Nida ENGALLA et al., Plaintiffs and Respondents, v. The PERMANENTE MEDICAL GROUP, INC., et al., Defendants and Appellants.
The PERMANENTE MEDICAL GROUP, INC., et al., Petitioners, v. ALAMEDA COUNTY SUPERIOR COURT, Respondent;
Nida ENGALLA et al., Real Parties in Interest. Willis F. McCOMAS et al., Petitioners, v. ALAMEDA COUNTY SUPERIOR COURT, Respondent; Nida ENGALLA et al., Real Parties in Interest.
These consolidated proceedings involve a broad attack on the arbitration program established by The Permanente Medical Group, Inc., Kaiser Foundation Hospitals, and Kaiser Foundation Health Plan, Inc. (collectively, hereinafter, Kaiser or appellants) for medical malpractice claims. In appeal No. A062642, Kaiser seeks review of an order by which the Alameda County Superior Court denied its petition to compel arbitration of the claims asserted by respondents, who are members of the family and representatives of the estate of Wilfredo Engalla (collectively, hereinafter, the Engallas or respondents), a Kaiser patient who died of lung cancer in October 1991.1 The trial court refused to enforce an arbitration provision contained in the Group Medical and Hospital Service Agreement (the Service Agreement) under which Mr. Engalla had health care coverage, holding that Kaiser had engaged in fraud in the inducement of the arbitration provision. This decision was based on findings that Kaiser knowingly misrepresented the speed and efficiency of its arbitration program, and that the collective bargaining agent for Mr. Engalla's employer reasonably relied on those representations in agreeing to accept the arbitration clause in the Service Agreement.
The trial court also found that Kaiser and its lawyers committed fraud “in the specific application” of the arbitration provision by engaging in dilatory behavior while defending against the Engallas' claims in the arbitration proceeding that was abandoned after Mr. Engalla died. Apparently, the trial court accepted respondents' argument that Kaiser was engaging in delaying tactics in order to minimize its exposure for noneconomic damages to Mr. and Mrs. Engalla. Finally, the trial court found that the Kaiser arbitration program is oppressive and unconscionable as currently structured, and that it would be inequitable to require the Engallas to arbitrate their claims in such a “corrupt” forum.
In two related writ proceedings, Nos. A063427 and A063547, Kaiser and its attorneys seek a writ of mandate directing the superior court to vacate its order compelling disclosure of 14 documents on the ground that they fell within the “fraud exception” to the attorney-client privilege. The Engallas cross-appeal from this discovery order, arguing that, by partially disclosing many details about the adoption and operation of its arbitration program, Kaiser has waived any applicable privilege or work product protections for all documents relating to its arbitration program. The Engallas further contend that Kaiser had a fiduciary duty to fully apprise its patients of the procedures in use and the implications of accepting the terms of the arbitration program, which duty was breached by both inaccurate and incomplete disclosures in its arbitration materials. They claim, therefore, the trial court order did not go far enough to require disclosure of attorney-client communications and work product generated by Kaiser lawyers on the subject of its arbitration program.
We conclude that: (1) the trial court's finding of fraud in the inducement of the arbitration provision is not supported by substantial evidence; (2) the Engallas' claim of “fraud in the application” of the arbitration provision must be submitted to the arbitrator; (3) the trial court's finding that the Kaiser arbitration program is oppressive and unconscionable as currently structured and administered is not supported by substantial evidence; (4) all of the Engallas' claims—including their causes of action for professional negligence, fraud, breach of contract, breach of the covenant of good faith and fair dealing, and abuse of process—are arbitrable; and (5) the trial court erred by refusing to enforce the arbitration provision in the Service Agreement. Accordingly, we reverse the decision of the trial court and remand with directions to enter an order granting appellants' petition to compel arbitration of the claims asserted in the Engallas' complaint.
In light of our ruling on the enforceability of the arbitration provision, we vacate the trial court's order compelling disclosure of certain attorney-client communications and attorney work product, but do so without prejudice to respondents' right to renew their motion before the neutral arbitrator, to the extent those materials—as well as others that were sought but not ordered disclosed—are relevant to respondents' remaining claims.
I. Factual And Procedural Background
Wilfredo Engalla (hereinafter, Mr. Engalla) immigrated to the United States in 1980, where he commenced employment with Oliver Tire & Rubber Company as a certified public accountant. At that time, Mr. Engalla was invited to enroll himself and his immediate family in a health plan offered by Kaiser. Oliver Tire & Rubber had offered its employees health care through Kaiser since 1976, and its plan was renewed annually thereafter. Mr. 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 [sic ] representative on account of bodily injury, mental disturbance or death must be submitted to binding arbitration instead of a court trial.” (Emphasis added.)
A. The Underlying Medical Malpractice Claim.
In March 1986, Mr. 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, Mr. Engalla repeatedly presented 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 Mr. Engalla's condition was inoperable.
B. The Arbitration Service Agreement.
On or about May 31, 1991, Mr. Engalla and members of his immediate family served on Kaiser a written demand for arbitration of their claims that Kaiser health care professionals had been negligent in failing to diagnose Mr. Engalla's lung cancer sooner. Apparently, the Engallas' attorney, Mr. Rand, believed they were required to do so pursuant to the Service Agreement which was in effect at the time.2 The arbitration clause contained in the Service Agreement described the process for initiating a claim, the requirement that three arbitrators be used, and the time frame within which the arbitrators were to be selected. In this regard, section 8.B of the Service Agreement provides that each side “shall” designate a party arbitrator within 30 days of service of the claim and that the two party arbitrators “shall” designate a third, neutral arbitrator within 30 days thereafter.3 Section 8.C sets forth general provisions concerning the arbitration of claims and incorporates applicable California law, including the California statute of limitations, the California Code of Civil Procedure provisions relating to arbitration, and the California Medical Injury Compensation Reform Act of 1975 (MICRA).
The Service Agreement further provides a broad statement governing its interpretation and, in that regard, states that appellant Kaiser Foundation Health Plan “is a named fiduciary to review claims under the Service Agreement.” The nature of the claims for which Health Plan 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 program was originally designed and written to be “equally fair to both parties,” but Kaiser now contends that it has no duty to maintain such a program because it claims to be free to “act[ ] in its own business interests when negotiating the terms of its [S]ervice [A]greement.” However, the arbitration program is not only designed, written, and mandated by Kaiser; it is also, as Kaiser concedes, administered by it. In this regard, 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 and, as Kaiser further concedes, such counsel are ethically obliged to act zealously and exclusively in the best interests of their client.
The fact that Kaiser has designed and administers its arbitration program from an adversarial perspective is not disclosed to Health Plan members or subscribers. It is not set forth in the arbitration provision itself, or in any of Kaiser's publications or disclosures about the arbitration program, and it was unknown to Mr. Engalla's employer, who signed the Service Agreement on his behalf. The employer's representative read the provisions of the Service Agreement, and believed that the arbitration process would be equally fair to both the employee-subscriber and to Kaiser, and that it would allow employees to resolve disputes quickly and without undue expense. His expectation in that regard was consistent with the intent of Health Plan's general counsel, Scott Fleming, who originally drafted the arbitration provision, as well as various publications disseminated to Kaiser members. In those materials, Kaiser represented that an arbitration in its program would reach a hearing within several months' time, and that its members would find the arbitration process to be a fair approach to protecting their rights.
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 respondents' counsel. In that demand letter, Mr. Rand explained the nature of the claim, advised Kaiser of Mr. 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, Mr. Rand expressed an unqualified willingness to submit the matter to arbitration. At the same time, Mr. Rand indicated that he needed and was requesting a copy of the arbitration provision.
After hearing nothing for two weeks, Mr. 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 Mr. Rand's request. In turn, she requested $150, as required by the arbitration provision, as a deposit for half the expenses of the arbitration. Mr. Rand mailed the check the same day he received Ms. Shiffrin's letter. Ms. Shiffrin also expressed her willingness to comply with the request to avoid delay, noting that she had arranged for “expedited copies” of Mr. Engalla's medical records, and promising that outside counsel would contact Mr. 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, Mr. Rand requested that Kaiser's counsel contact him at the earliest convenience “so we may choose arbitrators․” He repeated that request on June 14, 1991. On June 21, Kaiser's outside counsel, Willis McComas, indicated that Kaiser would provide the identity of its arbitrator only after receiving the Engallas' designation. Mr. Rand objected to this staggered disclosure as not authorized by the arbitration agreement. Having heard nothing from Mr. McComas by July 8, Mr. Rand went ahead and designated attorney Peter Molligan as the Engallas' arbitrator, again repeating his request that Kaiser do likewise “so that the two arbitrators can immediately commence efforts to identify and appoint the neutral arbitrator.” It was not until July 17, 47 days after service of the claim, that Mr. McComas designated Kaiser's party arbitrator, attorney Michael Ney. Mr. McComas admitted that he had not calendered any of the deadlines for designation of the arbitrators, claiming “[t]here is no rule that requires that.”
Although he had designated Mr. Ney as his party arbitrator, Mr. McComas had not actually contacted Mr. Ney beforehand to see if he was available. Instead, on the day he designated him, Mr. McComas wrote to Mr. Ney asking if he was available. In that letter, Mr. McComas advised Mr. Ney that the plaintiff was terminally ill, and that Mr. Rand had asked for an early arbitration date, but said that he had not responded to the request.
