Chappel v. Laboratory Corp.

• Decision Date: 14 November 2000
• Docket Number: No. 98-17361,98-17361
• Citation: 232 F.3d 719
• Parties: (9th Cir. 2000) JAMES CHAPPEL, Plaintiff-Appellant, v. LABORATORY CORPORATION OF AMERICA, aka National Health Lab, Defendant-Appellee
• Court: U.S. Court of Appeals — Ninth Circuit

Page 719

232 F.3d 719 (9th Cir. 2000)

JAMES CHAPPEL, Plaintiff-Appellant, v. LABORATORY CORPORATION OF AMERICA, aka National Health Lab, Defendant-Appellee.

No. 98-17361

U.S. Court of Appeals for the Ninth Circuit

Argued and Submitted February 15, 2000

Filed November 14, 2000

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Robert J. Rosati, Fresno, California, for the appellant.

Marvin I. Bartel and Douglas J. Woods, Pillsbury Madison & Sutro LLP, Sacramento, California, for the appellee.

Appeal from the United States District Court for the Eastern District of California; Robert E. Coyle, District Judge, Presiding. D.C. No. CV-97-06041-REC/SMS

Before: Alex Kozinski, Ferdinand F. Fernandez, and William A. Fletcher, Circuit Judges.

W. FLETCHER, Circuit Judge:

We hold that an arbitration clause in appellee Laboratory Corporation of America's ERISA-governed health benefits plan is enforceable. We also hold that appellant James Chappel should have received leave to amend his complaint to state a claim against the administrator of the plan for breach of fiduciary duty in failing adequately to notify Chappel of the existence and terms of the arbitration clause.

I

In September 1993, Trina Chappel became an employee of National Health Laboratories Incorporated, a company now known, and to which we will refer, as Laboratory Corporation of America ("Lab Corp"). Lab Corp provided health insurance benefits to its employees and their eligible dependents through the National Health Laboratories Incorporated Medical Plan ("Plan"), a self-insured welfare benefits plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. S 1001 et seq . Lab Corp both sponsored and administered the Plan.

Trina's then-spouse, James Chappel ("Chappel"), was insured under the Plan by virtue of Trina's employment with Lab Corp. Lab Corp provided Trina with the summary plan description as part of her "Employment Manual. " This manual explained that the Plan would not pay medical expenses for "any condition which, in the judgement [sic] of an independent physician designated by the Plan Administrator, had to have existed in the twelve (12) months prior to[the] plan effective date."

The Employment Manual also contained a description of the Plan's claims procedure. The claims procedure required a Plan participant who wished to dispute the denial of requested benefits first to file an internal appeal with the Plan. If the Plan denied the internal appeal, it required a dissatisfied claimant to seek arbitration as his or her exclusive remedy. Specifically, the Plan's arbitration clause provided:

If your claim is denied on appeal, your sole remaining remedy is to appeal the matter to an impartial arbitrator. . . .

You must submit your request for arbitration to the [Lab Corp] Human Resources Department within 60 days of receipt of the written denial of your appeal. You and the Plan each will pay one-half of the costs of arbitration. . . .

. . . The arbitrator may grant your appeal, in whole or in part, but only if the arbitrator determines that its grant is justified because (1) the appeal official was in error upon an issue of law, (2) the official acted arbitrarily and capriciously in denying your claim or (3) the official's finding of fact, if applicable, was not supported by substantial evidence.

The decision of the arbitrator will be final and binding on all parties. No party has the right to sue in any state [or] federal court with respect to any matter to which this claims procedure applies.

After enrolling in the Plan, Chappel underwent surgery and related medical treatment, and he thereafter submitted his medical bills to the Plan for payment. The Plan denied benefits because it concluded that Chappel's medical condition was pre-existing. Chappel filed an internal appeal. The Plan denied the appeal in a letter dated May 17, 1995. According to Chappel, the Plan did not then bring to his attention, in the May 17 letter or otherwise, that his sole means of redress was arbitration and that he had 60 days in which to pursue it.

On October 24, 1997, Chappel timely filed suit against Lab Corp, as the Plan's administrator, in federal district court pursuant to ERISA's private right of action, 29 U.S.C. S 1132(a)(1). Chappel's complaint requested reversal of the Plan's denial of his medical benefits. Lab Corp defended on the ground that it was not the proper defendant and asserted that Chappel should instead have sued the Plan. In response, Chappel filed a first amended complaint naming both Lab Corp and the Plan as defendants.

