Heartland Surgical Specialty Hosp., LLC v. Reed

• Decision Date: 19 October 2012
• Docket Number: No. 106,660.,106,660.
• Citation: 287 P.3d 933,48 Kan.App.2d 237
• Parties: HEARTLAND SURGICAL SPECIALTY HOSPITAL, LLC, Appellant, v. William O. REED, Jr., M.D., Appellee.
• Court: Kansas Court of Appeals

48 Kan.App.2d 237

287 P.3d 933

HEARTLAND SURGICAL SPECIALTY HOSPITAL, LLC, Appellant,

v.William O. REED, Jr., M.D., Appellee.

No. 106,660.

Court of Appeals of Kansas.

Oct. 19, 2012.

Syllabus by the Court

1. Issues involving the interpretation of a contract involve questions of law over which an appellate court has de novo review.

2. Generally, courts have taken two different approaches in determining if parties may, by contract, waive their right to seek judicial review of all aspects of an arbitration decision. Under the first, courts have held that parties may eliminate judicial review of an arbitration award by contract, but their intention to do so must be stated clearly and unequivocally. Under the second approach, courts have held that public policy prohibits parties from contractually eliminating judicial review of some but not all aspects of an arbitrator's decision.

3. In order to ensure the integrity of the arbitration process, where parties had entered into an agreement to arbitrate their disputes, the parties then submit to arbitration, and one party later seeks review of the arbitration award for reasons set forth in K.S.A. 5–412(a), Kansas public policy allows such review even when the agreement to arbitrate contains a clause in which the parties waived their right to seek review.

4. Under the facts here, the arbitrator was not required to provide an evidentiary hearing before issuing an award since the American Health Lawyers Association Alternative Dispute Resolution Service Rules of Procedure which the parties agreed would apply, grant the arbitrator wide discretion as to what hearings are set in the course of an arbitration procedure.

5. Before a court vacates an arbitration award on grounds of improper ex parte communication, the party alleging such improper contact must establish that the communicationaffected the substance of the arbitrator's ruling against the party.

[48 Kan.App.2d 238]6. Under the facts of this case, the party seeking to vacate the arbitration award failed to meet its burden to establish that any ex parte contact between the arbitrator and the other party's counsel affected the substance of the award or corrupted the process.

Jerry D. Hawkins and Randy J. Troutt, of Hite, Fanning & Honeyman L.L.P., of Wichita, for appellant.

Greg T. Spies and David S. Lockett, of McDowell, Rice, Smith & Buchanan, P.C., of Overland Park, for appellee.

Before McANANY, P.J., HILL, J., and BUKATY, S.J.

BUKATY, J.

Heartland Surgical Specialty Hospital, LLC (Heartland) filed a motion in the district court to vacate an arbitration award against it in favor of William O. Reed, Jr., M.D. The court denied the motion and confirmed the award. Heartland appeals, arguing that the court erred in its ruling because Heartland was denied an evidentiary hearing during the course of the arbitration and the arbitrator engaged in ex parte contact with Reed's counsel that should result in vacating the award. We first conclude that under the rules of arbitration the parties agreed would apply, the arbitrator had discretion whether to set a hearing or dispose of the case otherwise and, under the facts present here, both parties had sufficient opportunity to present their evidence and arguments. We next conclude that any contact between the arbitrator and defendant's counsel did not corrupt the process to the point that the award should be vacated. We therefore affirm.

Prior to the arbitration proceedings, Heartland and Reed had been involved in litigation apparently over compensation for administrative services that Reed claimed was owed to him. The parties settled that suit and entered into an agreement on July 31, 2009. A portion of that agreement contained a restrictive covenant that prohibited Reed from competing with Heartland in the future. In part, the relevant clause stated:

“Dr. Reed shall not, either directly or indirectly, for a period of five years following the execution of this agreement, and within 25 miles of [Heartland] accept employmentwith, acquire an ownership interest in, provide consulting or administrative services for, or participate in the development of any hospital or ambulatory surgery center.”

