The Supreme Court of Washington Mistakenly Applies State Law Resulting in Invalidation of Arbitration Provisions in Kruger Clinic Orthopaedics, Llc v. Regence Blueshield

• Publication year: 2022

40 Creighton L. Rev. 777. THE SUPREME COURT OF WASHINGTON MISTAKENLY APPLIES STATE LAW RESULTING IN INVALIDATION OF ARBITRATION PROVISIONS IN KRUGER CLINIC ORTHOPAEDICS, LLC V. REGENCE BLUESHIELD

Creighton Law Review

Vol. 40

INTRODUCTION

The litigation process has been characterized as lengthy, costly, and excessively formal.(fn1) As a result, parties have become increasingly eager to settle their disputes outside the courtroom through various forms of alternative dispute resolution ("ADR").(fn2) Arbitration, a form of ADR in which judges are selected to preside over informal hearings, often proves to be economical and less time-consuming than litigation.(fn3) By creating arbitration provisions, parties to a contract can attempt to control the process and costs of any future controversies.(fn4) However, if a dispute arises, and one or both parties fail to comply with the terms of the arbitration provision, courts may have difficulty determining whether state law or federal law should govern arbitrability.(fn5)

In Kruger Clinic Orthopaedics, LLC v. Regence Blueshield,(fn6) the Supreme Court of Washington invalidated the arbitration provision between Kruger Clinic Orthopaedics ("Kruger") and Regence Blueshield ("Blueshield") under the Revised Code of Washington § 48.43.055 ("RCW") and the Washington Administrative Code § 284-43-322(4) ("WAC").(fn7) The court also invalidated the arbitration provision between Tacoma Orthopaedic Surgeons ("Tacoma") and Blueshield under the same Washington statute and regulation.(fn8) The Kruger-Blueshield arbitration provision mandated binding arbitration of any dispute, while the RCW and the WAC prohibited parties from requiring binding arbitration to the exclusion of judicial remedies; however, the RCW and the WAC allowed arbitration prior to judicial remedies.(fn9) The Tacoma-Blueshield provision, however, did not compel binding arbitration to the exclusion of judicial remedies.(fn10)

Further, the Kruger court considered whether the McCarran-Ferguson Act protected the RCW and the WAC from preemption by the Federal Arbitration Act ("FAA").(fn11) The McCarran-Ferguson Act declared that a state law enacted to regulate the business of insurance shall not be superseded by any act of Congress.(fn12) The court determined the RCW and the WAC regulated the business of insurance according to the McCarran-Ferguson Act because the RCW and the WAC served to strengthen the relationship between insurer and insured.(fn13) Therefore, the court held, by application of the McCarran-Ferguson Act, the FAA did not preempt the RCW and the WAC.(fn14) As a result, the court held the RCW and the WAC should be applied to invalidate the arbitration provisions in both the Kruger and Tacoma contracts because the provisions compelled binding arbitration and afforded only limited judicial review.(fn15)

This Note will first discuss the facts and holding of Kruger.(fn16) This Note will then consider other cases analyzing the validity of certain arbitration provisions.(fn17) This Note will demonstrate the Supreme Court of Washington correctly determined the Kruger-Blueshield arbitration provision would be invalid if the RCW and the WAC were correctly applied because the agreement compelled binding arbitration.(fn18) This Note will also demonstrate the Supreme Court of Washington erred by determining the Tacoma-Blueshield arbitration provision was invalid, even if the RCW and the WAC had been correctly applied, since that agreement did not compel binding arbitra-tion.(fn19) This Note will then demonstrate that even if the court had been correct in determining the Tacoma-Blueshield provision compelled binding arbitration, the court erred by applying Washington state law to both Blueshield provisions since the McCarran-Ferguson Act did not protect the RCW and the WAC from preemption by the FAA.(fn20)

FACTS AND HOLDING

Kruger Clinic Orthopaedics, LLC ("Kruger") and Tacoma Orthopaedic Surgeons, