Because courts apply a presumption of arbitrability when they analyze whether particular claims fall within the scope of an arbitration clause, and arbitration clauses are generally drafted very broadly, I don’t usually get to write about courts finding that a dispute falls outside the scope of arbitrable claims. But this week, both the Second and Third Circuits issued decisions holding that defendants could not compel arbitration because the plaintiffs’ claims fell outside the arbitration clause.
In Allstate Ins. Co. v. Mun, 2014 WL 1776007 (2d Cir. May 6, 2014), Allstate alleged that two New York providers had engaged in insurance fraud. Allstate had already paid the providers for their services, and sought to recover those payments. After Allstate sued, the providers moved to compel arbitration. The district court denied the motion and the Second Circuit affirmed that decision. Both courts found that the arbitration provision, although “appear[ing] quite broad,” only applied to disputes over claims for first-party benefits (i.e. the providers’ initial request for payment). The courts reached that conclusion in part because of its interpretation of aspects of New York’s no-fault insurance statutes, which had been interpreted to require arbitration only of first party claims..
In CardioNet, Inc. v. Cigna Health Corp., 2014 WL 1778149 (3d Cir. May 6, 2014), medical device providers sued CIGNA for its decision not to pay for services related to those devices (after it had covered such services for four years). The device company had brought two types of claims: 1) direct tort claims relating to a letter that CIGNA sent to doctors calling the devices experimental and unproven; and 2) derivative claims on behalf of individual insureds under ERISA. CIGNA moved to compel arbitration. The district court granted the motion, but the appellate court vacated that decision, finding both categories of claims fell outside the scope of the parties’ arbitration agreement.
The Third Circuit found the direct claims about the letter to doctors were not arbitrable. The parties’ contract provided for arbitration of disputes “regarding the performance or interpretation of the Agreement,” and the court found that “whether CIGNA performed its obligations under the Agreement has no bearing on whether it harmed the [device company] by providing physicians with misleading information” about their services.
The Third Circuit also found that the derivative claims were outside the scope of the Agreement’s arbitration provision. The district court had enforced the arbitration agreement because it felt to do otherwise would allow the device company to “nullify their agreement to arbitrate these claims for payment by becoming assignees of the Plan Participants’ claims.” The Third Circuit disagreed for two reasons. First, it found that the underlying claims did not concern the “performance or interpretation of the Agreement” and therefore the claims would not have been arbitrable even if the device company brought them directly. Second, it found that as an assignee, the device company was in the same legal position as the plan participants, and therefore should be treated as a non-signatory even if the claims fell within the arbitration clause. “Just as the burden of arbitration must travel with a claim, so too, must the right to litigate.”
These decisions may be part of a new direction in arbitration case law. Courts are only authorized to decide three things: whether the parties formed an arbitration agreement; whether that agreement is valid under state and federal law; and whether the instant dispute falls within the scope of that arbitration agreement. But SCOTUS continues to narrow (via Buckeye Check Cashing, Concepcion, Italian Colors, etc) – or should I say knock out — the potential bases for finding an arbitration agreement invalid. It is then a very logical reaction for parties, counsel, and courts who want to get around arbitration agreements to focus on the other two categories of arguments — formation and scope. Indeed there have been many state cases recently finding the parties never formed an arbitration agreement (often based on lack of authority). And these two cases may be leading the way on scope. (I note that the Third Circuit raised concerns about the “policy implications” of forcing the participants’ claims into arbitration…)