Although Mr. McComas was aware of Mr. Engalla's terminal condition from the outset, 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 Mr. Ney in July that Mr. Ney was “unable [to] accept any further assignments to act as a party arbitrator until late November, 1991,” long after the expected (and actual) date of Mr. Engalla's death. When the fact of Mr. Ney's unavailability came to light on August 15, Mr. Rand made repeated requests that Kaiser appoint another arbitrator, but Mr. McComas refused. Mr. Rand also requested that Kaiser stipulate to a single neutral arbitrator, but that request was similarly refused. However, in late July, Mr. McComas did make arrangements for a backup arbitrator, Tom Watrous, who would step in if Mr. Ney was not available when the parties were ready to proceed with the arbitration hearing.4
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 30 days of their selection, and the hearing is to be held “within a reasonable time thereafter.” Thus, pursuant to the time frame mandated by Kaiser, the neutral arbitrator must be selected within 60 days after initial service of the claim. There is no dispute that timely appointment of a neutral arbitrator is critical to the progress of the case, inter alia, because the Code of Civil Procedure provides a right to discovery only “after the appointment of the arbitrator or arbitrators․” (Id., § 1283.05, subd. (a).) 5 In fact, in this case, Mr. McComas asserted that discovery could not commence until the neutral arbitrator was selected, because the neutral arbitrator would have to approve any discovery. Similarly, a hearing date cannot be set until the neutral arbitrator is appointed. (§ 1282.2, subd. (a).) In this case, Mr. McComas refused to discuss disclosure of expert witnesses until the hearing date was set. In short, the timely appointment of a neutral arbitrator is the linchpin of all progress in a Kaiser arbitration. Without a neutral arbitrator in place, and absent a stipulation, nothing can be accomplished.
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, Mr. McComas instructed Mr. 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, Mr. Rand requested the immediate commencement of the process for selection of arbitrators. During the next few months, Mr. Rand wrote more than a dozen letters to arbitrators and Mr. McComas asking that the selections be made. Only two weeks after serving his demand letter, Mr. Rand stated that he intended “to encourage both designated arbitrators to identify the third arbitrator at the earliest possible date.” On July 8, Mr. 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, Mr. Rand again wrote to Mr. McComas on the subject of scheduling the arbitration hearing, noting that he would be prepared to proceed by early September. On July 23, Mr. Rand wrote to both party arbitrators and Mr. 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. Mr. 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 Mr. Ney on the phone, Mr. Molligan finally wrote Mr. Ney about selecting the neutral arbitrator in order to “get this case moving.” A few days later, having still heard nothing, Mr. Rand tried again, saying: “Time is of the absolute essence and I again ask that you use all possible means to quickly select the third arbitrator. I am becoming increasingly concerned about the delays and am beginning to wonder whether the arbitration proceedings are suitable for this case.”
During the week following August 15, 1991, the two party arbitrators exchanged six names. Mr. 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, Mr. Rand wrote to JAMS' Judge Daniel Weinstein requesting proposals for judges who could be available for a hearing date “within the next several weeks.”
On September 3, Mr. Ney wrote to Mr. Molligan, rejecting as unacceptable Judge Francis Mayer, one of the “neutrals” Mr. Molligan had suggested. Apparently, this veto was exercised pursuant to Mr. McComas' instructions. Mr. Ney expressed doubts about the availability of Mr. Molligan's other two choices—retired judges Fannin or Weinstein, although he had not checked with either judge—and pressed instead for one of his own choices. On September 5, while Mr. Molligan was out of town, Mr. 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, Mr. Rand suggested two JAMS judges (Donald Constine and John Racanelli) he knew to be available in September. Mr. Rand wrote to Mr. McComas again on September 18 and 25, literally begging for responses to his many suggestions for expediting the arbitration process.
Despite this additional prompting, Mr. McComas did not respond for almost three weeks and, when he finally wrote to Mr. Rand on September 24, he expressed uncertainty as to whether Judge Cooney had been agreed upon. Mr. 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, Mr. 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, Mr. McComas wrote again on October 7, this time claiming that “[t]o this date, neither you nor your clients have agreed to the appointment of a neutral arbitrator” because “[y]ou apparently agreed to Judge Cooney with an unrealistic condition.” 6 Mr. Rand responded on October 16, stating, “I am incredulous that you are still asking that we agree to the appointment of the neutral arbitrator. We have repeatedly informed you that we will agree to your suggestion of Judge Cooney. Why do you continue to insist that we have not agreed? My only reservation was and still is a question concerning availability.” (Emphasis in original.) On October 18, Mr. Rand again wrote that he was “still waiting to hear from you concerning the final retention of Judge Cooney. I had promised him that he would be hearing from you when I advised him that we had agreed to his appointment.”
Finally, on October 22, Mr. 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 Mr. Ney to complete the retainer. By this time, 144 days—almost 3 months more than represented in the Service Agreement—had elapsed since the initial service of the claim. Mr. Engalla died the next day.
F. Historical Data re Speed of Kaiser Arbitrations.
Statistically, the delays which occurred in this case occur in 99 percent of all Kaiser medical malpractice arbitrations. An independent statistical analysis of Kaiser-provided data 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, claimants who demand arbitration must wait 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 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 to reach a hearing in a Kaiser arbitration.
G. Deposition Scheduling During the Aborted Arbitration Proceedings.
In proceedings parallel to his efforts to complete appointments of the arbitrators, Mr. Rand began attempts to conduct discovery immediately after filing his demand for arbitration. On June 14, he wrote to Mr. McComas stating his desire to complete Mr. Engalla's deposition “on the earliest date permitted by law,” and his willingness to schedule it for a mutually convenient time. Mr. 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 and long after Mr. Engalla's expected (and actual) date of death. On June 26, Mr. Rand notified Mr. McComas that his proposed dates were unacceptable, and suggested that Mr. Engalla's deposition be taken “much earlier than you have noticed [because his] developing condition may not permit a full deposition on November 18.” Mr. Rand again indicated his willingness to find mutually agreeable dates. He also requested the depositions of involved doctors “in the near future.”
When Mr. McComas did not respond for almost two weeks, Mr. Rand noticed Mr. Engalla's deposition for August 9. In a letter accompanying that notice, Mr. 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 Mr. McComas' “earliest convenience.” After the location was changed for medical reasons, Mr. Rand proceeded with Mr. 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 Mr. Engalla, noticed and taken by Mr. Rand, was to be the only deposition that would be accomplished in the arbitration phase of this case.
Mr. 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, Mr. 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, Mr. McComas' secretary called Mr. Rand to request that they be taken off calendar. Mr. 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. Mr. McComas failed to respond to three subsequent requests for depositions, which were made on September 5, 18, and 25. On September 24, Mr. McComas simply promised that his secretary would call to give dates for the health care providers. That did not occur until October 2, when Mr. McComas' secretary offered November 21 and 22 for the depositions of the doctors. This was the first time Kaiser had offered to produce the involved physicians, and the dates were still almost a month after Mr. Engalla's death. Although Mr. Rand ultimately convinced Mr. McComas to provide earlier dates for some (but not all) of the involved health-care providers, the depositions were not taken because Mr. Engalla died before they could be completed.
As he subsequently admitted in a sworn declaration, the reason for the delays in scheduling depositions was that Mr. McComas “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 Mr. Engalla's death on October 23, Mr. Rand notified Mr. McComas of that fact and asked him to stipulate that Kaiser would not capitalize on the delays that had plagued the arbitration. Specifically, Mr. Rand explained that under the case of Atkins v. Strayhorn (1990) 223 Cal.App.3d 1380, 273 Cal.Rptr. 231, the limitation on non-economic damages of Civil Code section 3333.2 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 non-economic damages of $500,000. However, upon the passing of Mr. 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 of $250,000. Mr. Rand's request for a stipulation to override the effect of Yates was flatly refused. At that point, Mr. Rand notified Mr. 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 County Superior Court. They alleged, inter alia, fraud as a defense to enforcement of the arbitration provision and as an affirmative claim for damages. On March 20, Kaiser removed the case to the United States District Court for the Northern District of California, claiming that the action and all issues presented were subject to the rule of federal preemption contained in the Employee Retirement Income Security Act of 1974 (29 U.S.C. §§ 1132, 1144). At about the same time, Kaiser proposed to continue the arbitration process. The Engallas declined the offer and, instead, filed a motion to remand. On June 19, the federal court granted the Engallas' motion in its entirety and remanded the matter back to state court.
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 it 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.7
The parties then submitted further briefs in connection with Kaiser's petition to compel arbitration. The Engallas also moved for summary adjudication of issues by which they asked for a judicial determination, pursuant to section 437c, subdivision (f), that Kaiser owed them certain duties. Specifically, the Engallas sought a ruling that Kaiser owed fiduciary duties with respect to the design and administration of the arbitration procedures, and heightened duties of good faith and fair dealing sufficient to subject Kaiser to tort liability for the breach thereof. In support of this motion, the Engallas submitted declarations from statistical expert Michael J. Sullivan, arbitration expert Francis O. Spalding, and the Honorable Robert Cooney, Ret., who had been appointed as the neutral arbitrator.
On March 25, 1993, the Engallas filed a further motion to compel disclosure of documents claimed to be privileged and asked the court to review Kaiser's claims of privilege and work product protection in light of the evidence that had been developed in discovery. The court had previously ordered Kaiser to produce certain documents listed in privilege logs pursuant to the “business capacity” exception to the attorney-client privilege, but did not have the benefit of the declarations or other evidence of fraud that was offered at the final hearings.
A hearing on Kaiser's petition and the Engallas' two motions was set for May 18, 1993. At the outset of the hearing, the court denied the motion for summary adjudication of issues based on technical objections raised by Kaiser. The ruling was expressly made without prejudice. Because of the length of the hearing, the court did not have time to hear oral argument on the discovery motion, but indicated its intention to file a decision within several days. The bulk of the hearing was, thus, focused on Kaiser's petition to compel arbitration.
On May 24, 1993, 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 provision. The court further found that the provision, as applied, was overbroad, unconscionable and violative of public policy, and that equitable considerations peculiar to this case required the invalidation of the arbitration provision.
On June 4, 1993, a hearing was held on the discovery motion. At that hearing, defense counsel advised the court that Kaiser would not appeal the decision denying the petition, conceding that the court's ruling on the petition “was quite correct.” However, Kaiser later reconsidered and so advised the court on July 21, 1993, the date it filed its notice of appeal. On August 18, the trial court filed its order compelling disclosure of fourteen documents reflecting Kaiser's internal evaluation of the arbitration program (the arbitration memoranda) and Mr. McComas' handling of this specific matter (the McComas file). On October 1, Kaiser filed an amended notice of appeal, seeking review of the August 18 discovery order. On October 18, Kaiser filed a petition for writ of mandate and/or prohibition, also for the purpose of obtaining review of the August 18 discovery order. Immediately thereafter, on October 21, respondents filed a notice of cross-appeal from the same discovery order.
