been given and payments made, the two arbitrators so selected shall select a neutral arbitrator and give notice of the selection to Claimant and all Respondents served, and the three arbitrators shall hold a hearing within a reasonable time thereafter. . . .”
Watrous was, however, planning a three-week European vacation during October, which would have made him unavailable for much of the time period in which the Engallas were seeking to complete the arbitration.
The Engallas claim that McComas dissembled on September 24 and October 7 when he expressed uncertainty about Judge Cooney’s availability and the plaintiffs’ agreement to appointment of the retired judge. They argue that, by that time, McComas had not even contacted Judge Cooney to determine his availability, and that, in fact, Judge Cooney was available during September and October to preside over the hearing. They conclude that, by initially feigning uncertainty about whether Engalla had agreed to Judge Cooney’s appointment, McComas managed to delay the appointment for over six weeks.
Kaiser and its counsel also filed in the Court of Appeal separate writ petitions requesting reversal of the trial court’s discovery order discussed above. The Court of Appeal granted that relief, concluding that such discovery issues should be addressed to the arbitrator. The petition for review did not request review of the Court of Appeal’s decision in the writ petition, which was premised on its grant of Kaiser’s petition to compel arbitration. Accordingly, we do not address the issues raised by the writ petitions in this opinion. On remand, the parties are free to make or renew any discovery request relevant to the resolution of the petition to compel arbitration.
In reviewing this quasi-summary-judgment motion we will “undertaken an independent review of the evidence presented to the trial court to determine whether [any] triable issues of fact were presented.” (Schrader v. Scott (1992) 8 Cal.App.4th 1679, 1683 [11 Cal.Rptr.2d 433].)
For the sake of convenience, the arguments of the various amici curiae for the parties will be attributed to the parties.
Under the AAA proceeding, for example, that organization submits simultaneously to each of the parties, shortly after the arbitration demand is filed, a list of names of possible arbitrators and their biographical information. Each party is then given 10 days to cross off the names to which it objects and to number the remaining names in order of preference. If a party does not respond within the 10-day period, all the arbitrators on the list are deemed to be acceptable to it. The AAA then selects the arbitrator or arbitrators from the list, who set a hearing date and supervise discovery. A similar procedure is employed for judicial arbitration. (See Cal. Rules of Court, rule 1605.)
There is also evidence that Kaiser disseminated information through its newsletters which was seen by responsible officials in Oliver Tire, the company in which Engalla was employed, that represented Kaiser’s arbitration system as fast and efficient. These misrepresentations further support the Engallas’ fraud claim.
We recognize, of course, that this inverse agency relationship between the employer and its employees is a narrow one, and does not preclude an employer from acting in its own interests to obtain cost savings for the enterprise as a whole when choosing a group health plan. But, within these constraints, an employer negotiating or selecting a group health plan on behalf of its employees is presumed to be acting in their interest. If that proves not to be the case, then an employee bound by an arbitration agreement of which he was scarcely aware could well raise a claim that such agreement was unconscionable. (See Madden, supra, 17 Cal.3d at p. 711.) In the present case, the deposition testimony of Oliver Tire personnel confirms that the company acted with its employees’ interests in mind in selecting a group health plan.
On remand the trial court may, at its discretion, rely on the documentary evidence already presented, may request further documentary submissions, or may request oral testimony. (See Rosenthal, supra, 14 Cal.4th at p. 414.)
The Engallas also argue “constructive fraud” based on Kaiser’s duty, as a fiduciary, to disclose the actual workings of its arbitration system, including systemwide delay. Constructive fraud consists of “any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him.” (Civ. Code, § 1573.) It is
Kaiser also claims that support for its position that the waiver issue is for the arbitrator can be found in Brock v. Kaiser Foundation Hospitals (1992) 10 Cal.App.4th 1790 [13
See footnote 9, ante, at page 976, for an explanation of AAA’s procedures.
We note that after review was granted in this case, the Legislature enacted Senate Bill No. 1660 (1995-1996 Reg. Sess.) amending Health and Safety Code section 1373.19 and adding Health and Safety section 1373.20. Health and Safety Code section 1373.20 specifically addresses a situation in which a health care service plan does not use “a professional dispute resolution organization independent of the plan” to settle arbitration disputes. For such organizations, Health and Safety Code section 1373.20 provides a means of expediting the procedures set forth in Code of Civil Procedure section 1281.6, mandating the trial court to “conclusively presumed” that the agreed method of selecting arbitrators has failed 30 days after one party has served a written demand to designate an arbitrator upon the other one. That section also provides, for an award of the reasonable cost of a section 1281.6 petition when the court finds a party’s conduct to be “dilatory.” We express no opinion whether this new legislation would affect our analysis of cases such as the present.
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