Chandler v. Blue Cross Blue Shield of Utah

• Decision Date: 15 May 1992
• Docket Number: No. 890540,890540
• Citation: 833 P.2d 356
• Parties: Dr. Thomas E. CHANDLER, Dr. Michael E. Allen, Dr. Clark Fullmer, Dr. Rodney W. Livingston, Dr. Garth L. Nelson, Dr. Gene M. Richards, Dr. Phillip H. Spencer, Dr. Clive C. Ingram, Dr. David B. Hincks, Dr. Aldean Washburn, and Dr. Paul R. Olsen, individually and on behalf of Members of the Utah Dental Association, Plaintiffs and Appellees, v. BLUE CROSS BLUE SHIELD OF UTAH, Massachusetts Mutual Life Insurance Company, a Massachusetts corporation, Gary D. Henderson, Steven G. Sholy, and Utah Dental Association, a Utah incorporated association, Defendants and Appellants.
• Court: Utah Supreme Court

Page 356

833 P.2d 356

Dr. Thomas E. CHANDLER, Dr. Michael E. Allen, Dr. Clark Fullmer, Dr. Rodney W. Livingston, Dr. Garth L. Nelson, Dr Gene M. Richards, Dr. Phillip H. Spencer, Dr. Clive C Ingram, Dr. David B. Hincks, Dr. Aldean Washburn, and Dr Paul R. Olsen, individually and on behalf of Members of the Utah Dental Association, Plaintiffs and Appellees, v. BLUE CROSS BLUE SHIELD OF UTAH, Massachusetts Mutual Life Insurance Company, a Massachusetts corporation, Gary D Henderson, Steven G. Sholy, and Utah Dental Association, a Utah incorporated association, Defendants and Appellants.

No. 890540.

Supreme Court of Utah.

May 15, 1992.

Norman J. Younker, Michael L. Chidester, Salt Lake City, for plaintiffs and appellees.

Timothy C. Houpt, Salt Lake City, for Blue Cross Blue Shield.

Phillip S. Ferguson, Salt Lake City, for Massachusetts Mut. Life Ins. Co.

D. Gary Christian, Heinz J. Mahler, Salt Lake City, for Steven G. Sholy and Gary D. Henderson.

David G. Williams, Salt Lake City, for Utah Dental Ass'n.

HALL, Chief Justice:

Defendant Blue Cross Blue Shield of Utah appeals the denial of its motion to compel arbitration. We affirm.

The plaintiffs in this action are members of the Utah Dental Association ("UDA"). In November of 1987, plaintiffs filed a complaint in the Third Judicial District Court asserting that Massachusetts Mutual Life Insurance Company, Massachusetts Mutual agents Gary D. Henderson and Steven G. Sholy, and the UDA are liable for the cancellation of their health insurance.

The complaint alleged that in 1975, the UDA entered into an agreement with Blue Cross whereby the UDA agreed to endorse Blue Cross's health insurance plan and Blue Cross agreed to insure all UDA members regardless of any preexisting illnesses or disabilities. In July of 1987, the UDA cancelled its endorsement of Blue Cross and began encouraging UDA members to obtain health insurance from Massachusetts Mutual. When Blue Cross discovered that the UDA no longer endorsed its health insurance, it notified UDA members that their benefits would terminate. Thereafter, plaintiffs applied for coverage under Massachusetts Mutual's health plan, but coverage was denied due to serious illnesses and physical impairments.

The named defendants answered the complaint, and discovery procedures were commenced. On November 2, 1988, plaintiffs amended their complaint, joining Blue Cross as a defendant. On November 22, 1988, Blue Cross answered the complaint, raising seventeen defenses but making no mention of the existence of an arbitration agreement. On this date, Blue Cross also filed cross-claims against the UDA, Massachusetts Mutual, Henderson, and Sholy, alleging the rights to indemnity, apportionment of liability, and attorney fees.

For the next five months, Blue Cross actively participated in discovery. On December 12, 1988, plaintiffs served a request for production of documents on Blue Cross. On December 21 and 22, Blue Cross participated in the depositions of three Massachusetts Mutual officials. These depositions were conducted in Springfield, Massachusetts. On December 30, 1988, plaintiffs requested a rule 30(b)(6) designation of corporate spokesman from Blue Cross in conjunction with the deposition of Blue Cross's vice president. On January 23, 1989, Blue Cross designated its corporate spokesman. On February 2, 1989, Blue Cross participated in the deposition of its vice president and circulated a stipulation for a protective order among all parties. On February 8, 1989, UDA submitted interrogatories to Blue Cross. On February 24, 1989, Blue Cross participated in the deposition of Massachusetts Mutual general agent, Larry Hanks. On March 9, 1988, plaintiffs served a request for production of documents on Blue Cross. On March 19, 1989, Blue Cross served interrogatories and a request for production of documents on plaintiffs. On March 21, 1989, Massachusetts Mutual answered Blue Cross's cross-claims.

