Highmark Inc. v. Hospital Service Ass'n

• Decision Date: 21 September 2001
• Parties: HIGHMARK INC., successor in interest to Medical Service Association of Pennsylvania d/b/a Pennsylvania Blue Shield, and Blue Cross Blue Shield Association, Appellants, v. HOSPITAL SERVICE ASSOCIATION OF NORTHEASTERN PENNSYLVANIA d/b/a Blue Cross of Northeastern Pennsylvania and HMO of Northeastern Pennsylvania d/b/a First Priority Health, Appellees (Four Cases). Appeal of Blue Cross Blue Shield Association.
• Court: Pennsylvania Superior Court

785 A.2d 93

HIGHMARK INC., successor in interest to Medical Service Association of Pennsylvania d/b/a Pennsylvania Blue Shield, and Blue Cross Blue Shield Association, Appellants, v. HOSPITAL SERVICE ASSOCIATION OF NORTHEASTERN PENNSYLVANIA d/b/a Blue Cross of Northeastern Pennsylvania and HMO of Northeastern Pennsylvania d/b/a First Priority Health, Appellees (Four Cases).

Appeal of Blue Cross Blue Shield Association.

Superior Court of Pennsylvania.

Argued May 15, 2001.

Filed September 21, 2001.

Reargument Denied November 30, 2001.

James M. Amend, Chicago, IL, for Blue Cross Blue Shield Association.

Patrick J. O'Connor, Philadelphia, for Hospital Service Association of Northeastern Pennsylvania, appellee.

Joseph Friedman, Pittsburgh, for Highmark, Inc.

Before: CAVANAUGH, STEVENS, and TAMILIA, JJ.

CAVANAUGH, J.

¶ 1 This case involves Blue Cross Blue Shield Association (Association) and one of its licensees attempting to compel a second licensee to arbitrate a dispute between the licensees pursuant to a provision of an agreement between Association and the second licensee requiring that all such disputes be submitted to arbitration. We hold that the agreement contained a valid arbitration provision, that the present dispute falls within the scope of that provision, and that waiver and other defenses to arbitration are properly before the arbitrator rather than this court.

¶ 2 Highmark Inc. and Association appeal the November 12, 1999, and December 10, 1999, orders denying the petition to compel arbitration and the motions for reconsideration. We reverse.

¶ 3 Highmark was formed through the December 6, 1996, consolidation of Veritus Inc., which operated as Blue Cross of Western Pennsylvania, and Medical Service Association of Pennsylvania, which operated as Pennsylvania Blue Shield (Blue Shield). Historically, Veritus supplied hospitalization coverage while Blue Shield provided coverage for doctors' services. Highmark is a member of Association, which owns and licenses the Blue Cross and Blue Shield names. The license agreements with Association require, with limited exception, that disputes between licensees be submitted to arbitration. Highmark's license to use the Blue Cross name is restricted to 29 western Pennsylvania counties. It has the exclusive right to use the Blue Shield name throughout all of Pennsylvania.

¶ 4 Hospital Service Association of Northeastern Pennsylvania, which operates as Blue Cross of Northeastern Pennsylvania (BCNEPA), is licensed by Association to use the Blue Cross name in 13 northeastern Pennsylvania counties. BCNEPA traditionally provided hospitalization coverage. HMO of Northeastern Pennsylvania, which operates as First Priority Health (First Priority), is a wholly owned subsidiary of BCNEPA and is a party to an affiliate license agreement with Association which entitles it to the same service area as BCNEPA. Pursuant to a January 1, 1976, joint operating agreement between Blue Shield and BCNEPA, BCNEPA markets health care plans offered by Highmark and BCNEPA as a single package in BCNEPA's service area.

¶ 5 In the mid-1980s, Blue Shield and BCNEPA discussed establishing a jointly owned Health Maintenance Organization (HMO) in BCNEPA's service area. Since they were unable to come to an agreement as to the percentages of ownership, BCNEPA founded and began operating First Priority in 1987, as a wholly owned subsidiary. According to Highmark, BCNEPA did not actively promote First Priority's HMO until about 1992. By 1993, BCNEPA allegedly provided incentives to their sales agents to sell First Priority coverage instead of traditional BCNEPA/Blue Shield coverage.

¶ 6 In December of 1993, Blue Shield sent a letter to BCNEPA stating its concern that BCNEPA's promotion of HMO coverage in which Blue Shield had no interest to the detriment of traditional coverage may be a breach of BCNEPA's duty as its agent under the January 1, 1976, joint operating agreement. BCNEPA and Blue Shield recognized that the situation could be ameliorated if Blue Shield acquired an equity interest in First Priority. In 1995, BCNEPA and Blue Shield agreed to negotiate in good faith for the acquisition of stock by Blue Shield in First Priority. In February of 1996, BCNEPA rejected Blue Shield's offer to purchase a 50% interest.

¶ 7 In May of 1997, after the formation of Highmark through the consolidation of Blue Shield and Veritus, Highmark sought arbitration pursuant to Association's license agreement with BCNEPA. Highmark alleged that BCNEPA's promotion of First Priority's HMO coverage violated the January 1, 1976, joint operating agreement. BCNEPA responded that Association's license agreement did not require arbitration of the matter.

