Brandon, Jones, Sandall, Zeide, Kohn, Chalal & Musso, P.A. v. MedPartners, Inc.
Docket: No. 99-8624-CIV
Court: District Court, S.D. Florida; September 20, 2001; Federal District Court
A series of motions were presented to the Court, including a renewed motion from the Orthopedic Center and various plaintiffs to compel arbitration and for attorneys’ fees, as well as motions from defendants to excuse the arbitration panel and to dismiss the case. The Court held oral arguments on these motions. The underlying dispute stems from a 1994 clinic services management agreement between the Orthopedic Center and MedPartners, which includes a guaranteed minimum compensation of $5.35 million annually and provisions for arbitration of certain disputes. Specifically, the arbitration clauses require binding arbitration to resolve disagreements over payment amounts and breach of contract allegations after notice and an opportunity to cure has been provided. The arbitration process mandates that both parties select arbitrators, with a decision to be reached within three weeks of the payment due date. The prevailing party in arbitration is entitled to recover fees and costs from the losing party. Following arbitration, MedPartners is required to pay the determined amount plus interest within five days, and upon receipt, the Orthopedic Center must provide a release acknowledging the settlement.
If a majority of arbitrators determine that one party owes over $50,000 to the other, the owing party is considered 'the losing party.' Similarly, if they find sufficient grounds for breach of the Agreement justifying termination, the breaching party is also deemed 'the losing party.' MEDPARTNERS can terminate the Agreement based on alleged lack of industry by physician shareholders and P.A. employees, provided they notify the involved parties of the breach and the specific reasons. The alleged breaching party has six months to cure the breach. If the breach persists, arbitration procedures are triggered, with specific outcomes depending on which party the arbitrators rule against.
If a party believes the other has breached the contract, they must notify the alleged breaching party, who then has time to cure the breach or contest it. Failure to resolve the matter leads to a demand for arbitration, governed by the American Arbitration Association, with costs split between the parties. Each party selects one arbitrator, who, together, will choose a third arbitrator, and arbitration is to occur within three weeks in Palm Beach County, Florida. The Clinic Services Agreement remains effective until the arbitrators decide, and their decision is binding.
In May 1999, a dispute arose when MedPartners alleged a lack of industry among the Orthopedic Center's doctors and threatened termination of the Agreement. The Orthopedic Center claims MedPartners underpaid them by $277,240 in April 1999 and has withheld approximately $200,000 monthly since then, totaling about $5.8 million owed as of July 15, 2001. The Orthopedic Center filed for arbitration on May 21, 1999, due to the unilateral payment reductions and later amended the claim to include anticipatory breach after further reductions occurred. MedPartners consented to arbitration.
The Orthopedic Center sought $554,518 in back compensation for April and May 1999 and over $40 million in future damages due to anticipatory breach of a management agreement. MedPartners moved to strike this amended claim but the Arbitrators ruled it would be heard. Subsequently, MedPartners sued the American Arbitration Association (AAA) in Alabama, obtaining a temporary restraining order preventing the AAA from arbitrating any claims except the April 1999 payment dispute. The AAA did not respond, claiming it was not a proper party to the lawsuit. MedPartners also filed a fraud and breach of contract suit against the Orthopedic Center, alleging failure to meet contractual obligations. The Orthopedic Center sought to dismiss or stay the action in favor of arbitration.
On July 28, 1999, a hearing was converted into a final trial without the AAA being served notice. The state court issued a permanent injunction against the AAA, limiting its involvement to the April payment dispute, while the Orthopedic Center was not named in these proceedings. On August 9, 1999, the Arbitrators debated their rights given the state court injunction. Despite MedPartners' claims that the injunction extended to the arbitration panel, the arbitrators determined they were not bound by the injunction as they were not employed by the AAA. The Orthopedic Center argued that further arbitration delays would cause it substantial prejudice, citing MedPartners' financial troubles, including a $1.3 billion loss in 1998. On August 11, 1999, the arbitrators voted to proceed with arbitration, regardless of the AAA's inability to participate due to the injunction.
On August 12, 1999, the American Arbitration Association (AAA) documented a panel majority's decision, while MedPartners secured an order from an Alabama state court regarding potential civil contempt against the arbitrators. The AAA subsequently moved the case to the Northern District of Alabama, where Judge U.W. Clemon denied MedPartners' motion as premature, noting that the arbitrators had not yet violated the injunction. On August 18, 1999, the final arbitration hearing commenced in West Palm Beach, Florida, where the arbitrators concluded that the injunction did not apply to them, despite the absence of AAA representatives at the hearing. That same day, MedPartners accused the AAA and the arbitrators, Mssrs. Burman and Engelhard, of contempt for their votes. Judge Clemon halted the Florida arbitration and mandated that Burman and Engelhard attend contempt proceedings in Birmingham.