II. Appeal No. A062642
A. California Law Governs the Issues Raised in This Appeal.
As a threshold matter, the parties disagree whether our decision on the petition to compel arbitration is governed by state or federal law. Respondents note that the arbitration provision incorporates the service procedures for California civil actions, the California Code of Civil Procedure sections pertaining to arbitration, and MICRA. Indeed, appellants have specifically relied on Code of Civil Procedure sections 1281.2, 1281.4, 1290, and 1292.8, Health and Safety Code sections 1373, subdivision (i), and 1363, subdivision (a)(10), as well as the California Supreme Court decision in Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 131 Cal.Rptr. 882, 552 P.2d 1178, as the bases of its petition and its appeal from the denial thereof. Nevertheless, citing Southland v. Keating (1984) 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1, Kaiser contends that Federal Arbitration Act preempts application of California law and that the arbitrability of this controversy is, therefore, governed by federal law.
The United States Supreme Court has recently analyzed the rule of preemption by the Federal Arbitration Act (FAA) of conflicting state statutes and policies. In Allied–Bruce Terminix Cos. v. Dobson (1995) 513 U.S. ––––, 115 S.Ct. 834, 130 L.Ed.2d 753, the Court held that section 2 of the FAA (9 U.S.C. § 2) 8 is to be read broadly as applying—in both state and federal courts—to all written arbitration provisions in contracts evidencing transactions which, in fact, involve interstate commerce, whether or not the parties contemplated an interstate commerce connection. (Allied–Bruce Terminix Cos. v. Dobson, supra, 513 U.S. at p. –––– – ––––, 115 S.Ct. at pp. 839–843.) 9 Nevertheless, the Court acknowledged that state law still plays an important role in decisions on the enforceability of arbitration clauses: “[Section] 2 gives States a method for protecting consumers against unfair pressure to agree to a contract with an unwanted arbitration provision. States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract.’ 9 U.S.C. § 2 ․ (emphasis added). What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The [FAA] makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal ‘footing,’ directly contrary to the [FAA's] language and Congress' intent. [Citation.]” (Allied–Bruce Terminix Cos. v. Dobson, supra, 513 U.S. at p. ––––, 115 S.Ct. at p. 843, citing Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 474, and see also pp. 475–476, 109 S.Ct. 1248, 1253, and see also pp. 1253–1254, 103 L.Ed.2d 488; First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, ––––, 115 S.Ct. 1920, 1924, 131 L.Ed.2d 985 [generally, when deciding issues of arbitrability, courts “should apply ordinary state-law principles that govern the formation of contracts”].)
Even where the underlying contract involves interstate commerce, however, parties to an arbitration agreement remain free to include a choice-of-law provision under which state law will govern the arbitration of claims to which the arbitration provision applies (Volt Info. Sciences, supra, 489 U.S. at p. 479, 109 S.Ct. at p. 1255 [federal law does not preempt imposition of a stay of arbitration pursuant to section 1281.2, subdivision (c), where parties' contract provides that their arbitration agreement would be governed by California law] ), at least insofar as the state law does not purport to limit the authority of the arbitrator (see Mastrobuono v. Shearson Lehman Hutton, Inc. (1995) 514 U.S. 52, ––––, 115 S.Ct. 1212, 1219, 131 L.Ed.2d 76). The parties in this case agreed that the California Code of Civil Procedure would govern the arbitration of claims arising from the Service Agreement with respect to any matter not expressly provided for therein. This choice-of-law provision does not offend any federal policy and is enforceable. (Volt Info. Sciences, supra, 489 U.S. at pp. 477–479, 109 S.Ct. at pp. 1254–1256; but cf. Mastrobuono v. Shearson Lehman Hutton, Inc., supra, 514 U.S. at p. ––––, 115 S.Ct. at p. 1219.) 10 Thus, pursuant to the parties' agreement, we conclude that California law governs the issues presented in this appeal.
B. The Trial Court Erred in Denying Kaiser's Petition on Grounds of Fraud “In the Inducement” of the Arbitration Provision.
As we have noted, arbitration clauses are generally enforceable under both California and federal statutes, which reflect a strong and, by now, well-established public policy favoring arbitration. (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 706–707, 131 Cal.Rptr. 882, 552 P.2d 1178; Moses H. Cone Hospital v. Mercury Const. Corp. (1983) 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765.) “[A]rbitration has become an accepted and favored method of resolving disputes [citations] praised by the courts as an expeditious and economical method of relieving overburdened civil calendars [citation].” (Madden v. Kaiser Foundation Hospitals, supra, 17 Cal.3d at pp. 706–707, 131 Cal.Rptr. 882, 552 P.2d 1178.) Nevertheless, under both California and federal law, arbitration may be refused where grounds exist for “revocation” of the agreement to arbitrate. (§§ 1281, 1281.2; 9 U.S.C. § 2.) Because of the strong policy favoring arbitration, however, any doubts about the existence of those grounds must be resolved against the party objecting to enforcement of the arbitration provision. (Moses H. Cone Hospital v. Mercury Constr. Corp., supra, 460 U.S. at pp. 24–25, 103 S.Ct. at 941–42; Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323, 197 Cal.Rptr. 581, 673 P.2d 251.)
As some commentators have observed, “revocation” is something of a misnomer under California law because, while offers may be revoked (Civ.Code, § 1586), contracts are extinguished by “rescission” (Civ.Code, § 1688 et seq.). (Knight, Fannin & Disco, Cal.Practice Guide—Alternative Dispute Resolution (1992) § 4:111, p. 4–22.) However, construing the two terms as synonymous for purposes of sections 1281 and 1281.2, the grounds for “revocation” of an agreement to arbitrate include a showing that the objecting party's consent to the arbitration agreement was obtained through fraud. (Civ.Code, § 1689, subd. (b)(1).)
Under federal law it is clear that, when raised, a claim of fraud directed to the making of the arbitration agreement is a defense to enforcement of that agreement which must be decided by the court before the matter may be submitted to arbitration.11 (Moseley v. Electronic Facilities (1963) 374 U.S. 167, 170–171, 83 S.Ct. 1815, 1817–1818, 10 L.Ed.2d 818; and see Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street, supra, 35 Cal.3d at p. 323, 197 Cal.Rptr. 581, 673 P.2d 251; Lynch v. Cruttenden & Co. (1993) 18 Cal.App.4th 802, 807, 22 Cal.Rptr.2d 636.) However, it is unsettled under California law whether this type of fraud claim is a matter for the court, as opposed to the arbitrator, to decide. (See Herman Feil, Inc. v. Design Center of Los Angeles (1988) 204 Cal.App.3d 1406, 1416, 251 Cal.Rptr. 895 [holding of the California Supreme Court in Ericksen case left undecided the issue of arbitrability of claims of fraud directed to the arbitration provision]; cf. Herman Feil, Inc. v. Design Center of Los Angeles, supra, 204 Cal.App.3d at pp. 1416, 1418–1419, 251 Cal.Rptr. 895 [for purposes of motion to confirm arbitration award, it was not error for trial court to find arbitrable a tenant's dual claim of fraud in the inducement of the arbitration provision of a lease agreement and in the landlord's performance under the lease].) 12 Because the parties agreed to be bound by California law, we must decide whether the Engallas' claim of fraud directed to the arbitration provision was properly considered and decided by the trial court. We readily conclude that it was.
When read together, sections 1281 and 1281.2, and Civil Code section 1689, subdivision (b)(1), clearly provide for judicial determination of a claim of fraud directed to the making of the arbitration agreement. And section 1290.2 plainly contemplates that this type of fraud claim is to be determined in summary motion proceedings in which declarations and other evidence may be presented. (See Herman Feil, Inc. v. Design Center of Los Angeles, supra, 204 Cal.App.3d at p. 1418, 251 Cal.Rptr. 895; but cf. Rice v. Dean Witter Reynolds, Inc. (1991) 235 Cal.App.3d 1016, 1025, 1 Cal.Rptr.2d 265 [if a jury trial is properly demanded, claim of fraud in the making or execution of the contract must be tried to a jury].) This is the only logical result where, as here, the party objecting to arbitration claims that his or her consent to the arbitration provision was ineffective because it was obtained through fraud. (See Civ.Code, § 1565 et seq.) If there was no effective consent to the arbitration agreement, the nonconsenting party cannot be compelled to submit the dispute to arbitration.
Having decided that the trial court properly considered respondents' claim of fraud—at least insofar as the claim is one of fraud directed to the making of the arbitration agreement—we turn next to the issue whether there was substantial evidence to support the court's finding on that claim. Under Civil Code section 1572, fraud in the making of a contract may be found from “the suggestion, as a fact, of a fact that is not true, by one who does not believe it to be true,” or “the positive assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true though he believes it to be true,” or “the suppression of that which is true, by one having knowledge or belief of the fact,” or “a promise, made without any intention of performing it.” The intent necessary to a finding of fraud is simply the intent to induce one to rely on the representation without having a reasonable ground for believing it to be true. (Continental Airlines, Inc. v. McDonnell Douglas Corp. (1989) 216 Cal.App.3d 388, 405, fn. 4, 264 Cal.Rptr. 779.) Common to all the possible theories of fraud are the elements that the plaintiff must have been unaware of the falsity of, and must have justifiably relied on, the false promise or representation. (See 1 Witkin, Summary of Cal.Law (9th ed.1987) §§ 392–399, pp. 356–360 & § 403, pp. 363–364; 5 Witkin, Summary of Cal.Law (9th ed.1988) § 676, p. 778.)
