Mount Diablo Medical Center v. Health Net

• Decision Date: 28 August 2002
• Docket Number: No. A096018.,A096018.
• Citation: 124 Cal.Rptr.2d 607,101 Cal.App.4th 711
• Court: California Court of Appeals Court of Appeals
• Parties: MOUNT DIABLO MEDICAL CENTER, Plaintiff and Respondent, v. HEALTH NET OF CALIFORNIA, INC., Defendant and Appellant.

124 Cal.Rptr.2d 607

101 Cal.App.4th 711

MOUNT DIABLO MEDICAL CENTER, Plaintiff and Respondent, v. HEALTH NET OF CALIFORNIA, INC., Defendant and Appellant.

No. A096018.

Court of Appeal, First District, Division 3.

August 28, 2002.

Glenn E. Solomon, Mark Johnson, Hooper, Lundy & Bookman, Inc., Los Angeles, CA, for plaintiff and respondent Mount Diablo Medical Center.

John M. Grenfell, Shawn Hanson, Matthew P. Vandall, Pillsbury Winthrop LLP, San Francisco, CA, for defendant and appellant Health Net.

POLLAK, J.

We confront what one commentator has characterized as "the thorny question of contract construction raised by the generic choice-of-law clause" in an agreement calling for the resolution of disputes by arbitration.¹ Appellant Health Net of California, Inc. (Health Net) appeals from the denial of its petition to compel arbitration of the claims of respondent Mount Diablo Medical Center (Mt.Diablo) and to stay the litigation in which Mt. Diablo asserts those claims. The trial court denied the petition under Code of Civil Procedure section 1281.2, subdivision (c) (hereafter section 1281.2(c)), finding that the arbitration would create a risk of rulings that conflict with rulings in pending litigation involving third parties. Health Net contends the clause choosing California law in the contract between the parties does not evince an intention to render their agreement to arbitrate subject to the terms of the California Code of Civil Procedure, so that section 1281.2(c) has been preempted by the Federal Arbitration Act, 9 United States Code section 1 et seq. (FAA), and that the federal statute requires that the arbitration agreement be enforced despite the potential for conflicting results. The trial court read the choice-of-law provision more broadly and therefore rejected this contention. We interpret the authorities on the subject to require the court to look first to the language of the contract to determine what portions of state law the parties intended to incorporate, and then, if any ambiguity exists, to determine whether the provision in question conflicts with the objectives of the FAA. Under this approach, we conclude that the parties intended to incorporate California procedural law governing the enforcement of their agreement to arbitrate, and that these provisions are not preempted. Therefore we affirm.

Factual and Procedural Background

The relevant facts are not controverted. Mt. Diablo is an acute care hospital located in Concord, California. As of June 1,1995, it entered into a "fee-for-service" agreement, entitled the Health Net Per Diem Hospital Agreement for Mt. Diablo Medical Center (Health Net/Mt. Diablo Agreement), with Health Net, a health care service plan,² under which Health Net agreed to pay Mt. Diablo specified fees for providing health care services to plan members.³ As contemplated by the Health Net/Mt. Diablo Agreement, effective January 1, 1998, Health Net entered into a "third party payor capitation agreement" with Alta Bates Medical Center (Alta Bates) (the Health Net/Alta Bates Agreement), under which Alta Bates agreed to be responsible for providing medical services to Health Net plan members on the basis of capitated or prepaid rates, as distinguished from fee-for-service rates, with the understanding that Alta Bates would subcontract its obligations to individual providers or hospitals such as Mt. Diablo. Alta Bates in turn had a preexisting Hospital Participation Agreement with Mt. Diablo, under which Mt. Diablo agreed to provide covered services at the capitated rates to Health Net members who selected the Alta Bates network of providers. As of May 1, 1999, Mt. Diablo purported to terminate its Hospital Participation Agreement with Alta Bates.