On August 19, Judge Clemon ruled that Burman and Engelhard were in contempt for not adhering to the state court order, prohibiting them from conducting arbitration until further notice, and imposed a monetary sanction for attorneys’ fees to MedPartners. The arbitrators appealed to the Eleventh Circuit, but the appeal was dismissed due to lack of jurisdiction since the fee was not liquidated. MedPartners later added the Orthopedic Center as a defendant and consolidated the case in Alabama. On September 15, 1999, the Orthopedic Center sought to dissolve the injunction against the AAA and to transfer the case to Florida. After a year of judicial inaction, the Orthopedic Center appealed to the Eleventh Circuit, claiming the district court's delay effectively denied its motions.
The Orthopedic Center had initiated a lawsuit on July 23, 1999, to compel arbitration, which MedPartners removed to federal court. The court dismissed the motion on November 10, 1999, asserting the Orthopedic Center was bound by the Jefferson County injunction against the AAA. However, the Eleventh Circuit reversed this dismissal on April 17, 2001, ruling that the Orthopedic Center was not bound by the injunction since it was not a party to the case and had no obligation to intervene to avoid issue preclusion. This ruling is now final, with the mandate issued.
On April 30, 2001, the Eleventh Circuit ruled on Med-Partners' federal suit in the Northern District of Alabama, deciding not to address the district court's refusal to rule on the Orthopedic Center's motions regarding the injunction or arbitration. Instead, the court ordered the case's transfer to the Southern District of Florida for consolidation with a related case. Med-Partners' motion for rehearing en banc was denied, and the mandate was issued on July 6, 2001, placing the entire case before the current court.
On July 24, 2001, the Orthopedic Center filed an Amended Complaint and renewed its motion to compel arbitration. In response, MedPartners moved to dismiss the Amended Complaint and requested to excuse the AAA arbitration panel. The Orthopedic Center also sought to dissolve the Alabama state court injunction, claiming that during a two-year arbitration delay, MedPartners withheld approximately $5.8 million due to them. The Orthopedic Center's motion included claims for each overdue payment and requested to prevent the termination of their management agreement.
The legal analysis section outlines that the plaintiff seeks arbitration under 9 U.S.C. § 43 and Florida Statute § 682.03(1). Both parties agree that arbitration is appropriate for a disputed payment from April 1999 under their Agreement; however, MedPartners contests the arbitration of the Center’s anticipatory breach claim, asserting it exceeds the arbitration provisions. The arbitrators had previously ruled that the Agreement grants them authority over this claim. MedPartners cites *First Options of Chicago, Inc. v. Kaplan* to argue that this court should determine arbitrability unless there is clear evidence of the parties’ intent to delegate this authority to the arbitrators.
The court concludes that arbitration is appropriate for both the anticipatory breach claim and the disputed payment claims, emphasizing that the determination of arbitrability is fundamentally a contract law issue guided by state law principles. Under Florida law, contracts should be interpreted to reflect the parties' intent, and the arbitration provisions of the Agreement explicitly mandate arbitration under AAA rules, which include the stipulation that these rules apply as of the time the demand for arbitration is received.
Federal Courts interpreting Rule 1 have determined that parties agreeing to arbitration with the AAA accept its procedural rules unless specified otherwise in their contract. In P. P Indus. Inc. v. Sutter Corp., the court affirmed that parties consented to the AAA Rules that were in effect at the time of arbitration initiation. UNC, by contracting with the AAA, agreed to any amendments to these rules, thus the 1999 version applies to this dispute initiated in May 1999. Under the 1999 AAA Rules, specifically Rule 8, arbitrators have the authority to determine their own jurisdiction, including the validity and scope of the arbitration agreement. Challenges to jurisdiction must be raised promptly, and arbitrators can address these objections as preliminary matters or in their final award. MedPartners argued that the 1999 version of Rule 8 should not apply since the Agreement was made in 1996, but this argument fails as Rule 1 states that the applicable rules are those in effect at the time of arbitration demand. MedPartners could have explicitly excluded subsequent amendments but did not. Consequently, the 1999 version of Rule 8 governs this arbitration, affirming that the procedural rules of the AAA are incorporated into the Agreement by reference, as the parties did not limit their applicability.