Under these well-established standards and after a careful review of the record, we conclude that, regardless of the precise theory under which respondents make their claim of fraud directed to the arbitration clause, the evidence presented to the trial court was insufficient to warrant “revocation” of their agreement to arbitrate. The Engallas' primary contention is that the arbitration provision contains the false representations—in the form of a suggestion of fact or a promise—that a neutral arbitrator “shall” be appointed within 60 days of service of a claim arising under the Service Agreement and that a hearing “shall” be held “within a reasonable time thereafter.” Respondents are undoubtedly correct when they argue that Kaiser has long known that neutral arbitrators are rarely appointed within the 60–day time period provided in the Service Agreement. Indeed, in 1989, Kaiser learned of a statistical analysis performed by an expert on arbitration, Professor Francis O. Spalding, who concluded that in only 1 percent (or a total of 2) of cases studied (197 out of a total of 757 cases filed between 1984 and 1986 for which a neutral arbitrator was appointed by November 30, 1988) was a neutral arbitrator appointed within the time period provided by the arbitration provision and that, on average, it took 677 days (approximately 22.6 months) after claim presentation to appoint a neutral arbitrator.
Respondents may also be correct in arguing that Kaiser has long been aware of information indicating that its arbitration process is not—again, on average—as speedy and efficient as originally anticipated, or even as court litigation. For example, in a 1985 speech to the board of directors of the Michigan State Medical Society, a Kaiser physician stated that “despite the timetable included in the arbitration contract, the average time for closure of an arbitration involving Kaiser Permanente is about thirty months.” Then, too, in his 1989 study, Professor Spalding concluded that it took an average of 863 days (approximately 28.8 months) to reach a final resolution of a claim filed in the Kaiser arbitration system. Although the analogy is far from perfect, Kaiser's track record in arbitration compares unfavorably to the roughly 15 to 19 months it took to litigate an average case from the filing of the at-issue memorandum through trial in Alameda County Superior Court during the 1980s. (See Cal.Jud.Council, 1990 Annual Report, p. 80.)
Nevertheless, the statements in the Kaiser arbitration provision about the time for selection of a neutral arbitrator and the scheduling of a hearing cannot reasonably be read as representations of fact or unilateral promises by Kaiser. At most, they describe the rules or method for selection of the arbitrators. Moreover, it is unreasonable for respondents to claim reliance on an absolute 60–day time limit for selection of the neutral arbitrator as a representation of fact or a promise by Kaiser because appointment of the neutral arbitrator requires the cooperation and mutual agreement of the parties. It is true that in an overwhelming majority of cases, the 60–day time limit is not honored. However, there is no way of knowing from this record what percentage of cases exceed the 60–day time limit because of foot-dragging by Kaiser or their counsel, by claimants or their counsel, or because of mutual consent of the parties to continue negotiations for a neutral arbitrator beyond the contractual time limit.
Of course, respondents are correct that appointment of the neutral arbitrator is key to obtaining an efficient and speedy adjudication in the Kaiser arbitration process. Absent a stipulation, discovery cannot proceed until a neutral arbitrator is in place to direct and resolve disputes in that process, and a hearing cannot be held until the parties have completed approved discovery. Respondents were not without recourse, however, when they found themselves beyond the 60–day time limit for appointment of the neutral arbitrator. As Kaiser itself concedes, claimants who want an early arbitration date, but are unable to secure Kaiser's consent to a neutral arbitrator within the 60–day time period, can go to court on the 61st day following service of the claim to obtain an order appointing a neutral. (§ 1281.6.) 13 Kaiser also acknowledges that, upon request, the claimant can obtain a court order setting a deadline for the issuance of an arbitral award. (§ 1283.8.)
Respondents further contend that Kaiser has falsely represented that an arbitration “can be concluded in several months' time,” that its arbitration program “can be fast, only a few months to final decision if parties are cooperative,” and that arbitration “will reduce the time required to reach a settlement” and will “expedite a resolution” of claims asserted by subscribers. Respondents also complain of misrepresentations by Kaiser about the relative costs of arbitration and court litigation, including statements that “both sides” will enjoy cost savings, that the arbitration program will “reduce administrative expenses,” and that use of arbitration “does not increase costs to the members.” The Engallas consider these representations about speed, efficiency, and cost to be, at best, hollow promises and, at worst, outright lies designed to mislead or placate subscribers who might have qualms about Kaiser's arbitration program.
What they have utterly failed to show, however, is that either Mr. Engalla or his employer actually read or relied on any of these statements, which were made in speeches by Kaiser officials and in literature sent to subscribers in the 1970s and early 1980s. Indeed, Mr. Roy, the benefits manager for Mr. Engalla's employer, testified that he did not recall any specific representations about the Kaiser arbitration program other than those contained in the Service Agreement, summaries thereof and amendments thereto. And there is no evidence one way or the other as to what Mr. Engalla may have read or relied on. Obviously, “A party cannot be defrauded by misrepresentations which never reached him․” (Slakey Brothers. Sacramento, Inc. v. Parker (1968) 265 Cal.App.2d 204, 207, 71 Cal.Rptr. 269.) 14
In any event, it is not at all clear that any of the claimed representations or promises was materially false, at least as events played out in this case. A key element of the Engallas' “fraud” theory has to be that they agreed to submit and submitted their medical malpractice claims to arbitration in the good faith belief that it would be faster than the civil courts in resolving those claims, thus maximizing their chances of an adjudication while Mr. Engalla was still alive. While it is apparent from the record that the Engallas' counsel, Mr. Rand, worked very diligently to move the case forward, it is also obvious that his expectations of both arbitration and court procedures were unrealistically optimistic for the instant medical malpractice case. Mr. Rand demanded arbitration on May 31, 1991. Under the terms of the arbitration agreement, Kaiser had a full 60 days—i.e., until July 30—to complete the process of selecting arbitrators. Then, counting Mr. Engalla, there were six claimants to be deposed. By mid-July, Mr. Rand had determined that there were also six physicians and two nurses to be deposed. He noticed these eight depositions for August 26 and 27, asserting that he would thereafter be ready for an arbitration hearing in September. On October 18, however, Mr. Rand noticed depositions for three additional witnesses. As to these percipient witnesses, Mr. Rand acknowledged that it would take at least an additional month after all of these witnesses had been deposed to transcribe the depositions, have the experts review the transcripts, and depose the experts. At the very earliest, that meant conducting an arbitration in late November, a month after Mr. Engalla was expected to and actually died, but, nevertheless, an arbitration that would have been “concluded in several months time.”
Viewed from a slightly different perspective, the Engallas' claim of fraud in the application is that a trial could have been completed in superior court before Mr. Engalla died if only they had not been deceived into submitting to the arbitration process. This claim is highly speculative, at best. Even assuming the fastest “fast track” treatment in superior court, without any pre-trial motions and with the application of the trial-setting preference contained in section 36, subdivision (d), it is extremely unlikely that the parties would have completed the pleading, discovery and trial phases of a civil action in the five-month period from May 31 (when the claims were first presented) to October 24 (when Mr. Engalla died). Indeed, the trial court expressed deep skepticism that a trial could have been had in Alameda County Superior Court on such an expedited timetable.
Respondents further contend that, with respect to the “design and administration” of its arbitration program, Kaiser is a fiduciary for its subscribers with duties fully to disclose information about the nature and implications of that program. (See Ford v. Shearson Lehman American Express, Inc., supra, 180 Cal.App.3d at p. 1020, 225 Cal.Rptr. 895 [“It is the settled law of this state, and elsewhere, that ‘[w]here there exists a relationship of trust and confidence it is the duty of one in whom the confidence is reposed to make full disclosure of all material facts within his knowledge relating to the transaction in question and any concealment of material facts is a fraud.’ ”].) Thus, in addition to their claims that Kaiser has made false and/or misleading statements about the speed, efficiency and cost of its arbitration program, the Engallas maintain that Kaiser has committed fraud simply by failing to inform subscribers that: (1) Kaiser attorneys (both in-house and retained) administer the arbitration program without any independent oversight or review by outsiders, and with an adversarial mindset designed to protect and promote Kaiser's own business interests; (2) The function of selecting a neutral arbitrator is not actually entrusted to the party arbitrators but, rather, is controlled by the parties; and (3) Kaiser has developed systematic advantages for itself in its arbitration program (e.g., in the selection of arbitrators, by maintaining a large database of information about the rulings of Kaiser arbitrators that is not available to claimants).
Kaiser does not seriously dispute the factual underpinnings of these three claims, except to say that claimants' attorneys have access—through informal networking with other plaintiff's attorneys and specialty bar organizations—to a similar store of information about individuals who have served as party or neutral arbitrators in Kaiser arbitrations. Indeed, Kaiser concedes that it has no right to adopt an arbitration clause that is unfair to claimants. (See Health & Saf.Code, § 1367, subd. (h) [contracts made in connection with a health care service plan must be “fair, reasonable, and consistent with the objectives” of licensing statutes].) Rather, Kaiser argues that it should not be held to the standard of a fiduciary when negotiating and administering the arbitration provision contained in its Service Agreements. We agree.
To the extent it is an insurer, Kaiser has a “special relationship” with its insureds (see Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 690, 254 Cal.Rptr. 211, 765 P.2d 373), with heightened duties of good faith and fair dealing in the handling of claims for benefits under the contract of insurance. (Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 425, 158 Cal.Rptr. 828, 600 P.2d 1060.) Similarly, under the Employee Retirement Income Security Act (29 U.S.C. § 1133), and the preamble to the Oliver Tire Service Agreement, Health Plan is a fiduciary for purposes of pre-litigation administration of claims for benefits under the Service Agreement.15
However, when it “negotiates” and enters into an arbitration agreement, Kaiser's relationship with its subscribers is essentially a standard commercial one, with the parties bargaining at arm's length. Both Kaiser and prospective subscribers are free to act in its or their own business interest and to consult with counsel. A prospective subscriber can choose to decline coverage by Kaiser, and select a different health care service plan provided by a competitor who is willing to give more information or more favorable terms. In such an arm's length transaction, the parties normally owe no duty to explain the terms of their contract to one another. (Cohen v. Wedbush, Noble, Cooke, Inc. (9th Cir.1988) 841 F.2d 282, 286–287.) Thus, a showing that Kaiser failed to provide a detailed explanation of its arbitration program to prospective subscribers is not sufficient to avoid the agreement to arbitrate.