The underlying controversy relates to who is responsible and in what amounts for services that Mt. Diablo rendered to Health Net members after the termination of the Hospital Participation Agreement. Mt. Diablo's complaint asserts several causes of action against Health Net and Alta Bates, and also against East Bay Medical Network (EBMN), which is the processing agent for Alta Bates, and against PacifiCare of California (Pacifi-Care), another health care service plan with which Mt. Diablo and Alta Bates had contractual arrangements similar to those with Health Net and with which a similar controversy exists. The complaint alleges, among other things, that Health Net breached the Health Net/Mt. Diablo Agreement by failing to pay Mt. Diablo at the fee-for-services rate for hospital services rendered Health Net members between May 1 and December 31, 1999, and it also alleges that Alta Bates and EBMN breached an oral agreement to pay these same amounts to Mt. Diablo. The complaint alleges breach of implied contract, open book account, quantum meruit, and unjust enrichment claims against all of the defendants.

The Health Net/Mt. Diablo Agreement contains a broad arbitration agreement, which unquestionably encompasses the present controversy between these two parties.⁴ The agreement also contains a separate provision concerning choice of law, which reads in relevant part: "The validity, construction, interpretation and enforcement of this Agreement shall be governed by the laws of the State of California." The Health Net/Alta Bates Agreement and the Hospital Participation Agreement also contain arbitration provisions, but no party other than Health Net has attempted to resolve any aspect of the present controversy through arbitration, nor has any attempt been made to arbitrate Mt. Diablo's similar claim against PacifiCare.

After being served with Mt. Diablo's complaint, Health Net filed a petition to compel arbitration of the dispute. Mt. Diablo opposed the petition on the ground that its claim against Health Net overlapped its claims against Alta Bates and EBMN, and that the court should exercise its discretion under section 1281.2(c) to refuse to compel arbitration because of the potential for inconsistent rulings if the controversy were adjudicated in multiple forums. Mt. Diablo argued that because its agreement with Health Net provided for the application of California law, section 1281.2(c) rather than the FAA, which gives the court no discretion to deny arbitration on this ground, applies. (Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (Volt).) The trial court denied the petition on this basis, ruling that "(a) the Supreme Court's decision in [Volt ] is controlling; (b) the parties to the arbitration agreement expressed a clear intent to incorporate the California Rules of Arbitration (Code of Civil Procedure section 1281, et. seq.) into their agreement through a general California choice-of-law clause; and (c) allowing arbitration to proceed would create a risk of conflicting rulings as described in ... section 1281.2(c)."

Health Net has timely appealed the denial, as it may do under Code of Civil Procedure section 1294, subdivision (a). On appeal, it does not dispute the manner in which the trial court exercised its discretion under section 1281.2(c), but it contends that the choice-of-law provision in the Health Net/Mt. Diablo Agreement should not be interpreted to call for the application of section 1281.2(c). Therefore, it argues, the FAA has preempted this provision of California law and the court was required to enforce the arbitration provision. As the parties agree, this issue presents a question of law subject to de novo review by the appellate court. (Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199, 1212, 78 Cal. Rptr.2d 533.)

Discussion

Section 1281.2(c) authorizes the court to refuse to enforce a contractual arbitration provision if arbitration threatens to produce a result that may conflict with the outcome of related litigation not subject to arbitration. Section 1281.2 provides that on petition of a party to an arbitration agreement, the court shall order the parties to arbitrate the controversy "unless it determines that ... [¶] (c) A party to the arbitration agreement is also a party to a pending court action ... with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact," in which case "the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action ...; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action ... pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action. ..."

The FAA, however, contains no similar provision. The federal statute was enacted in 1925 to "overrule the judiciary's longstanding refusal to enforce agreements to arbitrate" (Dean Witter Reynolds, Inc. v. Byrd (1985) 470 U.S. 213, 219-220, 105 S.Ct. 1238, 84 L.Ed.2d 158), and to place arbitration agreements "`upon the same footing as other contracts....'" (Scherk v. Alberto-Culver Co. (1974) 417 U.S. 506, 511, 94 S.Ct. 2449, 41 L.Ed.2d 270.) It provides for the enforcement of arbitration provisions in any contract evidencing a transaction involving interstate commerce. (9 U.S.C. § 2.)⁵ The modern era of Supreme Court interpretation of the FAA begins with Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765, in which the court held that the FAA "establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay or a like defense to arbitrability." However, the FAA leaves room for states to enact some rules affecting arbitration. (Volt, supra, 489 U.S....