CAROLINA CARE PLAN v. United Healthcare

• Decision Date: 18 October 2004
• Docket Number: No. 25879.,25879.
• Parties: CAROLINA CARE PLAN, INC. (f/k/a Physicians Health Plan, Inc.), Appellant, v. UNITED HEALTHCARE SERVICES, INC., United Health Group, Incorporated, United HealthCare Insurance Co., Ronald H. Harms, and Edward L. Graves, Respondents.
• Court: South Carolina Supreme Court

361 S.C. 544

606 S.E.2d 752

CAROLINA CARE PLAN, INC. (f/k/a Physicians Health Plan, Inc.), Appellant, v. UNITED HEALTHCARE SERVICES, INC., United Health Group, Incorporated, United HealthCare Insurance Co., Ronald H. Harms, and Edward L. Graves, Respondents.

No. 25879.

Supreme Court of South Carolina.

Heard March 4, 2004.

Filed October 18, 2004.

Rehearing Denied January 6, 2005.

C. Mitchell Brown, Kevin A. Hall, Jeffrey S. Patterson, and Elizabeth H. Campbell, all of Nelson Mullins Riley & Scarborough, of Columbia, for Appellant.

Eliott R. Good, Michael J. Zaretsky, and Michael W. DeWitt, all of Chorpenning Good & Pandora, of Columbus, OH; Gregory S. Coleman, of Well, Gotshal & Manges, LLP, of Austin, TX; Susan P. McWilliams and Angus H. Macaulay, Jr., both of Nexsen, Pruet, Jacobs & Pollard, of Columbia, for Respondents.

Justice WALLER:

The trial court granted respondents' 12(b)(6), SCRCP, motion to dismiss three of appellant's causes of action, granted respondents' motion to compel arbitration, and stayed petitioner's remaining claims pending the outcome of arbitration. Appellants appealed to the Court of Appeals, and this Court certified the case for review pursuant to Rule 204(b), SCACR. We affirm.

FACTS

Appellant (CCP) is a health maintenance organization (HMO), originally organized as a non-profit South Carolina corporation.¹ Respondents United HealthCare Services (UHS), United Health Group (UHG), and United HealthCare Insurance (UHI), (collectively "United"), provide managed health care services for HMO's.

In 1984, CCP and UHS entered into an Administrative Services Agreement, whereby UHS agreed to provide various services in furtherance of CCP's business as a South Carolina HMO. CCP had few, if any, employees, and outsourced virtually all of its work to United.

In 1996, the parties entered into a new agreement. Section 11.14 of the 1996 Services Agreement stated that:

[a]ny controversy, dispute or claim arising out of or relating to this Agreement or a breach of the Agreement, except as otherwise provided shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association. Upon such submission, UHS and [CCP] shall each choose one arbitrator and those two arbitrators shall mutually agree on the selection of the third arbitrator. Matters submitted to arbitration shall be determined by a majority vote of the arbitrators, and such decision shall be binding upon the parties. The arbitrators shall have no power to award any punitive or exemplary damages or to vary or ignore the terms of this Agreement and shall be bound by controlling law. It is the intent of the parties that all disputes arising under this Agreement which are not otherwise resolved be resolved by binding arbitration and not by other forms of legal proceedings.

In May 2001, CCP filed suit against UHS, UHG, UHI, Ronald Harms, and Edward Graves. Harms was a former chief financial officer of CCP, and Graves was a former chief executive officer of CCP. Harms and Graves were United employees at the time they served on the CCP board of directors, and are still employed by United. CCP alleged, among other things, that all the defendants failed to cooperate in good faith with CCP to promote CCP's economic interests, failed to properly account for funds that United held as a fiduciary to CCP, and generally put the economic interests of United ahead of CCP.

United moved to dismiss or stay the proceedings and compel arbitration. In response, CCP filed an amended complaint, which included new causes of action for fraud, fraud in the inducement, and fraudulent concealment in the making of the arbitration clause. CCP also alleged that the arbitration provision was unconscionable and violated South Carolina public policy because it limited discovery and limited CCP's rights and remedies under the South Carolina Unfair Trade Practices Act (SCUTPA).

United moved to dismiss the three causes of action related to the making of the arbitration clause pursuant to Rule 12(b)(6), SCRCP, for failure to state facts sufficient to constitute a cause of action. United argued the arbitration agreement was valid and enforceable, and that the Federal Arbitration Act (FAA) required that all of the claims be submitted to arbitration.