The agreement also provided that Reed would refrain from “ ‘knowingly engag [ing] in any ownership venture or participat[ing] in any administrative service with [Dr. Glenn Amundson or Dr. Alexander Bailey] in violation of this agreement.’ ” Reed was required to provide an annual written attestation to Heartland to show that he was in compliance with this noncompete clause. The agreement also specified that Reed would pay the amount of $792,500 in liquidated damages in the event he breached the agreement. Finally, the agreement also contained a binding arbitration clause which declared:

“ Binding Arbitration. Any controversy, dispute or disagreement arising out of or relating to this Agreement, including the breach thereof or the subject matter thereof, shall be settled exclusively by binding arbitration, which shall be conducted in Overland Park, Kansas, in front of a single arbitrator in accordance with the American Health Lawyers Association Alternative Dispute Resolution Service Procedural rules for Arbitration. Arbitration shall be binding not only on all parties to this Agreement, but on any other entity controlled by, in control of or under common control with a party to the extent that such affiliate joins in the arbitration and judgment on the award rendered by the arbitration may be entered in any court having jurisdiction thereof. Kansas law shall govern and the parties waive their right to appeal the ultimate decision of the arbitrator ....” (Emphasis added.)

Sometime after the parties entered into the agreement, Reed formed Elite Hospital Management, LLC (EHM) with Drs. Amundson and Bailey. In February 2010, EHM submitted a proposed management agreement to Heartland. Under the proposed agreement, EHM would have replaced Heartland's current administration and would have assumed control of Heartland's operations. On March 9, 2010, Heartland rejected EHM's proposal.

On March 10, 2010, Heartland filed a claim in arbitration, which alleged in part that Reed had breached the noncompete clause of the settlement agreement. The arbitrator, Jeffrey O. Ellis, was appointed, and on June 11, 2010, he held a preliminary hearing where he made some procedural rulings. In addition, the arbitrator scheduled a follow-up conference to “consider whether further discovery or preliminary matters need to be undertaken” or “whether the case is in a position to be submitted for decision.” On June 15, 2010, the arbitrator apparently had an 18–minute ex parte telephone call with Reed's counsel. Heartland was put on notice of the ex parte communication because of a fee statement submitted by the arbitrator shortly thereafter that included charged time for the telephone call.

Instead of filing an answer to Heartland's arbitration claim, Reed filed a motion to dismiss on June 28, 2010. He attached to the motion affidavits from Reed and Bailey that described EHM's operations. The motion stated that it was filed “per the Arbitrator's instructions.” Heartland filed its responses to the motion on August 3, 2010. On August 10, 2010, Reed filed his reply to the responses. On October 13, 2010, the arbitrator, without conducting an evidentiary hearing, dismissed all but one of Heartland's arbitration claims for failure to state a claim for which relief could be granted. His written decision stated in part:

“As arbitrator, I have evaluated each of [Heartland's] claims summarized above to determine whether [it] has stated a claim for which relief can be granted. Assuming the facts as alleged by [Heartland] to be true, and without regard to any evidence offered by Dr. Reed, [Heartland] has not stated a claim for which relief can be granted arising out of Dr. Reed's involvement with [EHM].... [Heartland], therefore, is not entitled to discovery on those matters, and it is appropriate for the arbitrator to issue a final ruling on those matters.”

This ruling had the effect of dismissing all but one of Heartland's claims, leaving in the case only the claim that Reed had breached the noncompete clause of the settlement agreement. In regard to that claim, the arbitrator stated:

“Insofar as the First Amended Petition alleges Dr. Reed currently is employed by or providing consulting or administrative services to a hospital operating within a 25 mile radius of [Heartland's] facility, [Heartland] has stated a claim for which relief may be granted. [Heartland], therefore, may pursue discovery on the limited issue of whether Dr. Reed has been employed by or provided specific services to one of the hospitals identified in the First Amended Complaint since executing the Agreement.”

The arbitrator then stated that the arbitration would remain open for 30 days so that Heartland could conduct discovery and submit additional evidence. He further noted that “should [Heartland] decide to not pursue this matter further and not produce additional evidence on the limited issue identified ... on or before November 12, 2010, this arbitration shall be declared closed and this letter shall serve as the final award in this matter.”

Instead of conducting further discovery or producing additional evidence as allowed in the arbitrator's ruling, Heartland sent a letter to the arbitrator on November 12, 2010, requesting that he reconsider his ruling. The letter also requested that the arbitration be dismissed without prejudice or, in the alternative, that a different arbitrator be appointed. On November 29, 2010, the arbitrator denied all of Heartland's requests.

Heartland next filed a motion to vacate the arbitration award in the district court. The court denied the motion and confirmed the award. The court first found that it had no jurisdiction to review the arbitration proceedings because both parties had agreed to waive “their...