Dr. Kenneth Ford v. NYLCare Health Plans of Gulf Coast, Inc.

• Citation: 141 F.3d 243
• Decision Date: 26 May 1998
• Docket Number: No. 97-20109,97-20109
• Parties: Kenneth FORD, Dr., Plaintiff-Appellee, v. NYLCARE HEALTH PLANS OF THE GULF COAST, INC., et al., Defendants, NYLCare Health Plans of the Gulf Coast Inc.; New York Life Insurance Company, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 243

141 F.3d 243

Kenneth FORD, Dr., Plaintiff-Appellee, v. NYLCARE HEALTH PLANS OF THE GULF COAST, INC., et al., Defendants,

NYLCare Health Plans of the Gulf Coast Inc.; New York Life

Insurance Company, Defendants-Appellants.

No. 97-20109.

United States Court of Appeals,

Fifth Circuit.

May 26, 1998.

Kenneth R. Wynne, Mark W. Maney, Wynne & Maney, Houston, TX, for Plaintiff-Appellee.

Neal Stuart Manne, J. Hoke Peacock, III, Susman Godfrey, Houston, TX, for Defendants-Appellants.

Appeal from the United States District Court for the Southern District of Texas.

Before JOLLY, WIENER and STEWART, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

In this appeal, we consider whether an agreement providing for the arbitration of all disputes "arising out of or relating to" the agreement may be invoked to compel arbitration of a cause of action that does not depend as a legal matter on the agreement. The appellants, NYLCare Health Plans of the Gulf Coast, Inc., and its parent corporation, New York Life Insurance Co., are federally qualified health maintenance organizations ("the HMOs"). ¹ Dr. Kenneth Ford, like many other physician-specialists, entered into an agreement with the HMOs to provide certain medical services to beneficiaries covered under their health plans. Dissatisfied with the way the HMOs were managing physicians and health care, and with the accuracy of the HMOs' advertising to consumers, Dr. Ford brought this action against the HMOs for, inter alia, false advertising in violation of the Lanham Act, 15 U.S.C. § 1125(a). Based on the arbitration clause in their agreement with Dr. Ford, the HMOs petitioned the district court to compel arbitration of the lawsuit under the Texas General Arbitration Act ("TGAA") and the Federal Arbitration Act ("FAA"). The district court denied the petition with respect to the false advertising claim, and the HMOs appeal. We conclude that, under the TGAA, the arbitration clause in the agreement between Dr. Ford and the HMOs does not reach the false advertising claim. We therefore affirm.

I

A

The facts of this case revolve around the agreement between Dr. Ford and the HMOs. Dr. Ford, an orthopedic surgeon, signed the agreement in December 1986. The agreement continues in effect from year to year until either party elects to terminate it. Neither Dr. Ford nor the HMOs have done so, and it remains in effect to this day. Dr. Ford entered into this agreement with the HMOs to provide medical services to those beneficiaries covered by the HMOs' health plan who require the attention of a specialist. In return for these services, the HMOs agreed to compensate Dr. Ford according to a rate schedule maintained by the HMOs. The agreement forbids Dr. Ford from seeking any payment for his services except from the HMOs and, then, subject to their payment procedures and schedules.

As a specialist under the agreement, Dr. Ford is permitted to treat a beneficiary covered by the HMOs' plan only upon proper referral by another physician who has contracted with the HMOs to provide primary care services to that beneficiary. When a specialist like Dr. Ford believes a beneficiary requires the attention of another specialist, referral is permissible only in cases involving "medical emergencies," a term defined by the agreement as the "sudden and unexpected onset of a condition of sufficient seriousness that failure to receive immediate medical or surgical care would jeopardize the life or seriously impair the health of the patient." This requirement may be waived only upon approval by HMO personnel. Even then, the referred specialist must also have contracted with the HMOs and have the referral approved by the primary care physician. "Incentive Withhold Pools" created by the agreement provide that 25% of all payments to primary care physicians and specialists are withheld to pay for medical cost overruns. The agreement likewise establishes a "Referral Services Pool," from which referral costs are paid. Annual surpluses in the referral pool are returned to physicians, while annual deficiencies are compensated by drawing funds from the incentive withhold pools.

The agreement also contains an arbitration clause. It states, in relevant part:

Any controversy or claim arising out of or relating to this Agreement, or the breach thereof shall be settled by arbitration in accordance with the Texas General Arbitration Act, and judgment upon the award rendered may be enforced in any Court of the State of Texas having jurisdiction thereof.... The arbitration proceeding shall be conducted in Harris County, Texas....