On March 30, 1989, Blue Cross responded to the UDA's first set of interrogatories and raised, for the first time, a right of arbitration. Nevertheless, Blue Cross raised specific objections and provided answers to the interrogatories.

On April 7, 1989, Blue Cross filed a motion to compel arbitration and stay the proceedings. During argument on this motion, plaintiffs asserted that no contractual right of arbitration existed ¹ and, in the alternative, that Blue Cross waived its right to compel arbitration. The trial court issued a memorandum decision, ruling that Blue Cross had waived any alleged right of arbitration by "actively participat[ing] in the litigation process" and that such participation has "been to the extent that arbitration would work a substantial prejudice on the remaining parties." Pursuant to Utah Code Ann. § 78-31a-19(1), Blue Cross appeals the trial court's denial of its motion to force arbitration. ²

This case presents an issue of first impression in this court: What standard should be employed in determining whether a party has waived a contractual right of arbitration? Although there is authority to the contrary, ³ several jurisdictions have held that a waiver occurs when the party seeking arbitration substantially participates in litigation, to a point inconsistent with an intent to arbitrate, and this participation results in prejudice to the opposing party. ⁴ These cases base the requirement of prejudice on a recognition of a public policy in favor of arbitration. ⁵ Because this court has also recognized the strong public policy in favor of arbitration "as an approved, practical, and inexpensive means of settling disputes and easing court congestion," ⁶ it is appropriate to look to these jurisdictions for guidance.

At first glance, the cases that apply this approach appear to reach disparate results. ⁷ However, closer examination reveals that the main reason for the discrepancies lies not in inconsistent application of the test, but rather, in the fact that the finding of both substantial participation and prejudice are factual determinations. ⁸ Therefore, results vary, depending on the facts presented in a particular case.

Indeed, while there is some conflict in the case law, ⁹ most courts consistently apply the same legal principles. The party claiming waiver has the burden of establishing substantial participation and prejudice. ¹⁰ While the party seeking arbitration must participate in the litigation to a point inconsistent with arbitration, once this point has been reached, the determination of whether waiver has occurred rests solely on a finding of prejudice. ¹¹ Furthermore, the prejudice must result from the delay in the assertion of the right to arbitrate, not from factors that are inherent in arbitration itself, such as the severance of a claim or limitations on remedies. ¹²

Though the cases consistently apply these principles, there is some conflict concerning what particular facts are sufficient to support a finding of prejudice. ¹³ However, there is general agreement concerning the prejudicial nature of certain factual situations. Courts have recognized that prejudice can occur if a party gains an advantage in arbitration through participation in pretrial procedures. ¹⁴ Courts have also stated that prejudice exists when the party seeking arbitration is attempting to forum-shop after "the judicial waters [have] ... been tested." ¹⁵ In addition, prejudice has been found in situations where the party seeking arbitration allows the opposing party to undergo the types of expenses that arbitration is designed to alleviate, such as the expense of preparing to argue important pretrial motions ¹⁶ or the expense of conducting discovery procedures that are not available in arbitration. ¹⁷ The finding of prejudice, however, has never been linked to any specific type of harm.

The general approach used in these cases is consistent with our case law dealing with arbitration. ¹⁸ Mere delay should not result in a waiver of a method of dispute resolution that public policy clearly favors. However, there is an affirmative duty to enforce contractual rights; ¹⁹ it is not the policy of this court to allow a party to suffer prejudice because an opposing party has failed to timely assert a contractual right. We therefore adopt the principle that waiver of a right of arbitration must be based on both a finding of participation in litigation to a point inconsistent with the intent to arbitrate and a finding of prejudice. As noted above, both prongs of this test turn on the facts of the individual case. Furthermore, consistent with the policy considerations, any real detriment is sufficient to support a finding of prejudice.

It is also to be observed that there is some confusion concerning the applicable standard of review of a trial court's ruling that a party has waived the right to arbitrate. ²⁰ We are of the view that the requirements that a ruling of waiver must rest on findings of substantial participation and prejudice, that the prejudice must relate to the delay in the assertion of the right to arbitrate, and that the prejudice be of such a nature that the party opposing arbitration suffers some real harm are legal standards. Whether the trial court employed the proper standards presents a legal question which is reviewed for correctness. ²¹ However, the finding of the existence of substantial participation and the finding of the existence of prejudice are factual in nature. ²² Therefore, the existence of these factors should be reviewed as factual determinations. ²³

A reading of the trial court's memorandum decision reveals that the court employed the proper legal standard and based its ruling on the findings of substantial participation and prejudice. ²⁴ Since the underlying facts are not in dispute, the dispositive issue is whether there is sufficient support in the record to uphold the trial court's findings.

The record clearly supports the finding that Blue Cross participated in...