¶ 8 On October 3, 1997, Highmark filed a complaint and a petition to compel arbitration in Dauphin County against BCNEPA and First Priority. On the same day, BCNEPA and First Priority filed an action in Luzerne County seeking a declaration that they may market and sell First Priority's HMO products under the January 1, 1976, joint operating agreement. The cases were consolidated in Dauphin County. Association intervened as a party to the license agreement and asserted that the dispute was subject to arbitration. The lower court denied the petition to compel arbitration on November 12, 1999. On December 10, 1999, it denied Highmark and Association's motions for reconsideration. On appeal, our jurisdiction over the denial of the petition to compel arbitration arises from 42 Pa.C.S.A. § 7320(a)(1).

¶ 9 Highmark raises the following issues on appeal:

1. Is the dispute between Appellant Highmark Inc. and Appellee subject to mandatory arbitration pursuant to their

License Agreements with the Blue Cross and Blue Shield Association?

2. Did Appellant Highmark Inc. waive its right to invoke the mandatory arbitration provision of the applicable License Agreements with the Blue Cross and Blue Shield Association?

3. Did the lower court exceed its authority and commit[ ] errors of law in reaching factual conclusions based upon an incomplete record and in issuing its Order of December 10, 1999?

¶ 10 In addition, Association raises a number of overlapping issues:

4. Whether the lower court erred in finding that the dispute between Highmark and BCNEPA/First Priority is not within the scope of the arbitration provisions in the license agreements to which they are parties and in thereby denying and dismissing the complaint and petition to compel arbitration?

5. Whether the lower court erred in finding that the association has no right or need to compel arbitration pursuant to the arbitration provisions contained in the license agreements?

6. Whether the lower court lacked jurisdiction to enter the order dated December 10, 1999 insofar as it attempts to amend its prior order dated November 12, 1999?

¶ 11 Our standard of review for an appeal from a court sitting in equity is as follows: "A chancellor's findings of fact will not be disturbed absent an abuse of discretion, a capricious disbelief of the evidence, or a lack of evidentiary support on the record for the findings. A chancellor's conclusions of law are subject to stricter scrutiny." Lilly v. Markvan, 563 Pa. 553, 763 A.2d 370, 372 (2000) (quoting Masloff v. Port Auth. of Allegheny County, 531 Pa. 416, 613 A.2d 1186, 1188 (1992)).

¶ 12 As a threshold issue, we must determine what law applies to the determination of whether the chancellor should have compelled arbitration of the dispute between Highmark and BCNEPA. While the chancellor applied Pennsylvania law, appellants argue that federal law or that Illinois law, as per the choice of law provision in BCNEPA's license agreement, apply.

¶ 13 "In Pennsylvania, choice of law analysis first entails a determination of whether the laws of the competing states actually differ. If not, no further analysis is necessary." Keystone Aerial Surveys, Inc. v. Pa. Prop. & Cas. Ins. Guar. Ass'n, 2001 PA Super 139, ¶ 32, 777 A.2d 84 (quoting Ratti v. Wheeling Pittsburgh Steel Corp., 758 A.2d 695, 702 (Pa.Super.2000), appeal denied, 2001 WL 10367, 2001 Pa. Lexis 41 (Pa. Jan. 4, 2001)). The parties do not argue and we do not find that the choice of law affects the outcome in this case. Federal, Pennsylvania, and Illinois law all favor arbitration, Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987); Smith v. Cumberland Group, Ltd., 455 Pa.Super. 276, 687 A.2d 1167, 1171 (1997); Zimmerman v. Ill. Farmers Ins. Co., 317 Ill.App.3d 360, 251 Ill.Dec. 57, 739 N.E.2d 990, 994-95 (2000), and disfavor finding waiver of the right of arbitration, Klein v. Boyd, 949 F.Supp. 286, 289 (E.D.Pa.1996); Goral v. Fox Ridge, Inc., 453 Pa.Super. 316, 683 A.2d 931, 933 (1996); Schroeder Murchie Laya Assocs. v. 1000 W. Lofts, LLC, 319 Ill. App.3d 1089, 253 Ill.Dec. 846, 746 N.E.2d 294, 300 (2001). Since the various laws do not differ in ways that are material to the present case, we apply Pennsylvania law. Keystone, 2001 PA Super 139, ¶ 32, 777 A.2d 84.

¶ 14 Appellants argue that BCNEPA agreed to arbitrate all disputes with Association's licensees when it signed its license agreement with Association and that the chancellor erred in finding that the instant dispute was not within the scope of the arbitration provision in that agreement. The chancellor's "conclusion as to whether the parties have agreed to arbitrate is reviewable by this Court." Midomo Co. v. Presbyterian Hous. Dev. Co., 739 A.2d 180, 187 (Pa.Super.1999) (quoting Smith, 687 A.2d at 1171). "Our review is plenary, as it is with any review of questions of law." Id. See also Shadduck v. Christopher J. Kaclik, Inc., 713 A.2d 635, 637 (Pa.Super.1998)

("[T]he issue of whether a particular dispute falls within a contractual arbitration provision is a matter of law for the court to decide.").

¶ 15 "When one party to an agreement seeks to prevent another from proceeding to arbitration, judicial...