Once a claim has been presented for arbitration, the relationship between Kaiser and its subscriber-turned-claimant becomes one of adversaries represented by counsel, with express and implied duties under both the Service Agreement and applicable law. In neither situation is a subscriber justified in claiming that he or she reposed “trust and confidence” in Kaiser, or that Kaiser has obtained control over his or her affairs, such that a fiduciary relationship was created. (Cf. Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal.App.3d 19, 31–33, 136 Cal.Rptr. 378 [“fiduciary” relationship between stockbroker and an elderly, unsophisticated investor].) Accordingly, we decline respondents' invitation to expand Kaiser's duties to disclose the details of its arbitration program beyond those imposed by statute (see, e.g., Health & Saf.Code, § 1363, subd. (a)(10); § 1295, subd. (f)), and by case law (see, e.g., Davis v. Blue Cross of Northern California, supra, 25 Cal.3d at pp. 426–431, 158 Cal.Rptr. 828, 600 P.2d 1060 [when denying claim for benefits under hospital policy, Blue Cross had a duty to apprise patients of the existence of arbitration remedies and procedures for initiating arbitration].)
C. Respondents' Claims of “Fraud in the Application” and “Material Breach” Must be Presented to the Arbitrator.
Of course, respondents do not simply complain of fraud in the making of the arbitration provision. They also allege—and proved to the trial court's satisfaction—that Kaiser committed “fraud in the specific application” of the arbitration provision, i.e., during the course of performance under that provision in the arbitration proceedings below. In that regard, respondents claim that Kaiser intentionally stalled the process to avoid certain elements of damage that were available by contract and by statute while Mr. Engalla was alive, but were no longer recoverable once he died. We are unable to discern any legal basis for concluding that this type of “fraud” claim provides a basis for setting aside the arbitration agreement. The fraud which will justify rescission must induce the making of the contract; fraud related solely to performance will not suffice. (See Crow v. Kenworthy (1939) 30 Cal.App.2d 313, 315, 86 P.2d 154, italics added; and see Civ.Code, § 1689, subd. (b)(1).)
Respondents rely on Frey & Horgan Corp. v. Superior Court (1936) 5 Cal.2d 401, 404–405, 55 P.2d 203, and Weisman v. Johnson (1982) 133 Cal.App.3d 289, 295, 183 Cal.Rptr. 792, for their argument that breach of a “duty to cooperate” by a party to an arbitration agreement will suffice to prevent enforcement of the arbitration clause under a theory of “fraud in the application” of the arbitration clause. These cases cannot be stretched as far as respondents urge. They are more properly invoked in support of a claim of breach of the arbitration agreement or the covenant of good faith and fair dealing implied therein.16
Even if fraud occurring in the course of an arbitration were a cognizable basis for “revocation” of the agreement to arbitrate, however, we do not find sufficient evidence in the record of the summary trial court proceedings to support such a claim. At least to this point, there is no evidence of any misrepresentation or false promise by Kaiser or its attorneys on which Mr. Engalla, Mr. Rand, or respondents justifiably relied to their detriment during the course of the arbitration proceedings. Respondents' principal argument in this regard is that Mr. McComas feigned uncertainty about their agreement to have Judge Cooney serve as the neutral arbitrator, and misrepresented his availability, leading them to believe that it was “unrealistic” to expect Judge Cooney to conduct the arbitration hearing in September or October 1991. This argument seriously distorts the meaning of a single word used in one of the dozens of letters exchanged in this case. In that letter of October 7, Mr. McComas said:
“You have written advising that you wish to set this matter for an arbitration hearing at an early date. Despite your stated desire to so do, neither you nor your clients have agreed to the appointment of a neutral arbitrator. At one point, I was advised by Michael Ney, defendants' party arbitrator, that you were in agreement that Judge Robert Cooney could serve as neutral arbitrator, but only if the case could be set for an arbitration hearing before the end of September, 1991. At that point in time, that kind of time schedule was unrealistic. The end of September has come and gone. To this date, neither you nor your clients have agreed to the appointment of a neutral arbitrator. Obviously, this case cannot proceed to an arbitration hearing unless and until neutral arbitrator is appointed.
“We have proposed several persons to act as neutral arbitrator in this case. You apparently agreed to Judge Cooney with an unrealistic condition.” (Italics added.)
Respondents argue that, in this letter, Mr. McComas “affirmatively misrepresented that a September hearing was unrealistic for Judge Cooney when, in fact, he had not explored the subject with Judge Cooney, who was available.” (Italics in original.) Mr. McComas' October 7 letter, fairly read, contains no such misrepresentation. If he had never discussed the matter with Judge Cooney, Mr. McComas could not have known that the judge was in fact available for an arbitration in September and October.17 The plain import of Mr. McComas' October 7 letter is, thus, that the case was simply not ready for a hearing because no neutral arbitrator had been appointed and a great deal of planned discovery still needed to be completed by the parties.18
Respondents also rely on a claim that Ms. Shiffrin misled Mr. Rand about Kaiser's willingness to expedite the arbitration proceedings. There is no merit to this claim. Ms. Shiffrin promptly responded to Mr. Rand's request for a copy of the arbitration provision, arranged for expedited copies of Mr. Engalla's Hayward medical records, and assigned the case to outside counsel who would be responsible for contacting Mr. Rand “in the near future” with Kaiser's party arbitrator designation. There was nothing false or misleading about this, or any subsequent communication from Ms. Shiffrin.
On the other hand, there may well be substantial evidence that Kaiser and its counsel exhibited “a cavalier attitude toward time limits,” especially when compared to Mr. Rand's diligence in trying to bring the case to an arbitration hearing before his client was expected to and did die. It is possible to infer from his correspondence of October 7 that Mr. McComas was attempting to delay the appointment of a neutral arbitrator by expressing uncertainty about Mr. Rand's agreement to have Judge Cooney serve in that role. It is also possible to infer from the attorneys' correspondence, and from subsequent deposition testimony, that Mr. McComas stalled the depositions of the treating physicians in order to buy time with which to prepare them on theories developed by expert consultants. Likewise, it is possible to infer from the fact that Mr. McComas refused to stipulate to Mr. Rand's many suggestions for expediting the process that it was taking full advantage of its dominant position in an adhesive contractual relationship. While some or all of this conduct may have been improper under statutes that regulate lawyers' actions in litigation (see, e.g., Rosemont v. Superior Court (1964) 60 Cal.2d 709, 712, 715, 36 Cal.Rptr. 439, 388 P.2d 671), and morally reprehensible if undertaken by Kaiser and its attorneys simply to stall the litigation until the claimant died, it is not the stuff of which a claim of fraud is made.
That said, we do not mean to imply that the Engallas are barred from recovery of the elements of damage lost because they were unable to complete an arbitration in the Kaiser system while Mr. Engalla was still alive. At most, however, respondents' evidence to this point establishes a breach of the arbitration agreement or the covenant of good faith and fair dealing implied by law therein. In this regard, we disagree with the suggestion in Kaiser's brief that it has no further “duty to cooperate” once a claim is presented for arbitration. Far from it. Kaiser has contractual obligations to appoint its party arbitrator within 30 days of service of the claim, to negotiate in good faith for appointment of a neutral arbitrator within 60 days, and to proceed toward a hearing within a “reasonable” time thereafter. It has also specifically agreed to be bound by procedural rules contained in the California Code of Civil Procedure, including those pertaining to discovery and sanctions for discovery abuse. Arbitrators are free to fashion any relief they consider “just and fair under the circumstances existing at the time of the arbitration” for violation of any of these contractual duties. (See Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 383, 36 Cal.Rptr.2d 581, 885 P.2d 994.)
Alternatively, respondents may have been entitled to remedies under statutes designed to control and/or punish discovery abuse. We agree with Kaiser when it argues that the neutral arbitrator has “ample power to rectify abusive conduct which comes to his or her attention during the arbitration proceeding.” Under California law, once a neutral arbitrator is appointed for a Kaiser arbitration (whether by agreement or by court order), he or she controls the scope and course of discovery and can impose discovery sanctions—just as the superior court can—where warranted by a party's dilatory conduct or bad faith. (See §§ 1283.05, subds. (b)–(c), 1283.1.) The arbitrator may also look to other procedural statutes as a “ ‘measuring rod’ ” with which to assess and then to punish abusive or dilatory conduct by the parties or their lawyers in the arbitration. (See, e.g., Brock v. Kaiser Foundation Hospitals (1992) 10 Cal.App.4th 1790, 1808, 13 Cal.Rptr.2d 678, citing Young v. Ross–Loos Medical Group, Inc. (1982) 135 Cal.App.3d 669, 673, 185 Cal.Rptr. 536.) 19 In addition, there is nothing in the Code of Civil Procedure or the parties' arbitration agreement to prevent the neutral arbitrator (or the court, if an order pursuant to section 1281.6 is sought) from imposing sanctions for abusive conduct in the process provided for selection of the neutral arbitrator. Then, too, as Kaiser also acknowledges in its brief, “Should the neutral fail to correct misconduct which compromises the fairness of the proceeding, the courts can vacate the award for ‘corruption.’ ” (See § 1286.2, subd. (a); see also 9 U.S.C. § 10.)
The point is that respondents' claim of “fraud in the application”—whether denominated as such, or as a claim for breach of the arbitration agreement or the covenant of good faith and fair dealing—is predicated on the existence of duties created by the arbitration agreement and must be decided by the arbitrator. Any other approach would seriously compromise the utility of arbitration, allowing a party who has agreed to arbitrate the right to withdraw from a pending arbitration whenever he or she experiences frustration at the pace of the proceedings. A recent decision by the Fourth District Court of Appeal, Titan Value Equities Group, Inc. v. Superior Court (1994) 29 Cal.App.4th 482, 35 Cal.Rptr.2d 4 (Titan ), supports this conclusion.
In Titan, two investors filed suit in 1992 against Titan/Value Equities Group, Inc., and other defendants to recover losses suffered in securities trading. The defendants promptly moved to stay the litigation and to compel arbitration before the National Association of Securities Dealers in accordance with an agreement the investors had signed when they opened securities accounts in 1990. (29 Cal.App.4th at pp. 484–485, 35 Cal.Rptr.2d 4.) When the investors agreed to stipulate to arbitration, the trial court denied defendants' petition as moot and stayed the litigation. However, the arbitration stalled as a result of the bankruptcy of two individual defendants, discovery disputes, and scheduling conflicts. (Id. at p. 485, 35 Cal.Rptr.2d 4.)