P. P and Sutter implicitly agreed to the American Arbitration Association (AAA) rules for arbitration by not designating alternative rules, indicating a mutual consent to arbitrate issues regarding arbitrability. The Arbitrators possess the authority to make determinations on arbitrability under Rules 1 and 8. Section G of the management agreement mandates arbitration for disputes over payments owed or due, which encompasses debts arising from breaches of the agreement. Section 6.2(c) requires Med-Partners to initiate arbitration to terminate the contract for lack of industry. Assuming the Orthopedic Center's allegations are accurate, actions taken by Med-Partners, such as halting monthly payments and suing for fraud and breach, indicate that Med-Partners triggered arbitration provisions. The terms of Section 6.2(d) explicitly require arbitration for breach of contract allegations, and Florida law entitles the Orthopedic Center to claim damages for anticipatory breach. Med-Partners' argument that the agreement provisions do not permit arbitration of the anticipatory breach is overly narrow, as the core dispute involves what payments are owed, directly relating to the merits of the claims. Furthermore, Med-Partners' assertion that it did not formally seek contract termination through arbitration is countered by its letter indicating a repudiation of the compensation clause and intention to terminate. Thus, termination is a relevant issue, reinforcing the applicability of Section G. Case law supports the Arbitrators' authority to address anticipatory breach claims, permitting remedies, including monetary damages, even if not explicitly stated in the contract.
An arbitrator's authority to award damages is considered an integral part of the arbitration contract, as highlighted in Mastrobuono v. Shearson Lehman Hutton, Inc., where the Supreme Court found that punitive damages could be awarded in arbitration if not explicitly excluded. The broad authority of arbitrators to fashion remedies is supported by Totem Marine Tug, Barge, Inc., and the affirmation of awards for remedies not explicitly mentioned in contracts, such as back pay, is found in Minute Maid Co. v. Citrus, Cannery, Food Processing and Allied Workers. Under federal law, any ambiguities in arbitration clauses must favor arbitration, as established in AT&T Techs. Inc. v. Communications Workers of America.
In the context of Florida law, the Orthopedic Center is entitled and required to seek all damages related to MedPartners’ alleged conduct in a single arbitration proceeding, particularly since the claimed damages stem from a single act of contract breach. The principle that all damages from a single breach must be sought in one action is reinforced by National Educ. Ctrs. v. Kirkland. The Orthopedic Center's anticipatory breach claim falls within the arbitration clause and complies with Florida law, preventing MedPartners from evading arbitration through strategic legal maneuvering.
MedPartners has requested to excuse two remaining arbitration panel members due to perceived bias linked to an injunction from an Alabama state court. They argue that one arbitrator's disclosure of MedPartners' financial status was inappropriate. However, the motion to excuse the arbitrators is denied, as the Federal Arbitration Act does not permit interlocutory review of arbitrator qualifications or bias; such reviews are limited to post-arbitration judicial decisions regarding awards.
Court action under the Federal Arbitration Act (FAA) is limited to circumstances following a final arbitration award. Parties involved in arbitration must typically await the final award before pursuing judicial review. No provisions in the FAA allow for judicial scrutiny of an arbitrator's qualifications except in actions to confirm or vacate an award. In this case, the court declined to excuse the arbitrators based on MedPartners’ claims regarding bias or partiality, ultimately dissolving an injunction issued by a state court that had hindered arbitration proceedings. The court emphasized that the allegations of bias against Mr. Burman, who served as a non-neutral arbitrator, lacked credible evidence of dishonesty or improper conduct. It was noted that a partisan arbitrator is permissible as long as they act honestly. The plaintiff's request to dissolve an ex parte injunction against the American Arbitration Association (AAA) was granted, leading to the dismissal of the associated case. The court affirmed that arbitrators possess strict immunity from lawsuits intended to disrupt their jurisdiction, a principle upheld by multiple federal appellate courts.
