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Court Of Appeals Allows Limited Discovery In Actions To Compel Contractual Arbitration

Division Two of the Arizona Court of Appeals issued an important opinion on the enforceability of arbitration provisions in health care agreements and the patient’s right to limited discovery in proceedings to compel arbitration. Gullett on behalf of Estate of Gullett v. Kindred Nursing Centers W., L.L.C., No. 2 CA-CV 2016-0049, 2017 WL 631624 (Ariz. Ct. App. Feb. 15, 2017).

In January 2013, Winford Gullett was admitted to Hacienda Care and Rehabilitation Center. He signed an Alternative Dispute Resolution Agreement requiring all claims arising out of any stay at Hacienda to be submitted to arbitration. Winford remained at Hacienda until his death on February 21, 2013.

Jeffrey Gullett subsequently filed suit against Kindred Nursing Centers West, L.L.C., doing business as Hacienda, alleging it had abused and neglected Winford in violation of Arizona’s Adult Protective Services Act (APSA), resulting in his death. Kindred then moved to compel arbitration pursuant to the agreement. Gullett argued in opposition the agreement was substantively unconscionable and discovery was required on the issue of procedural unconscionability. The trial court granted Kindred’s motion to compel arbitration and denied Gullett’s request for an evidentiary hearing.

Appeal

On appeal, Gullett argued the Agreement is substantively unconscionable because it limits discovery, requires that arbitration be administered by a non-neutral administrator, and the obligations under the agreement are not mutual. He also argues that the trial court should have granted his request for an evidentiary hearing so that he could conduct discovery to develop his claim of procedural unconscionability.

The Court of Appeals held the agreement was not substantively unconscionable. Although the agreement limits the number of interrogatories, requests for production, and depositions, it still permits fairly wide discovery. Further, the parties may agree or the arbitrator may order additional discovery. Because “the primary purpose of arbitration is to provide an inexpensive and speedy final disposition of disputes, as an alternative to litigation,” the Court found the discovery limitations were reasonable.

The Court then considered Gullett’s argument because the entity charged with administration of arbitration is paid by Kindred, it is not neutral. The Court rejected the argument, finding the agreement requires an independent impartial entity conduct the arbitration, and the arbitrator is mutually selected by the parties.

Gullett also argued the agreement is not mutual, but the Court found that it was not one-sided and therefore not unconscionable.

The Court turned to Gullett’s arguments regarding procedural unconscionability. The Court denied procedural unconscionability as fairness in the bargaining process, including unfair surprise, use of fine print, and mistakes or ignorance of important facts. Gullett asserted that because his father was dead, he needed discovery of the circumstances surrounding his father’s signing of the agreement and an evidentiary hearing on the procedural unconscionability issues.

Standard of Review

The Court noted that prior decisions held a motion to compel arbitration is akin to a motion for summary judgment. The trial court first determines whether there are genuine issues of material facts and if not, the court can make a ruling. If disputed issues of fact exist, the trial court must hold an expedited evidentiary hearing. However, the Court recognized that the Arizona appellate courts had never considered whether a party opposing arbitration has the right to conduct discovery for the limited purpose of obtaining evidence concerning procedural unconscionability.

The Court began with a discussion of the summary judgment process. Although a party can file a motion for summary judgment soon after the initiation of litigation, the courts recognize that a party typically is entitled to a reasonable opportunity to conduct discovery in order to obtain evidence with which to oppose the motion. Similar considerations apply to a motion to compel arbitration, where the enforceability of the arbitration agreement is at issue.

Analysis & Holding

The Court observed the law favors arbitration, but only where the parties have agreed to arbitrate the dispute. The party challenging the arbitration agreement has the burden of proving the contract defense. The Court noted other courts have held there is a need for pre-arbitration discovery to determine whether an agreement to arbitrate was obtained under procedurally unconscionable conditions and/or whether there was a meeting of the minds. The Court found this approach consistent with the requirement that a court must consider each agreement on its on facts when determining whether the agreement is procedurally unconscionable.

The Court found limited discovery on the issue of procedural unconscionability is consistent with Arizona public policy favoring arbitration. Decisions on issues of procedural unconscionability will no longer be a “guessing game.” Arbitration agreements are subject to the same defenses as any other contract, and the trial courts are obligated to determine the validity of the agreement before ordering arbitration.
The Court rejected the notation that allowing limited discovery on the issue of procedural unconscionability would result in protracted and inappropriate discovery. Noting trial judges have broad discretion to control the scope and extent of discovery, the Court observed trial judges can limit the frequency or extent of discovery or use protective orders to control the scope of discovery.

Here, Gullett’s father and Kindred’s representative were the only participants present when Kindred and Gullett’s father entered into the arbitration agreement. Gullett’s father required in-patient care because of serious health problems, and he died approximately one month later. Because his father is unavailable, Gullett would be unable to oppose arbitration on the basis of procedural unconscionability without limited discovery on that issue. The Court reasoned “[t]he ability to mount a procedural unconscionability defense to arbitration should not depend on something as fortuitous as whether the individual who signed the agreement remains able to testify.”

The Court reversed the trial court’s decision and ordered that Gullett was entitled to limited discovery on the issue of procedural unconscionability.

Takeaway

The Court’s decision is a mixed bag for clients who use arbitration agreements as a means to control legal expenses and expedite resolution of claims. The Court’s decision reiterates its commitment to enforce fair arbitration agreements. However, where there are allegations of procedural unconscionability, the claimant may be entitled to limited discovery and an evidentiary hearing before the trial court orders the parties to arbitration.

ABOUT THE AUTHOR: Lynn Allen is a partner at Tyson & Mendes, LLP. She specializes in general liability defense, insurance coverage, and bad faith litigation. Contact Lynn at 602.386.5660 or lallen@tysonmendes.com.