In February 1994, the investors' counsel appeared in court for a “progress conference,” expressed frustration about the arbitration, and asked the trial court to resume control of the case. The trial court agreed to reassert its jurisdiction and set the case for trial on June 10, 1994. (Titan, supra, 29 Cal.App.4th at p. 485, 35 Cal.Rptr.2d 4.) In response, the defendants again moved to stay the superior court action, and sought an order compelling arbitration. The trial court issued an order compelling arbitration but imposed numerous conditions, including one requiring defendants to respond to certain discovery requests. The trial court further ordered the parties to conduct an arbitration before the end of June 1994 and, failing that, to return to court for trial on the previously-established trial date. (Id. at pp. 485–486, 35 Cal.Rptr.2d 4.)
Defendants sought writ review of this ruling, arguing that the trial court exceeded its jurisdiction by attempting to control the conduct of the litigation while it was pending in the arbitral forum. (Titan, supra, 29 Cal.App.4th at pp. 486–487, 35 Cal.Rptr.2d 4.) The Fourth District agreed and held that, with only a few exceptions expressly provided by statute (see § 1281.6 [power to appoint an arbitrator where the method chosen by the parties has failed], § 1281.8 [power to grant provisional remedies where a proper award would by rendered ineffectual without the provisional relief]; and § 1285 [power to confirm, correct, or vacate the arbitration award on specified grounds] ), the trial court is not authorized to interfere in a matter that has been submitted to arbitration. (Titan, supra, 29 Cal.App.4th at p. 487–488, 35 Cal.Rptr.2d 4.) “ ‘An arbitration has a life of its own outside the judicial system.’ [Citation.] The trial court may not step into a case submitted to arbitration and tell the arbitrator what to do and when to do it; it may not resolve procedural questions, order discovery, determine the status of claims before the arbitrator or set the case for trial because of a party's alleged dilatory conduct. It is for the arbitrator, and not the court, to resolve such questions.” (Id. at p. 489, 35 Cal.Rptr.2d 4, quoting Byerly v. Sale (1988) 204 Cal.App.3d 1312, 1316, 251 Cal.Rptr. 749; see also Brock v. Kaiser Foundation Hospitals, supra, 10 Cal.App.4th at p. 1796, 13 Cal.Rptr.2d 678; McRae v. Superior Court (1963) 221 Cal.App.2d 166, 171, 34 Cal.Rptr. 346.)
Of course, unlike Titan, supra, 29 Cal.App.4th 482, 35 Cal.Rptr.2d 4, the instant case did not involve a court-ordered stay of litigation pending completion of arbitration proceedings (§ 1282.4), a situation in which the court is said to retain “ ‘vestigial’ jurisdiction” over the matter submitted to arbitration. (Titan, supra, at p. 487, 35 Cal.Rptr.2d 4, quoting Brock v. Kaiser Foundation Hospitals, supra, 10 Cal.App.4th at p. 1796, 13 Cal.Rptr.2d 678.) It is also distinguishable in that the trial court here did not simply impose conditions on the conduct of the arbitration; it assumed full jurisdiction of the matter. Nevertheless, the reasoning of Titan applies. If the trial court lacks the authority to impose conditions on a pending arbitration in order to rectify a party's dilatory conduct, a fortiori, it lacks the power to completely remove the matter from the arbitral forum for that reason. Unless otherwise provided by statute or by the parties' agreement, it is the job of the arbitrator—and not the court—to grant appropriate relief for delay in bringing a pending arbitration to a resolution. (Titan, supra, 29 Cal.App.4th at pp. 487–488, 35 Cal.Rptr.2d 4.)
D. The Engallas' “Waiver” and “Unconscionability” Claims Do Not Provide a Basis for Avoiding Their Contractual Obligation to Submit to Arbitration All Causes of Action “Arising Out of” the Service Agreement.
Respondents assert additional, independent grounds for avoiding arbitration. Specifically, although the trial court did not so find, they contend that Kaiser “waived” its contractual right to arbitrate the claims asserted in this case 20 by engaging in dilatory conduct in the aborted arbitration proceedings. They further contend that the arbitration provision is so “unconscionable” as to be unenforceable. Neither of these theories provides a basis for denying Kaiser's petition to compel arbitration.
It is well-established that the right to compel arbitration is a contractual right which is subject to waiver, and that such waiver may be express or implied from the party's conduct. (See § 1281.2; Davis v. Blue Cross of Northern California., supra, 25 Cal.3d at p. 425, 158 Cal.Rptr. 828, 600 P.2d 1060.) “A party seeking to prove waiver of a right to arbitrate must demonstrate (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.” (See Britton v. Co-op Banking Group (9th Cir.1990) 916 F.2d 1405, 1412.) However, because of the strong public policy favoring arbitration, waiver will not be inferred and a party who asserts a claim of waiver bears a “heavy burden” of proof. (Thorup v. Dean Witter Reynolds, Inc. (1986) 180 Cal.App.3d 228, 234, 225 Cal.Rptr. 521 [FAA case]; accord Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 189, 151 Cal.Rptr. 837, 588 P.2d 1261 [same, under the California Arbitration Act].) Under California law, questions of waiver of the right to compel arbitration are for the court to decide. (§ 1281.2; and see Printing Specialties & Paper Products Union v. Litton Financial Printing Co. (1982) 129 Cal.App.3d 100, 104–105, 181 Cal.Rptr. 6.)
The California case on which respondents primarily rely for their waiver argument, Weisman v. Johnson, supra, 133 Cal.App.3d at page 295, 183 Cal.Rptr. 792, does not extend so far as to authorize a finding of waiver in this case. Indeed, there is no authority under either California or federal law 21 to support a court in ruling that a party has “waived” its contractual right to arbitrate by engaging in dilatory conduct in a pending arbitration proceeding.
Weisman v. Johnson, supra, 133 Cal.App.3d 289, 183 Cal.Rptr. 792, deals with a party's intransigent refusal to submit to the jurisdiction of any forum for a hearing on the merits of four distinct contract-based claims, only one of which was covered by a written arbitration clause under which the parties agreed to arbitrate “ ‘any and all disputes arising [under the contract] in accordance with the arbitration act of the Province of Ontario.’ ” The plaintiff, Weisman, first demanded payment of the amounts due on all four contracts in April 1979, but the defendant, Johnson, flatly denied all liability for the amounts owed. (Id. at pp. 291, 293, 183 Cal.Rptr. 792.) Weisman then filed a civil action in Los Angeles County in December 1979. In response, Johnson successfully moved to quash the substituted service by which Weisman had attempted to obtain personal jurisdiction over him. (Id. at pp. 291–292, 183 Cal.Rptr. 792.) When Weisman filed an amended complaint against Johnson and a corporation of which he was the sole shareholder and sole director, Johnson again moved to quash service on the ground that he was not a resident of California and that the action should be tried either in Ontario or in New York, where he allegedly resided. Johnson also moved to stay or dismiss the civil action, but did not assert any right to have the matter decided by an arbitrator. Weisman successfully opposed the second motion to quash with uncontroverted evidence that Johnson had filed for divorce in Los Angeles Superior Court in May 1979, alleging that he had been a resident of Los Angeles County for over three months, and that Johnson had recently given a newspaper interview, accompanied by his photograph, from his “ ‘huge, rambling Los Angeles home.’ ” (Id. at pp. 292, 294, 183 Cal.Rptr. 792.)
It was not until July 11, 1980—more than a year and three months after Weisman had originally demanded payment—that Johnson finally petitioned the court to compel arbitration, taking the position that the matter should be arbitrated in Toronto. However, Johnson refused to stipulate to the jurisdiction of the Ontario Courts or the Ontario Arbitration Panel. The trial court denied Johnson's petition to compel arbitration, ruling that there was no agreement to arbitrate three of the four contract claims and that, as to the fourth claim, the defendants had “ ‘․ waived their right to arbitrate.’ ” (Weisman v. Johnson, supra, 133 Cal.App.3d at p. 292, 183 Cal.Rptr. 792.) The court of appeal affirmed holding that, on these facts, there was ample evidence Johnson had acted in bad faith, violated a “duty to cooperate” implied by law in the agreement to arbitrate (see Frey & Horgan Corp. v. Superior Court, supra, 5 Cal.2d at pp. 404–405, 55 P.2d 203) and had, thus, lost his right to compel specific performance of the arbitration agreement. (Weisman v. Johnson, supra, 133 Cal.App.3d at pp. 293–295, 183 Cal.Rptr. 792.)
The instant case is readily distinguishable from Weisman, supra. The conduct of which respondents complain all occurred after the parties mutually agreed that the Engallas' medical malpractice claims were arbitrable and voluntarily submitted to the arbitral forum. Nothing in Kaiser's or its attorneys' conduct indicated that it was withdrawing its consent to arbitrate the dispute. In the circumstances of this case, and in light of the strong public policy favoring arbitration, we will not infer a waiver by Kaiser of its contractual right to arbitrate. (Thorup v. Dean Witter Reynolds, Inc., supra, 180 Cal.App.3d at p. 234, 225 Cal.Rptr. 521; Doers v. Golden Gate Bridge, Highway & Transp. Dist., supra, 23 Cal.3d at p. 189, 151 Cal.Rptr. 837, 588 P.2d 1261.)
Respondents contend, however, that certain language in Weisman, supra, supports the trial court's decision to reject Kaiser's petition to compel arbitration on “waiver” grounds. That is, the Weisman court stated, “A proceeding to compel arbitration is in essence a suit in equity to compel specific performance of a contract. [Citation.] Accordingly, equitable principles come into play and the actions of a party seeking to compel arbitration can be considered by the trial court and this court. Specifically, no one can take advantage of his own wrong. [Citation.]” (133 Cal.App.3d at p. 295, 183 Cal.Rptr. 792.) There is a certain appeal to this reasoning in the factual circumstances of Weisman and the instant case. The defendant in Weisman had clearly engaged in wrongful, dishonest conduct in his efforts to avoid an adjudication of the plaintiff's claims. Similarly, as we have already discussed, the trial court was fully justified in finding that Kaiser had a “cavalier attitude” about moving this case forward, to the Engallas' prejudice. Moreover, to the extent it can be inferred from the evidence that Kaiser was intentionally “dragging its feet” to avoid paying damages to a patient with a terminal illness for which Kaiser health care providers may have been partially responsible, Kaiser's conduct was truly reprehensible.
Nevertheless, we do not find the Weisman court's reasoning to be controlling in a case in which the parties have already submitted their dispute to arbitration when the wrongful conduct occurs. In such a case, there is no reason to assume that a neutral arbitrator cannot or will not take charge of the situation and impose appropriate sanctions for the misconduct. (See Titan, supra, 29 Cal.App.4th at p. 488, 35 Cal.Rptr.2d 4; Brock v. Kaiser Foundation Hospitals, supra, 10 Cal.App.4th at p. 1802, fn. 10, 13 Cal.Rptr.2d 678.) Besides, as we have already discussed, any party engaging in wrongful, dishonest conduct in the arbitration runs the risk that a court will ultimately vacate on grounds of “corruption” any award that party may obtain. (See § 1286.2, subd. (a); see also 9 U.S.C. § 10.)
Respondents' final challenge to the Kaiser arbitration program is an assertion that it is founded on an unconscionable contract of adhesion.22 Specifically, they contend that the arbitration provision is inherently unfair because it calls for a tripartite panel of two party arbitrators and one neutral arbitrator, entailing additional costs to be borne by claimants, and because Kaiser does not entrust administrative oversight to an independent organization such as JAMS–Endispute or the American Arbitration Association. Presumably, the trial court had these arguments in mind when it found that the Kaiser arbitration system is “corrupt ․ in general.”
“Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or ‘adhering’ party will not be enforced against him. [Citations.] The second—a principle of equity applicable to all contracts generally—is that a contract or provision, even if within the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or ‘unconscionable.’ ” (Graham v. Scissor–Tail, Inc. (1981) 28 Cal.3d 807, 828, 831, 171 Cal.Rptr. 604, 623 P.2d 165 [denying enforcement of unconscionable provision that required arbitration before an arbitrator allied with one party, but remanding with instructions that the superior court appoint a neutral arbitrator]; see also Dryer v. Los Angeles Rams (1985) 40 Cal.3d 406, 414, 220 Cal.Rptr. 807, 709 P.2d 826.) The ultimate test of unconscionability is whether the contractual provision “shocks the conscience.” (California Grocers Assn. v. Bank of America (1994) 22 Cal.App.4th 205, 213–215, 27 Cal.Rptr.2d 396 [rejecting unconscionability challenge to $3 charge for returned checks, which was at the low end of market prices charged by banks and was not “so exorbitant”].) However, even a finding of unconscionability as to a particular aspect of an arbitration agreement will not justify denial of a petition to compel arbitration; rather, because of the strong public policy favoring arbitration, courts will ordinarily enforce the arbitration agreement without requiring use of the offensive procedure(s). (Graham v. Scissor–Tail, Inc., supra, 28 Cal.3d at pp. 819–820, 171 Cal.Rptr. 604, 623 P.2d 165.) Under these standards, we conclude that the trial court's finding of unconscionability was not supported by substantial evidence.
Although the utility of party arbitrators is questionable where the parties are represented by counsel, such a requirement is not so harsh or surprising as to be deemed unconscionable. Claimants have clear notice of the requirement for tripartite panels, a requirement which is plainly within the contemplation of the California arbitration statutes. (See § 1282.) This is not a case, as was Patterson v. ITT Consumer Financial Corp. (1993) 14 Cal.App.4th 1659, 18 Cal.Rptr.2d 563, of “hidden procedures” that unjustifiably increase the cost of adjudicating relatively small claims. The instant case involves claims for hundreds of thousands of dollars in damages, prosecuted by a large San Francisco law firm. As Kaiser concedes, it would be a wholly different story if Kaiser was insisting on a panel of three arbitrators for a very small claim for damages. (See id. at pp. 1665–1666, 18 Cal.Rptr.2d 563.)
Respondents' complaint about the lack of independent administrative oversight is really just a reiteration of its arguments that the contractual mechanism for appointment of a neutral arbitrator is not self-executing, and subject to delays, and that Kaiser has superior access to information about the pool of potential arbitrators. These allegations do not fare any better when cast as a claim of “unconscionability” than they did when framed as charges of fraud. As we have explained, much of the delay in the appointment of a neutral arbitrator that occurred in this case could have been avoided if respondents had proceeded to court immediately after the 60–day contractual period expired to obtain an order pursuant to section 1281.6. We will not rewrite the party's arbitration agreement to replace this judicial oversight with that of a private arbitration organization.
E. All of the Causes of Action in the Engallas' Civil Complaint are Arbitrable.
Finally, we turn to the issue whether all of the causes of action asserted by the Engallas in their complaint are subject to arbitration. “[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” (AT & T Technologies v. Communications Workers (1986) 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648; and see Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street, supra, 35 Cal.3d at p. 323, 197 Cal.Rptr. 581, 673 P.2d 251.) Under both California and federal law, the question whether the parties agreed to submit a given dispute to arbitration is for the court to decide, unless the parties have “clearly and unmistakably” agreed to submit the question of arbitrability to the arbitrator. (First Options of Chicago, Inc. v. Kaplan, supra, 514 U.S. at p. ––––, 115 S.Ct. at p. 1924; AT & T Technologies v. Communications Workers, supra, 475 U.S. at p. 649, 106 S.Ct. at p. 1418; see also Parker v. Twentieth Century–Fox Film Corp. (1981) 118 Cal.App.3d 895, 901, 173 Cal.Rptr. 639). No such evidence appearing in this case, it is properly a judicial function to determine whether this entire dispute must be sent to arbitration.
In making that determination, we are mindful of a well-established principle that has been endorsed by the high courts of both California and the nation: “Doubts as to whether an arbitration clause applies to a particular dispute are to be resolved in favor of sending the parties to arbitration.” (United Transportation Union v. Southern Cal. Rapid Transit Dist. (1992) 7 Cal.App.4th 804, 808, 9 Cal.Rptr.2d 702; see also AT & T Technologies v. Communications Workers, supra, 475 U.S. at p. 650, 106 S.Ct. at p. 1419.) Indeed, as one California court has observed, “The general rule is that arbitration should be upheld unless it can be said with assurance that an arbitration clause is not susceptible to an interpretation covering the asserted dispute.” (Bos Material Handling, Inc. v. Crown Controls Corp. (1982) 137 Cal.App.3d 99, 105, 186 Cal.Rptr. 740.)
The Kaiser arbitration clause provides, “Any claim which arises from alleged violation of any duty incident to or arising out of this Agreement, irrespective of the legal theories upon which the claim is asserted, including any claim for medical or hospital negligence and premises liability ․ shall be submitted to binding arbitration.” This broadly-worded provision clearly encompasses each cause of action asserted by the Engallas in their complaint. The claims for professional negligence are within the express terms of the arbitration clause. The causes of action for breach of contract, breach of the covenant of good faith and fair dealing, abuse of process, and fraud all arise from the same conduct by Kaiser and its attorneys during the aborted arbitration and involve alleged violation of duties “incident to or arising out of” the arbitration clause, which is a part of the Service Agreement. As all of respondents' claims have their “roots” in the Service Agreement, we conclude that they are all subject to arbitration as provided therein. (Izzi v. Mesquite Country Club (1986) 186 Cal.App.3d 1309, 1315, 231 Cal.Rptr. 315; Bos Material Handling, Inc. v. Crown Controls Corp., supra, 137 Cal.App.3d at p. 106, 186 Cal.Rptr. 740.)
III. Writ Proceedings, Nos. A063427 And A063547
The Discovery Order Must be Vacated and Remanded for “Reconsideration” by the Arbitrator.
The trial court granted the Engallas' motion to compel production of portions of fourteen documents which, it believed, fell within the “crime-fraud” exception to the attorney-client privilege. The trial court also rejected the Engallas' claim that Kaiser had “waived” any attorney-client privilege or work product protections for a number of additional documents by partial disclosure of their contents. The trial court's discovery rulings were made, in part, before and, in part, after finding fraud in both the “inducement” and in the “specific application” of the arbitration provision.
In light of our conclusion that the trial court erred by refusing enforcement of the arbitration provision, the trial court's discovery order cannot stand, at least not in its present form. Just as the parties agreed that the instant claims must be submitted to an arbitrator in a proceeding governed by the California Code of Civil Procedure, so did they agree that their discovery disputes would be entrusted to the arbitrator for resolution. (§§ 1283.1, 1238.05; and see Titan, supra, 29 Cal.App.4th at p. 488, 35 Cal.Rptr.2d 4; Brock v. Kaiser Foundation Hospitals, supra, 10 Cal.App.4th at p. 1802, fn. 10, 13 Cal.Rptr.2d 678.) We, therefore, conclude that the discovery matter must be “reconsidered” by the arbitrator to determine whether the documents respondents are seeking are subject to disclosure either under the “crime-fraud” exception or because of “waiver” by partial disclosure. The arbitrator must also determine whether the documents are relevant, not to the issue of enforceability of the arbitration clause, but to the Engallas' substantive claims of fraud, breach of contract, breach of the covenant of good faith and fair dealing, and abuse of process. Accordingly, we will vacate the trial court's discovery order without prejudice to the Engallas' right to renew their motion to compel before the neutral arbitrator.
For all the foregoing reasons, the judgment of the trial court is reversed and the matter remanded with directions to enter an order compelling arbitration of respondents' claims of professional negligence, fraud, breach of contract, breach of the covenant of good faith and fair dealing, and abuse of process. We also vacate the trial court's order compelling disclosure of attorney-client privileged and work product documents, but do so without prejudice to respondents' right to renew their motion before the neutral arbitrator. The parties shall bear their own costs on appeal.