Sometime after Chappel filed suit, the Plan informed him of the arbitration clause. Chappel claims that he had not previously known about the clause. Chappel again amended his complaint, this time to state two claims rather than one. The first claim renews Chappel's earlier request for reversal of the denial of benefits. It asserts that the Plan's failure to notify him of the existence of the arbitration clause when it denied his internal appeal resulted in waiver, estoppel, and detrimental reliance. The second claim requests a declaratory judgment that the arbitration clause violates ERISA because the clause requires the beneficiary to pay one-half of the costs of the arbitration, imposes a contractual 60-day statute of limitations, and does not provide for attorneys' fees. By contrast, the private right of action under ERISA does not require the sharing of costs, allows a four-year statute of limitations for an action to recover benefits under a written contract, see Wetzel v. Lou Ehlers Cadillac Group Long Term Disability Ins. Program, 222 F.3d 643 (9th Cir. 2000) (en banc), and provides attorneys' fees to a prevailing plaintiff, see 29 U.S.C. S 1132(g)(1).

The district court dismissed Chappel's second amended complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). It held that Chappel's first claim is barred by the Plan's mandatory arbitration clause. It also held the arbitration clause valid and enforceable, despite the fact that the rights it confers are less advantageous than those conferred by the private cause of action otherwise available under ERISA. Finally, the district court denied Chappel leave to amend his complaint to state a claim against the plan administrator for breach of fiduciary duty in failing to notify him in a timely fashion of his right to pursue arbitration.

Chappel appeals. We have jurisdiction under 28 U.S.C. S 1291, and we affirm in part and reverse in part.

II

Whether a complaint states a claim is a question of law reviewed de novo. See Arnett v. California Pub. Employees Retirement Sys., 179 F.3d 690, 694 (9th Cir. 1999). Dismissal for failure to state a claim is proper only if it is clear that the plaintiff cannot prove any set of facts in support of the claim that would entitle him or her to relief. See Morley v. Walker, 175 F.3d 756, 759 (9th Cir. 1999).

Section 502 of ERISA entitles a participant or beneficiary of an ERISA-regulated plan to bring a civil action "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan." 29 U.S.C. S 1132(a)(1)(B). Before invoking this private right of action, however, an ERISA plaintiff whose claim is governed by the contractual terms of the benefits plan, rather than by the statutory provisions of ERISA itself, must first exhaust the administrative dispute-resolution mechanisms of the benefit plan's claims procedure. See Graphic Communications Union v. GCIU-Employer Retirement Benefit Plan, 917 F.2d 1184, 1187-88 (9th Cir. 1990). Thus, if the plan contains an arbitration clause, the plaintiff must arbitrate the dispute in accordance with the clause in order to exhaust his administrative remedies before filing suit in federal court.¹ See id.

The Plan at issue in this case contains an arbitration clause, and Chappel failed to exhaust this dispute-resolution mechanism before filing suit. His suit is therefore barred unless he can show that the arbitration clause is unenforceable or invalid.² Chappel makes three attacks on the clause, but each fails as a matter of law.

First, Chappel argues that even if the arbitration clause is legally enforceable as a general matter, the Plan waived its right to rely on the arbitration clause in this case by litigating the dispute in federal court. We do not lightly find waiver of the right to arbitrate, see Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 758 (9th Cir. 1988), and we do not do so here.

To prevail on this point, Chappel must show that the defendants knew of their right to arbitrate, acted inconsistently with that right, and, in doing so, prejudiced Chappel by their actions. See Britton v. Co-op Banking Group, 916 F.2d 1405, 1412 (9th Cir. 1990). While we do not doubt that the defendants knew of the arbitration clause, we cannot discern any aspect of their litigation behavior that was inconsistent with an intent to stand on their right to arbitrate. When Chappel filed a complaint against Lab Corp seeking judicial review of the Plan's benefit determination, Lab Corp moved to dismiss on the ground that the Plan, not Lab Corp, was the proper defendant. Because Lab Corp was not a proper defendant, it could not have invoked the arbitration clause as a defense, and its failure to stand on the arbitration clause therefore cannot be construed as waiver. Later, when Chappel amended his complaint to add the Plan as a defendant, the Plan promptly filed a motion to dismiss based on the arbitration clause. We perceive no inconsistency between the right to arbitrate and a litigation defense premised on that right.

Chappel next argues, in general reliance on Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), that we should declare the arbitration clause invalid because some of...