This week’s reading discussed “Judicial Policing of Arbitration Agreements in Consumer and Employment Contracts”. More specifically, this week’s reading discussed various ways in which courts have dealt with “unfair” arbitration agreements.
The week’s reading began with Engalla v. Permanente Medical Group, Inc. In Engalla, an employee, Engalla, brought a medical malpractice suit. The suit was submitted to arbitration, pursuant to the employee’s policy. “Engalla died before an arbitral hearing could be held. After his death, his family initiated a medical malpractice action in superior court.” Defendant HMO, Kaiser, brought a petition to compel arbitration.
Plaintiffs claimed that defendant HMO's self-administered arbitration system was unfair---the system was allegedly biased, and defendant HMO allegedly engaged in a course of dilatory conduct to postpone the employee's arbitration hearing until after his death. The trial court found for plaintiffs. The appellate court reversed. Plaintiffs appealed.
The Supreme Court of California reversed and remanded, finding that there was evidence to support the trial court's initial findings that defendant HMO engaged in fraudulent conduct justifying a denial of its petition to compel arbitration. The court did not find, however, that defendant HMO's arbitration program was unconscionable upon its face where it did not lack minimum levels of integrity.
This decision suggests that, while the courts will not circumvent arbitration agreements, the fairness of the arbitration process will be subject to court review. David Rand, attorney for the plaintiff in the suit against Kaiser, stated that the ruling "sends a clear message that plans can't manipulate arbitration to protect their interests."
After reading Engalla, I took a moment to reflect on prior reading assignments.
Throughout the course of the semester, we have discussed the doctrine of separability in great detail. As we have discussed, an agreement to arbitrate is "separate" or "separable" from the underlying contract, such that a contract is essentially viewed as containing two separate agreements, the agreement to arbitrate and the underlying contract. As such, the invalidity of the underlying contract does not necessarily invalidate an agreement to arbitrate and does not deprive an arbitrator of authority to decide on the validity of the underlying contract.
We first encountered the doctrine of separability in Prima Paint v. Flood & Conklin Mfg. Co. In Prima Paint, SCOTUS held that questions as to the validity of an underlying contract are for an arbitrator to decide and courts are confined to only determine challenges to an arbitration clause itself.
Later, in Buckeye Check Cashing v. Cardegna, SCOTUS reaffirmed Prima Paint's holding and held that a challenge to the validity of an underlying contract is for an arbitrator to decide, not only where a contract is claimed to be voidable, but also where it is claimed to be void.
Engalla provides a good example of arguing against the validity of an arbitration clause itself (for reasons other than the arbitrability of certain claims and public policy rationale). In Engalla, the Supreme Court of California held that since the challenge was to the arbitration agreement itself, the matter was for the court to decide not the arbitrator.
Do you agree with the doctrine of separability? Do you agree with the fact that arbitration agreements are enforceable in an otherwise void contract?
Sources: the Book; 18 Am. Rev. Int'l Arb. 455; 29 J.L. Med. & Ethics 203
Engalla was an interesting look at how an arbitration agreement can be challenged and litigated in the courts on the basis of fraud. I think that the decision is consistent with the logic of the separability doctrine, and I am glad to see that it is possible to challenge the validity of an arbitration agreement in court. I imagine that proving fraud would be a particularly difficult evidentiary standard to overcome without clear evidence such as was available in Engalla. However, it also seems like Engalla could work to encourage more litigation for judicial review of the validity of the arbitration agreement with plaintiffs alleging far-reaching facts and arguments to try to establish fraud. This case dealt with the specific factor of the length of time for appointing arbitrator. Arbitration agreements entail so many different rules and promises that fraud could be alleged on any one of these. The decision may ultimately lead to more court traffic--something that arbitration agreements are intended to minimize.
ReplyDeleteInteresting post. When reading Hooters and Engalla, I was so appalled by the actions of each of the defendants, I simply glossed over how the court was able to address the contracts at issue. You're right, the doctrine of separability makes so that courts only review the arbitration clause, and the contract itself is left within the province of arbitrators. It's very interesting, then, that the Hooters Court was able to rescind the entire contract while the Engalla Court interpreted the challenge as being to the arbitration clause itself. It seems that perhaps the Hooters Court should not have been able to rescind the contract and should have done what the Engalla Court did. Regarding the question you pose, I can't say I've made my mind up about separability in general. It seems illogical that an arbitration clause can be enforced in an otherwise void contract; yet, I admit that I'm not fully aware of all of the rationales that support separability. Of course, there's the FAA's broad national policy in favor of arbitration, but I'm not convinced that this policy, alone, should support the separability of arbitration clauses from otherwise void contracts.
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