1. Initially, appellants asserted only claims for professional negligence based on an alleged failure of Kaiser medical personnel to diagnose Mr. Engalla's cancer sooner, and loss of consortium and support by his wife and children, respectively. After submitting these claims for arbitration—and becoming frustrated by delays in the process—appellants filed a court action alleging claims of professional negligence, breach of contract, fraud, breach of the covenant of good faith and fair dealing, and abuse of process.
2. Mr. Rand had previously handled a malpractice claim against Kaiser and, thus, knew of the arbitration requirement.
3. The relevant portions of the Kaiser arbitration provision 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․”
4. Mr. 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.
5. All further statutory references are to the Code of Civil Procedure unless otherwise indicated.
6. Respondents claim that Mr. 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, Mr. 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 the Engallas had agreed to Judge Cooney's appointment, Mr. McComas managed to delay the appointment for over six weeks.
7. The trial court appointed the Honorable Harry Low, Ret., to preside over the depositions, which were taken of Mr. Rand, Mr. McComas, Ms. Shiffrin, and a number of other Kaiser personnel, including Scott Fleming (Kaiser's former general counsel, who initially designed and drafted the arbitration provision), Arthur Bernstein (Kaiser's senior counsel who assisted Mr. Fleming and who was assigned the task of explaining the program to large group subscribers and giving speeches to large organizations), the chief (Dr. Louise Chiu) and senior counsel (Milton Cooper), respectively, of Kaiser's Northern California Regional Legal Department. The depositions of party arbitrators Ney and Molligan were also taken.
8. Under 9 U.S.C. section 2, “A written provision ․ to settle by arbitration a controversy thereafter arising ․ or to submit to arbitration an existing controversy ․ shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. California has a virtually identical provision, which states, “A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (§ 1281.)
9. In that case, the Court accepted the parties' agreement that a life-time “Termite Protection Plan” provided to the plaintiff homeowners by Allied–Bruce Terminix Companies and guaranteed by Terminix International “involved interstate commerce,” because of the multistate nature of the defendant corporations and the fact that the termite-treating and house-repairing materials used by Allied–Bruce came from outside Alabama, where the home was located. The Alabama statute that invalidated the arbitration provision contained in the Termite Protection Plan was, thus, preempted. (Ibid.) In addition, the Court denied a request by the respondents, with the support of 20 attorney generals to overrule Southland v. Keating, supra, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1. (Allied–Bruce Terminix Cos. v. Dobson, supra, 513 U.S. at p. –––– – ––––, 115 S.Ct. at pp. 838–839.)
10. The United States Supreme Court has explained why the FAA does not prevent enforcement of agreements to arbitrate under different rules than those set forth in the federal statute: “Indeed, such a result would be quite inimical to the FAA's primary purpose of ensuring that private agreements to arbitrate are enforced according to their terms. Arbitration under the [FAA] is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate [citation], so too may they specify by contract the rules under which that arbitration will be conducted.” (Volt Info. Sciences, supra, 489 U.S. at p. 479, 109 S.Ct. at p. 1256.)
11. By contrast, fraud in the inducement of the underlying contract is not a defense to enforcement of an arbitration clause contained therein. (Prima Paint v. Flood & Conklin (1967) 388 U.S. 395, 403–404, 87 S.Ct. 1801, 1805–1806, 18 L.Ed.2d 1270.) As the Prima Paint Court explained, “Arbitration clauses are ‘separable’ from the contracts in which they are embedded ․,” and are enforceable despite defenses to the underlying contract. (Ibid.) Thus, claims that the underlying contract was procured by fraud are, themselves, subject to arbitration. (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street, supra, 35 Cal.3d at p. 323, 197 Cal.Rptr. 581, 673 P.2d 251.) In this case, the Engallas have expressly disavowed any claim that the Service Agreement was procured by fraud.
12. In arguing that fraudulent conduct by Kaiser rendered the arbitration provision in the Service Agreement unenforceable, respondents rely on Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal.App.3d 19, 136 Cal.Rptr. 378, Strotz v. Dean Witter Reynolds, Inc. (1990) 223 Cal.App.3d 208, 272 Cal.Rptr. 680, and Ford v. Shearson Lehman American Express, Inc. (1986) 180 Cal.App.3d 1011, 225 Cal.Rptr. 895. These cases are inapposite. They involve allegations of “fraud that permeates the entire contract,” including the arbitration provision, a type of fraud which has been held to void the entire agreement. (See Ford v. Shearson Lehman American Express, Inc., supra, 180 Cal.App.3d at p. 1019, 225 Cal.Rptr. 895.) In this case, there are no allegations or evidence of fraud in the making or performance of the Service Agreement.
13. Respondents contend, however, that they did not resort to court on the 61st day because Mr. McComas “concealed” his true intent of delaying both the selection of a neutral arbitrator and the arbitration itself so that any award would be entered after Mr. Engalla had died. Although the trial court apparently accepted this excuse, we are unable to discern any legal or factual basis for such a conclusion. As even Kaiser recognizes, respondents were entitled to bring a petition in superior court in early August 1991 to compel appointment of a neutral arbitrator and, therein, to prove to the trial court what they are belatedly trying to prove to this court: That the 60–day selection process provided by the parties' contract had “failed.” (§ 1281.6; see also American Home Assurance Co. v. Benowitz (1991) 234 Cal.App.3d 192, 201, 285 Cal.Rptr. 626.)
14. Respondents rely on Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 219, 197 Cal.Rptr. 783, 673 P.2d 660, to argue that it is sufficient to show that Mr. Engalla and his employer were the targets of a “long-term advertising campaign” by Kaiser, and that they are not required to prove reliance on any of the “specific advertisements” in order to establish their claim of fraud. We disagree. Unlike the children to whom a cereal company's broad advertising campaign was directed, Mr. Roy was a sophisticated executive of a large manufacturer. We presume that Mr. Engalla, who was highly educated, was a sophisticated businessman as well. Moreover, Committee on Children's Television, Inc. v. General Foods Corp., supra, was an appeal from an order sustaining a demurrer to a complaint for advertising fraud in a class action, in which the court held that allegations about thousands of misrepresentations on various media over a span of four years were sufficient to satisfy the specificity requirement for pleading common law fraud claims on behalf of a group of individual children, notwithstanding the fact that there was insufficient information to show that any child (or parent) acted in reliance to any particular misrepresentation. (35 Cal.3d at pp. 217–219, 197 Cal.Rptr. 783, 673 P.2d 660.) In this case, there is no evidence that Mr. Engalla or his employer relied on either a single misrepresentation or a “campaign of advertising” in deciding to accept Kaiser's offer of health care coverage under an agreement containing an arbitration provision.
15. Because there is no issue in this appeal about a failure by Kaiser to provide Mr. Engalla or his family with adequate information about his medical condition or treatment, we express no opinion about Kaiser's status as a fiduciary with respect to the provision of health care services to its subscribers.
16. To the extent they support respondents' theory of “waiver,” Weisman and Frey & Horgan Corp. will be discussed in more detail in section II.D., post.
17. Citing Boutwell v. Kaiser Foundation Health Plan (1988) 206 Cal.App.3d 1371, 1374, 254 Cal.Rptr. 173), Kaiser further contends that it was Mr. Rand's duty, as the attorney prosecuting the claim, to contact Judge Cooney to arrange for a conference and hearing date. Kaiser reads too much into the Boutwell case. Under the plain terms of the Kaiser arbitration provision, it is the duty of the two-party arbitrators to “select” the neutral arbitrator, and the duty of the neutral arbitrator to designate the time and place for the arbitration hearing.
18. This reading of Mr. McComas' October 7 letter is all the more clear when placed in the context of several other letters exchanged between counsel. Mr. Rand first agreed to Judge Cooney on September 5, “provided that he can be available to commence this matter this month,” but also proposed two alternative retired judges to serve as neutral arbitrator. Mr. Rand followed up with an additional letter on September 18, asking for confirmation of his “agreement to one of Mr. Ney's suggestions.” Mr. McComas did not respond until September 24, at which time he stated, “I was advised at one point that plaintiffs were in agreement that Judge Robert Cooney could act as neutral arbitrator in this case. [¶] If for some reason Judge Cooney is not acceptable to you and your clients as a neutral arbitrator, please advise.” Mr. Rand responded by letter dated September 26, in which he reiterated that his agreement to Judge Cooney had been conditional: “We had agreed to Judge Cooney only if he was going to be available to commence this arbitration in the very near future. I am still waiting to hear from you or Mr. Ney to determine whether his availability has been confirmed.” (Italics added.)
19. Thus, for example, if a neutral arbitrator were appointed within the 60–day period provided by the Service Agreement (or shortly thereafter pursuant to section 1281.6) and Kaiser were to engage in misconduct thereafter in order to prevent an arbitration during the claimant's lifetime, it is possible that, upon request by the offended party, the arbitrator could dismiss the arbitration (see, e.g., § 2023, subd. (b)(4)) without prejudice, allowing the claimant to proceed to superior court within the period provided by the applicable statute of limitations. (See Brock v. Kaiser Foundation Hospitals, supra, 10 Cal.App.4th at p. 1808, 13 Cal.Rptr.2d 678.)
20. This is a variant of the argument that Kaiser materially breached the arbitration agreement and, thereby, forfeited its right to compel arbitration.
21. Quite to the contrary, under federal law, the Ninth Circuit has held that claims of waiver based on a party's dilatory conduct in the selection of an arbitrator must be submitted to the arbitrator. (ATSA of California, Inc. v. Continental Ins. Co. (9th Cir.1983) 702 F.2d 172, 175; see also John Wiley & Sons, v. Livingston (1964) 376 U.S. 543, 556–558, 84 S.Ct. 909, 917–919, 11 L.Ed.2d 898 [“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.”].)
22. There is no dispute that the arbitration provision is adhesive. (Victoria v. Superior Court (1985) 40 Cal.3d 734, 743, 222 Cal.Rptr. 1, 710 P.2d 833; and see Neal v. State Farm Insur. Cos. (1961) 188 Cal.App.2d 690, 694, 10 Cal.Rptr. 781 [defining contract of adhesion as “a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it”].)
PHELAN, Associate Justice.
SMITH, Acting P.J., and HAERLE, J., concur.