The front page of the agreement further states, underlined and in bold type: "NOTICE: THIS AGREEMENT IS SUBJECT TO ARBITRATION UNDER THE TEXAS GENERAL ARBITRATION ACT." The scope of the arbitration clause is the focus of this litigation.

B

On May 15, 1996, Dr. Ford brought this action against the HMOs ² based generally on his dissatisfaction with the way the HMOs administered physicians in their provision of health care services and the way the HMOs advertised the benefits of their plan to consumers. Dr. Ford claimed that these practices constituted false advertising under section 1125(a) of the Lanham Act and violated the Texas Insurance Code and Texas Deceptive Trade Practices Act ("TDTPA"). In support of these claims, he alleged that the HMOs make tall promises to consumers about the quality of health care their plan is designed to provide, but that the plan actually results in a reduced quality of care because of medical decision-making by relatively unqualified individuals, burdensome internal procedures, and incentive programs designed to minimize medical costs at the expense of needed health care measures. Rather than using premiums to provide effective health care as promised, Dr. Ford alleged, the HMOs divert needed funds to fill "overflowing corporate coffers" and to pay "bloated executive salaries." Dr. Ford also alleged claims for tortious interference with business relations, negligence, negligent misrepresentation, fraud, breach of good faith and fair dealing, unjust enrichment, and a right to an accounting. Because the HMOs had entered agreements similar to Dr. Ford's with many other specialist-physicians, ³ Dr. Ford sought to bring these claims in a class action on behalf of himself and all other specialist-physicians who had contracted with the HMOs under a managed care plan.

The HMOs filed a motion to dismiss Dr. Ford's claims and a petition to compel arbitration. On January 3, 1997, the court dismissed the claims based on the Texas Insurance Code, the TDTPA, negligence, negligent misrepresentation, unjust enrichment, and the right to an accounting. The court then ordered arbitration of the claim for breach of the duty of good faith and fair dealing. It refused, however, to compel arbitration of the false advertising and tortious interference claims. The court reasoned that these claims would exist in the absence of the agreement between Dr. Ford and the HMOs and, therefore, did not arise out of or relate to that agreement. The court did not specify whether federal or state law governed its analysis. The HMOs appeal this order. They contend that although the district court basically employed the correct test to determine whether those claims were arbitrable, it applied the test incorrectly. Based on the allegations in Dr. Ford's complaint, the HMOs argue, the false advertising and tortious interference claims are related to the agreement between the parties and thus come within the scope of the arbitration clause.

Dr. Ford, in an effort to better limit the case to an easily definable class action, has since agreed to send the tortious interference claim to arbitration. ⁴ Thus, we consider only the arbitrability of the false advertising claim in this appeal. "Resolving this dispute is a matter of contract interpretation and therefore is subject to de novo review by this court." Neal v. Hardee's Food Sys., Inc., 918 F.2d 34, 37 (5th Cir.1990).

II

Ordinarily, "the first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985). And, ordinarily, "[t]he court is to make this determination by applying the 'federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the FAA.' " Id. (citations omitted). The arbitration clause in the agreement between Ford and the HMOs in this case, however, states that controversies would be subject to arbitration in accordance with the Texas General Arbitration Act. This provision is significant evidence that the parties intended the scope of the clause to be determined according to Texas law. Citing Atlantic Aviation, Inc. v. EBM Group, Inc., 11 F.3d 1276 (5th Cir.1994), the HMOs argue that such references to Texas law are irrelevant because, even if the parties had chosen Texas law to govern arbitration, the FAA preempts any otherwise applicable state law if the agreement involves commerce. ⁵

A

We will consider as a threshold matter, therefore, whether parties may designate state law to govern the scope of an arbitration clause in an agreement otherwise covered by the FAA. Clearly, they can. The federal policy underlying the FAA "is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate." Volt Information Sciences Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 476, 109 S.Ct. 1248, 1254, 103 L.Ed.2d 488 (1989) (emphasis added). Indeed, the FAA was specifically designed to place arbitration agreements " 'upon the same footing as other contracts.' " Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11, 94 S.Ct. 2449, 2453, 41 L.Ed.2d 270 (1974) (quoting H.R.Rep. No. 96, 68th Cong., 1st Sess., 1, 2 (1924)). And, "as with any other...