CCP moved to file a second amended complaint, which the trial court granted. However, the trial court then granted United's motion to compel arbitration and to dismiss three of CCP's causes of action related to the making of the arbitration clause.² The trial court also ruled that the inclusion of defendants Harms and Graves as defendants did not defeat United's right to arbitrate the dispute, despite the fact that Harms and Graves were not parties to the 1996 Services Agreement containing the arbitration clause. Accordingly, the trial court ordered that the remaining claims be arbitrated pursuant to the rules of the American Arbitration Association and stayed the proceedings pending the outcome of arbitration.

ISSUES

1. Did the trial court err in dismissing CCP's causes of action for fraud, unconscionability, and a violation of public policy pursuant to Rule 12(b)(6)?

2. Did the trial court err in finding that the arbitration clause was applicable to individual defendants and in staying the remaining claims pending arbitration?

1. 12(b)(6) Motions

CCP contends the trial court erred in dismissing the causes of action for fraudulent inducement, unconscionability, and violation of public policy pursuant to Rule 12(b)(6). We disagree.

The ruling on a Rule 12(b)(6), SCRCP, motion to dismiss must be based solely upon the allegations set forth in the complaint. Baird v. Charleston County, 333 S.C. 519, 527, 511 S.E.2d 69, 73 (1999); Washington v. Lexington County Jail, 337 S.C. 400, 405, 523 S.E.2d 204, 206 (Ct.App.1999). A 12(b)(6) motion should not be granted if the facts alleged and the inferences reasonably deducible therefrom would entitle the plaintiff to any relief on any theory of the case. Gentry v. Yonce, 337 S.C. 1, 5, 522 S.E.2d 137, 139 (1999). The question to be considered is whether, when viewed in the light most favorable to the plaintiff, the complaint states any valid claim for relief. Further, the complaint should not be dismissed merely because the court doubts the plaintiff will prevail. Gentry, id. at 5, 522 S.E.2d at 139.

A. Fraud and Concealment

South Carolina law generally favors arbitration. McMillan v. Gold Kist, Inc., 353 S.C. 353, 359, 577 S.E.2d 482, 485 (Ct.App.2003). In interpreting agreements within the scope of the FAA, "due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration." Stokes v. Metropolitan Life Ins. Co., 351 S.C. 606, 610, 571 S.E.2d 711, 714 (Ct.App.2002) (quoting Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989)). Any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Zabinski v. Bright Acres Associates, 346 S.C. 580, 597, 553 S.E.2d 110, 118 (2001). Further, unless the Court can say with positive assurance that the arbitration clause is not susceptible to an interpretation that covers the dispute, arbitration should be ordered. Id. at 597, 553 S.E.2d at 118.

A written provision in any contract evidencing a transaction involving commerce to settle by arbitration shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C.A. § 2 (2000). A party cannot avoid arbitration through rescission of an entire contract when there is no independent challenge to the arbitration clause itself. There must be fraud in the inducement of the arbitration agreement to avoid arbitration of the contract. South Carolina Pub. Serv. Auth. v. Great Western Coal (Kentucky), Inc., 312 S.C. 559, 562-63, 437 S.E.2d 22, 24 (1993) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.E.2d 1270 (1967)). "Fraud as a defense to an arbitration clause must be fraud specifically as to the arbitration clause and not the contract generally." South Carolina Pub. Serv. Auth., id. at 563, 437 S.E.2d at 24 (emphasis added).

In the present case, CCP alleged that at the time it was considering and negotiating the 1996 Services Agreement with United, CCP relied on and utilized the employees and services of United to run virtually all of CCP's business. Further, CCP had no employees of its own, and used United employees to fill all of its officer positions.

CCP alleged that, during the 1996 negotiations, Bill Martin³ was both its CEO and a paid employee of UHS. CCP alleged that as its CEO, Martin was responsible for negotiating and reviewing proposed contracts. CCP further alleged that Martin failed to object to the inclusion of the arbitration clause in the 1996 Services Agreement because Martin knew United had committed various torts and other wrongful acts against CCP and Martin knew that United planned to commit additional torts and wrongful acts against CCP in the future. Alternatively, CCP alleged that Martin knew United inserted the arbitration clause into the 1996 Services to limit CCP's ability to discover the extent of United's misconduct and to limit its ability to recover punitive or exemplary damages. CCP further alleged that Martin failed to disclose to CCP's board of directors why United wanted the arbitration clause included or to explain the impact of the provision, and that Martin told CCP's board that the 1996 Services Agreement was merely changing the method of payment between CCP and United. The trial court found that the pleadings failed to state a claim that CCP was fraudulently induced into agreeing to the arbitration provision. The trial court found that any reliance on the alleged misconduct only...