Engalla v. Permanente Medical Group, Inc.

• Decision Date: 30 June 1997
• Docket Number: No. S048811,S048811
• Citation: 938 P.2d 903,15 Cal.4th 951,64 Cal.Rptr.2d 843
• Court: California Supreme Court
• Parties: , 16 Cal.4th 283A, 938 P.2d 903, 21 Employee Benefits Cas. 1407, 97 Cal. Daily Op. Serv. 5206, 97 Daily Journal D.A.R. 8384 Nida ENGALLA et al., Plaintiffs and Respondents, v. PERMANENTE MEDICAL GROUP, INC. et al., Defendants and Appellants. PERMANENTE MEDICAL GROUP, INC. et al., Petitioners, v. The SUPERIOR COURT of Alameda County, Respondent; Nida ENGALLA et al., Real Parties in Interest. Willis F. McCOMAS et al., Petitioners, v. The SUPERIOR COURT of Alameda County, Respondent; Nida ENGALLA et al., Real Parties in Interest.

Page 843

64 Cal.Rptr.2d 843

15 Cal.4th 951, 16 Cal.4th 283A, 938 P.2d 903,

21 Employee Benefits Cas. 1407,

97 Cal. Daily Op. Serv. 5206,

97 Daily Journal D.A.R. 8384

Nida ENGALLA et al., Plaintiffs and Respondents, v. PERMANENTE MEDICAL GROUP, INC. et al., Defendants and Appellants.

PERMANENTE MEDICAL GROUP, INC. et al., Petitioners, v. The SUPERIOR COURT of Alameda County, Respondent;

Nida ENGALLA et al., Real Parties in Interest.

Willis F. McCOMAS et al., Petitioners, v. The SUPERIOR COURT of Alameda County, Respondent;

Nida ENGALLA et al., Real Parties in Interest.

No. S048811.

Supreme Court of California.

June 30, 1997.

As Modified July 30, 1997.

Marion's Inn, Kennedy P. Richardson, Mark Palley, Oakland, Archer, McComas & Lageson, Archer, McComas, Breslin, McMahon & Chritton and Willis F. McComas, Walnut Creek, in pro. per., and for Defendants and Appellants and Petitioners.

Paul N. Halvonik, Berkeley, Fred J. Hiestand, Sacramento, Jackson, Tufts, Cole & Black, Gerald Z. Marer, San Jose, Kenneth J. Philpot, San Francisco, Thelen, Marin, Johnson & Bridges, Curtis A. Cole, Michele Logan-Stern, Los Angeles, Hammond, Zuetel & Cahill, Kenneth R. Zuetel, Jr., Pasadena, and Victoria K. Torigian as Amici Curiae on behalf of Defendants and Appellants and Petitioners.

No appearance for Respondent Superior Court.

David S. Rand, Carroll, Burdick & McDonough, Donald T. Ramsey and Rosemary Springer, San Francisco, for Plaintiffs and Respondents and for Real Parties in Interest.

David E. Feller, Robert C. Post, Berkeley, Gail K. Hillebrand, Stefan M. Rosenzweig, San Francisco, David Link, Amy Bach, Anderson, Kill, Olick & Oshinsky, Eugene R. Anderson, Bennett Ellenbogen, New York City, Deborah M. Mongan, San Francisco, The Sturdevant Law Firm, James C. Sturdevant, San Francisco, Ann Saponara, McGuinn, Hillsman & Palefsky, Cliff Palefsky and Keith Ehrman, San Francisco, as Amici Curiae on behalf of Plaintiffs and Respondents and Real Parties in Interest.

MOSK, Justice.

In this case we consider the circumstances under which a court may deny a petition to compel arbitration because of the petitioner's fraud in inducing the arbitration agreement or waiver of the arbitration agreement. Plaintiffs are family members and representatives of the estate of Wilfredo Engalla (hereafter sometimes the Engallas). Engalla was enrolled, through his place of employment, in a health plan operated by the Permanente Medical Group, Inc., Kaiser Foundation Hospitals, and the Kaiser Foundation Health Plan (hereafter Kaiser).

Prior to his death, Engalla was engaged in a medical malpractice dispute with Kaiser, which, according to the terms of Kaiser's "Group Medical and Hospital Services Agreement" (Service Agreement), was submitted to arbitration. After attempting unsuccessfully to conclude the arbitration prior to Engalla's death, the Engallas filed a malpractice action against Kaiser in superior court, and Kaiser filed a petition to compel arbitration pursuant to Code of Civil Procedure section 1281.2. ¹ In opposing the petition, plaintiffs claimed that Kaiser's self-administered arbitration system was corrupt or biased in a number of respects, that Kaiser fraudulently misrepresented the expeditiousness of its arbitration system, and that Kaiser engaged in a course of dilatory conduct in order to postpone Engalla's arbitration hearing until after his death, all of which should be grounds for refusing to enforce the arbitration agreement. The trial court found in the Engallas' favor, denying Kaiser's petition to compel arbitration on grounds of fraud, but the Court of Appeal reversed.

We conclude that there is indeed evidence to support the trial court's initial findings that Kaiser engaged in fraudulent conduct justifying a denial of its petition to compel arbitration, but we further conclude that questions of fact remain to be resolved by the trial court before it can be determined whether Kaiser's conduct was actually fraudulent. Similarly, there is a factual question as to whether Kaiser's actions constituted a waiver of its right to compel arbitration. We accordingly reverse the judgment of the Court of Appeal and direct it to remand the case to the trial court for such factual determinations. As will appear, although we affirm the basic policy in favor of enforcement of arbitration agreements, the governing statutes place limits on the extent to which a party that has committed misfeasance in the performance of such an agreement may compel its enforcement.

I. FACTUAL AND PROCEDURAL BACKGROUND

Because the nature of this case cannot be appreciated without a detailed understanding of its factual context, these facts are set forth at length below. ²

Engalla immigrated to the United States in 1980, where he commenced employment with Oliver Tire & Rubber Company (hereafter Oliver Tire) as a certified public accountant. At that time, Engalla was invited to enroll himself and his immediate family in a health plan offered by Kaiser. Oliver Tire had offered its employees health care through Kaiser since 1976, and its plan was renewed annually thereafter. Engalla enrolled with Kaiser by signing an application form which stated, in relevant part: "I apply for health plan membership for the persons listed and agree that we shall abide by the provisions of the Service Agreement and health plan regulations. If the agreement so provides, any monetary claim asserted by a Member or the Member's heirs or personnel [sic ] representative on account of bodily injury, mental disturbance or death must be submitted to binding arbitration instead of a court trial."

A. The Underlying Medical Malpractice Claim.

In March 1986, Engalla presented himself to Kaiser's Hayward facility complaining of a continuing cough and shortness of breath. Tests were administered, including radiologic examinations, and Kaiser's radiologist noted abnormalities of his right lung. Previous radiologic studies performed by Kaiser in 1982 at the same Hayward facility had been inadvertently destroyed, but would otherwise have confirmed that the abnormal condition had only recently developed. In his notes from the 1986 examination, the radiologist recommended follow-up if the films could not be located, but none was ever performed. For several years thereafter, Engalla repeatedly presented Kaiser with complaints symptomatic of respiratory disease. On some occasions he was given an appointment with a physician, but on other occasions he was only permitted to see nurse practitioners. For years, he was given inhalation medication, but Kaiser failed to perform diagnostic tests that might have revealed the developing cancer. Instead, he was repeatedly diagnosed with common colds and allergies. X-rays taken in 1991 finally revealed adenocarcinoma of the lung, a type of lung cancer, but by then Engalla's condition was inoperable.

B. The Arbitration Clause.

On or about May 31, 1991, Engalla and members of his immediate family served on Kaiser a written demand for arbitration of their claims that Kaiser health care professionals had been negligent in failing to diagnose Engalla's lung cancer sooner. The Engallas' attorney, David Rand, correctly believed his clients were required to do so pursuant to the Service Agreement which was in effect at the time. The arbitration clause contained in the Service Agreement described the process for initiating a claim, the requirement that three arbitrators be used, and the time frame within which the arbitrators were to be selected. In this regard, section 8.B. of the Service Agreement provides that each side "shall" designate a party arbitrator within 30 days of service of the claim and that the 2 party arbitrators "shall" designate a third, neutral arbitrator within 30 days thereafter. ³ Section 8.C. sets forth general provisions concerning the arbitration of claims and incorporates applicable California law, including the California statute of limitations, the California Code of Civil Procedure provisions relating to arbitration, and the California Medical Injury Compensation Reform Act of 1975 (MICRA).

The Service Agreement further provides a broad statement governing its interpretation and, in that regard, states that Kaiser "is a named fiduciary to review claims under the Service Agreement." The nature of the claims for which Kaiser promises to act as a fiduciary is not specified, but a review of the Service Agreement reveals that the term "claims" appears in section 8, entitled "Arbitration of Claims."

The arbitration program is designed, written, mandated and administered by Kaiser. In regard to the latter, Kaiser collects funds from claimants and holds and disburses them as necessary to pay the neutral arbitrator and expenses approved by him or her. It monitors administrative matters pertinent to the progress of each case including, for example, the identity and dates of appointment of arbitrators. It does not, however, employ or contract with any independent person or entity to provide such administrative services, or any oversight or evaluation of the arbitration program or its performance. Rather, administrative functions are performed by outside counsel retained to defend Kaiser in an adversarial capacity.

The fact that Kaiser has designed and administers its arbitration program from an adversarial perspective is not disclosed to Kaiser members or subscribers. It is not set forth in the arbitration provision itself, or in any of Kaiser's publications or disclosures about the arbitration program, and it was unknown to Engalla's employer, who signed the Service Agreement on his behalf. The employer's representative, Theodomeir Roy, read the provisions of the Service Agreement, and believed that the arbitration process would be equally fair to both the employee-subscriber and to Kaiser, and that it would allow employees to resolve disputes quickly and without undue expense. His expectation in that regard was consistent...