Arbitral immunity extends to situations where an arbitrator's authority is challenged, as established in Tamari v. Conrad, 552 F.2d 778 (7th Cir. 1977), and is upheld under Florida law, specifically in Hospitality Ventures v. American Arbitration Ass’n, 755 So.2d 159 (Fla. 4th DCA 2000). The law specifies that only the parties to the arbitration agreement can contest arbitration's propriety, relieving potential arbitrators from unnecessary litigation costs. This policy aims to protect the arbitration process, preventing intimidation of arbitrators, similar to the protection afforded to empaneled jurors. The AAA Rules, which MedPartners agreed to, further reinforce this immunity by stating that neither the AAA nor arbitrators are liable for actions taken during arbitration. Additionally, MedPartners' interests are adequately safeguarded through judicial review of arbitration awards, making pre-arbitration injunctions unnecessary. MedPartners contended that arbitral immunity does not protect against claims for equitable relief; however, the court found that the legal distinction was irrelevant, as immunity applies equally to both damages and equitable claims. The court also considered MedPartners' federal suit against the Orthopedic Center, asserting that claims of fraud and breach of contract are subject to arbitration under the Federal Arbitration Act and Florida statutes. The court emphasized that parties cannot avoid arbitration by rephrasing their claims, and that allegations of fraud must pertain specifically to the arbitration clause to warrant judicial intervention; otherwise, they must be resolved in arbitration.
In *Western International Media Corp. v. A.R. Johnson*, the court addressed MedPartners' complaint against the Orthopedic Center, which was directly related to ongoing arbitration regarding compensation claims. MedPartners' defenses in that arbitration included allegations that the Orthopedic Center physicians' performance had declined, impacting their guaranteed minimum compensation. The Orthopedic Center argued that these allegations were pretextual, aimed at advancing MedPartners' strategy of divesting from physician management contracts. The court found that MedPartners' suit was closely connected to the arbitration issues and therefore subject to arbitration under federal and Florida law.
The court granted the Orthopedic Center's motion to compel arbitration and dismissed MedPartners' lawsuit against the American Arbitration Association (AAA) with prejudice, while reserving the right to award costs and fees. The court also stayed MedPartners v. Brandon Jones pending arbitration, denied MedPartners' motion to excuse the arbitration panel, and retained jurisdiction to address any arbitration outcomes, including fees and costs. The Orthopedic Center claimed that MedPartners' rationale for terminating compensation was unfounded and part of a broader plan to eliminate its physician practice management operations, as noted in its 1998 10K form. All pending motions were denied as moot, and the case was closed.
The Orthopedic Center claims entitlement to unpaid compensation for April and May 1999, as well as future damages reflecting the guaranteed minimum annual compensation under the Agreement due to an anticipatory breach. An injunction has been issued that permanently bars the AAA from conducting further arbitration between MedPartners and the P.A., except for determining the amount owed for April 1999. The arbitration proceedings are limited solely to this calculation.
The document outlines that a party aggrieved by another's failure to arbitrate can petition a U.S. district court to compel arbitration as per the agreement's terms. If the court finds no substantial issue regarding the arbitration agreement's validity, it will order compliance; if a substantial issue exists, the court will conduct a summary hearing to resolve it. Federal courts must defer to arbitrators' decisions on arbitrability as they would on the merits of the case.
Mr. Engelhard, the neutral arbitrator, indicated that MedPartners' financial status was a minor issue, while MedPartners has accused Mr. Burman of violating AAA's Canon III, a claim lacking substantial evidence. Importantly, the AAA Preamble clarifies that this Canon does not influence arbitration rules or create additional grounds for judicial review. MedPartners argues that Alabama law, which seems questionable in this context, allows for an injunction against the AAA to prevent improper arbitration, referencing the case Riscorp, Inc. v. Occupational Safety Ass’n of Alabama Workmen’s Compensation Fund.
The Alabama Supreme Court upheld a trial court's preliminary injunction preventing the American Arbitration Association (AAA) from overseeing arbitration, focusing on a party's misconduct in disregarding a court order to arbitrate. The court did not discuss arbitral immunity or the AAA's actions beyond the parties' conduct. This ruling does not support MedPartners' claim that Alabama courts permit injunctions against the AAA in similar situations, which contradicts federal law. MedPartners contends that the Hospitality Ventures case is limited to Florida Statutes section 682.03, but this section parallels the Uniform Arbitration Act, which is based on the Federal Act, making the case persuasive. MedPartners also raised due process concerns and argued the Center was an indispensable party to the injunction request; however, these issues were deemed unnecessary for ruling since the arbitrators were found immune from the injunction. Additionally, MedPartners accused the Original Shareholders of failing to maintain an expected level of productivity as per the Amended CSA, leading to a breach of contract. MedPartners determined that the shareholders and employees were not upholding their contractual obligations, prompting a good faith assessment that they were not as diligent as previously. The court emphasized that parties to an arbitration agreement, including employees and agents, are bound by it, thus preventing MedPartners from avoiding arbitration by naming the Center's shareholders as individual defendants.
