Imbler v. Pacificare of Cal., Inc.

• Decision Date: 06 November 2002
• Docket Number: No. E030820.,E030820.
• Citation: 103 Cal.App.4th 567,126 Cal.Rptr.2d 715
• Court: California Court of Appeals Court of Appeals
• Parties: Donald IMBLER, Plaintiff and Respondent, v. PACIFICARE OF CALIFORNIA, INC. et al., Defendants and Appellants.

126 Cal.Rptr.2d 715

103 Cal.App.4th 567

Donald IMBLER, Plaintiff and Respondent, v. PACIFICARE OF CALIFORNIA, INC. et al., Defendants and Appellants.

No. E030820.

Court of Appeal, Fourth District, Division 2.

November 6, 2002.

Konowiecki & Rank, K & R Law Group, Jon N. Manzanares, and Gary S. Pancer, Los Angeles; Greines, Martin, Stein & Richland and Timothy T. Coates, Los Angeles, for Defendants and Appellants.

Shernoff Bidart & Darras, Michael J. Bidart, Claremont, and Jeffrey Isaac Ehrlich for Plaintiff and Respondent.

OPINION

WARD, J.

Defendants and appellants PacifiCare of California, Inc. and PacifiCare Health Systems, Inc. appeal from a trial court's order denying their petition to compel arbitration in a lawsuit filed by plaintiff and respondent Donald Imbler. We affirm the order.

FACTUAL AND PROCEDURAL HISTORY

On July 20, 2001, plaintiff filed a complaint for damages against defendants PacifiCare of California, Inc. and PacifiCare Health Systems, Inc. (collectively PacifiCare).

The complaint alleged as follows: Plaintiff had developed prostate cancer. Plaintiffs doctors recommended that he undergo proton beam therapy. Because plaintiffs employer was in the process of changing health plans and entering into a new contract with PacifiCare, plaintiff asked PacifiCare if it would cover the therapy. PacifiCare told plaintiff that the therapy would be covered. Plaintiff subsequently enrolled in the PacifiCare plan, but PacifiCare denied coverage for the therapy. Plaintiff complained to the California Department of Managed Health Care (Department). When the Department submitted an inquiry to PacifiCare, PacifiCare advised the Department that it would cover the therapy. Thereafter, plaintiff received the therapy but PacifiCare then refused, and continues to refuse, to pay for the treatment. Based upon these allegations, plaintiff asserted causes of action for breach of the duty of good faith and fair dealing, breach of contract, unfair business practices under Business and Professions Code section 17200, intentional misrepresentation and negligent infliction of emotional distress.

On August 27, 2001, PacifiCare filed a notice of petition and petition to compel arbitration and for stay of proceedings (hereafter petition). On November 26, 2001, the trial court denied the petition. PacifiCare appeals.

On appeal, PacifiCare raises two issues:

(1) Whether Health and Safety Code section 1363.1 (section 1363.1) is preempted by the Federal Arbitration Act (FAA), or whether it is saved from preemption by the McCarran-Ferguson Act.

(2) Assuming arguendo that section 1363.1 applies, whether PacifiCare's plan documents comply with the disclosure requirements imposed by section 1363.1.

ANALYSIS

I. The FAA Does Not Preempt Section 1363.1

We first address preemption. Based on a recent case on point, Smith v. PacifiCare,¹ we conclude that the FAA does not preempt section 1363.1 by operation of the McCarran-Ferguson Act.

A Background

PacifiCare is a licensed heath care service plan. In a declaration filed in support of PacifiCare's petition, it stated: "PacifiCare is licensed in accordance with the Knox-Keene Health Care Service Plan Act of 1975, as amended, Cal. Health & Safety Code Section 1340 et seq. PacifiCare is a health care service plan that arranges for and facilitates the provision of health services for employer groups with which they contract."

"In California, health care service plans (or HMO's) are licensed and regulated by the Department of Managed Care under the Knox-Keene Act."² One of the provisions of the act is section 1363.1; it provides that a health care service plan that includes terms requiring binding arbitration to settle disputes, or providing for a waiver of the right to a jury trial, shall include the terms requiring binding arbitration as set forth under section 1363.1.

PacifiCare contends that section 1363.1 does not apply because it is preempted by the FAA. "The FAA applies to any `contract evidencing a transaction involving commerce' which contains an arbitration clause. (9 U.S.C. § 2.) Section 2 of the FAA provides that arbitration provisions shall be enforced, `save upon such grounds as exist at law or in equity for the revocation of any contract.' (Ibid.) Thus, a state court may, without violating section 2, refuse to enforce an arbitration clause on the basis of `generally applicable contract defenses, such as fraud, duress, or unconscionability.' (Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 687 [116 S.Ct. 1652, 1656, 134 L.Ed.2d 902, 909] (Casarotto).) Critically, however, a state court may not defeat an arbitration clause by applying state laws `applicable only to arbitration provisions.' (Ibid,)"³

In Erickson v. Aetna Health Plans of California, Inc.,⁴ we held that section 1363.1 was preempted by the FAA. We noted that section 1363.1 "imposes on arbitration clauses in health care plans `a special notice requirement not applicable to contracts generally,'" and such "arbitration clauses must satisfy special requirements as to form and content which are not imposed on contracts generally."<sup>5</sup> Hence, section 1363.1 "`"takes its meaning precisely from the fact that a contract to arbitrate is at issue ...,"' and, consequently, conflicts with section 2 of the FAA."⁶

In Smith, the Second Appellate District, Division Three, recognized that "[t]he FAA would appear to apply to the PacifiCare agreements at issue here."⁷ Smith, however, took the analysis one step further. Smith analyzed the McCarran-Ferguson Act and held that the FAA cannot preempt section 1363.1 because of the operation of the McCarran-Ferguson Act. Erickson did not address the McCarran-Ferguson Act.⁸

B. Smith Decided the Precise Issue in This Case: The McCarran-Ferguson Act Precludes the Preemption of Section 1363.1 by the FAA

The Smith court aptly described the McCarran-Ferguson Act as follows:

"Congress enacted McCarran-Ferguson in 1945.⁹ It sets forth a policy declaration that it is in the public interest that the primary regulation of the business of insurance be in the states, not in the national government. (15 U.S.C. § 1011.) It was passed in response to a United States Supreme Court decision (United States v. South-Eastern Underwriters Assn. (1944) 322 U.S. 533 [64 S.Ct. 1162, 88 L.Ed. 1440]), which held that the business of insurance was `commerce' within the meaning of the commerce clause and therefore the business of insurance was subject to all federal laws, including those relating to antitrust. (Id. at p. 553 .) This was a major change in the law. In 1869, the Supreme Court had held (Paul v. Virginia (1868) 75 U.S. (8 Wall.) 168,183 ) that insurance was not `commerce' and therefore was not subject to federal commerce clause statutes."¹⁰

"The clear purpose of McCarran-Ferguson was to abrogate this change and to insure that the states would continue to enjoy broad authority in regulating the dealings between insurers and their policyholders. [Italics added.] (Cochran v. Pojco, Inc. (5th Cir.1979) 606 F.2d 460, 462-63 .) As the Supreme Court itself later explained, `The McCarran-Ferguson Act was passed in reaction to this Court's decision in United States v. South-Eastern Underwriters Assn., 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440[, supra]. Prior to that decision it had been assumed, in the language of the leading case, that "[i]ssuing a policy of insurance is not a transaction of commerce." Paul v. Virginia, [75 U.S.] (8 Wall.) 168, 183[, 19 L.Ed. 357, supra]. Consequently, regulation of insurance transactions was thought to rest exclusively with the States. In South-Eastern Underwriters, this Court held that insurance transactions were subject to federal regulation under the Commerce Clause, and that the antitrust laws, in particular, were applicable to them. Congress reacted quickly.... The McCarran-Ferguson Act was the product of this concern. Its purpose was stated quite clearly in its first section; Congress declared that "the continued regulation and taxation by the several States of the business of insurance is in the public interest." 59 Stat. 33 (1945), 15 U.S.C. § 1011.... [¶] ... In context, however, it is relatively clear what problems Congress was dealing with. Under the regime of Paul v. Virginia, supra, States had a free hand in regulating the dealings between insurers and their policyholders. Their negotiations, and the contract which resulted, were not considered commerce and were, therefore, left to state regulation. The South-Eastern Underwriters decision threatened the continued supremacy of the States in this area. The McCarran-Ferguson Act was an attempt to turn back the clock, to assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation.' (SEC v. National Securities, Inc. (1969) 393 U.S. 453, 458-459 [89 S.Ct. 564, 567-568, 21 L.Ed.2d 668, 675-676] (National Securities), italics added.)"¹¹

"Thus, there seems little question that Congress, by its passage of McCarran-Ferguson, `returned to the states the plenary power to regulate the business of insurance that they had enjoyed prior to the South-Eastern. Underwriters decision. If Congress intended to invoke its Commerce Clause powers to occupy part of the field of insurance regulation, it would expressly say so.' (Cochran v. Paco, Inc., supra, 606 F.2d at p. 463, fn. omitted.)¹²"¹³

"The mandate of McCarran-Ferguson appears to be both plain and clear. An act of Congress may not be construed to `invalidate, impair, or supercede' a state law enacted `for the purpose of regulating the business of insurance' unless the federal act `specifically relates to the business of insurance.' (15 U.S.C, § 1012(b), italics added.) There is no dispute between the parties that the application of the FAA would have the effect of invalidating, impairing and superceding the operation of section 1363.1; indeed, it would absolutely preclude its use to...