Is Your Arbitration Agreement Enforceable?

by Snell & Wilmer

Snell & Wilmer

Health care providers may favor arbitration due to the perception that it is a faster, less expensive alternative to litigation. State and federal policy favors arbitration for the same reasons.  Because of the strong public policy favoring arbitration, doubts as to whether a case is subject to arbitration are resolved in favor of arbitration.[1]  (Arbitration may also provide a desired level of confidentiality by preventing allegations from becoming a matter of public record in court.)  Arbitration agreements, however, are subject to the same defenses to enforceability as any other contract.[2]

A recent decision of the Arizona Court of Appeals provides guidance for evaluation of the enforceability of arbitration agreements. Gullett v. Kindred Nursing Centers West, LLC arose out of the plaintiff’s claims that a rehabilitation center had abused and neglected his father, who lived there for the last month of his life.[3]  After the complaint was filed, the defendant moved to compel arbitration pursuant to an agreement signed by the decedent upon admission.  The plaintiff opposed arbitration, arguing that the agreement was substantively and procedurally unconscionable.  After evaluating several aspects of the agreement, the Court held that the agreement was not substantively unconscionable, but remanded to the trial court for further proceedings regarding procedural unconscionability.

“Substantive unconscionability concerns the actual terms of the contract and examines the relative fairness of the obligations assumed.”[4]  Essentially, the terms of the arbitration agreement cannot be so one-sided as to oppress or unfairly surprise the patient or employee.  The plaintiff in Gullett argued that the arbitration agreement was inappropriately one-sided for at least three reasons: (1) it did not provide sufficient discovery to allow plaintiff to prosecute his case; (2) it provided an inherently biased arbitrator; and (3) it lacked mutuality.  The Court evaluated and rejected each of these arguments.

When a party agrees to arbitration, it may trade some procedures available in traditional litigation for simplicity, informality, and speed. Thus, while parties are entitled to enough discovery to effectively arbitrate their claims, discovery need not be unlimited or even equivalent to the amount allowed under the Rules of Civil Procedure.  Discovery provisions in an arbitration agreement are only unconscionable if the amount of permitted discovery is so low and the burden to obtain additional discovery is so high that the litigant is not able to prosecute his claim.  Accordingly, the Court upheld the arbitration agreement in Gullett, which provided discovery that was similar to, and in some cases broader than, the discovery allowed under the Arizona Rules of Civil Procedure.

As to alleged arbitrator bias, the Court acknowledged that an independent arbitrator is necessary for fair and effective dispute resolution.  The Court rejected the plaintiff’s argument, however, that such independence was unavailable as a result of a clause in the agreement naming a particular entity that “may” provide arbitration services.  The Court recognized that this language did not require the use of the named entity, and focused instead on the requirement that arbitration “be conducted by an independent impartial entity.”

Finally, plaintiff argued that the arbitration agreement was impermissibly one-sided because it did not require the rehab facility to give up its rights to any judicial claims because it had none. The Court declined this argument, again focusing on the language of the agreement, which required both parties to arbitrate “any and all claims or controversies arising out of or in any way relating to” the parties’ agreement or the resident’s stay.  In the Court’s view, this showed that both parties had mutually waived their right to seek redress in the courts.  Finding the arbitration agreement sufficiently fair, the Court held that it was not substantively unconscionable.

The Court’s procedural unconscionability analysis was a different story. “Procedural unconscionability addresses the fairness of the bargaining process, including such concerns as unfair surprise, fine print clauses, mistakes or ignorance of important facts or other things that mean bargaining did not proceed as it should.”[5]  On this point, the Court remanded for a hearing regarding the process through which the decedent’s agreement to the arbitration agreement was obtained.  The court reasoned that the transaction needed to be examined, which required some limited discovery and an evidentiary hearing.  This was due in part to a fact that is somewhat unique in the healthcare context – the decedent was one of only two people present when the agreement was signed, and he entered the agreement due to his own serious health problems and died shortly thereafter.  Therefore, the Court reasoned, it would be impossible for the plaintiff to oppose arbitration without at least some limited discovery into circumstances under which the agreement was entered.  Thus, although the Court determined that the agreement was substantively valid, it remanded the case for further proceedings in the trial court limited to the issue of procedural unconscionability.

Interestingly, just before the Arizona Court of Appeals announced its decision in Gullett, the Florida Supreme Court held in Hernandez v. Crespo an arbitration agreement between a physician and patient unenforceable because it was too imbalanced in favor of the physician.[6]  The Hernandez Court did not make its decision under traditional unconscionability grounds, instead finding that the agreement violated public policy set forth in Florida’s Medical Malpractice Act.[7]  Although decided under Florida law, this case, along with Gullett, provides important guidance in evaluating health care arbitration agreements.

Health care providers may wish to consider including arbitration agreements in their employment contracts and conditions of admission.  These recent decisions are a reminder, however, that these arbitration agreements need to be drafted carefully and reviewed regularly to ensure they remain valid.  It may also be important to watch the outcome of the Gullett case after remand for guidance regarding the process for obtaining an enforceable arbitration agreement.

[1] See, e.g., City of Cottonwood v. James L. Fann Contracting, Inc., 179 Ariz. 185, 189 (App. 1994).

[2] Duenas v. Life Care Ctrs. Of Am., Inc., 236 Ariz. 130 (2014).

[3] 390 P.3d 738 (App. 2017).

[4] Id. at ¶ 7 (quoting Maxwell v. Fid. Fin. Servs., Inc., 184 Ariz. 82, 89 (1995).).

[5] Id. at ¶ 26 (internal citation omitted).

[6] No. SC15-67 (Fla. Dec. 22, 2016).

[7] Fla. Stat. § 766.207-212.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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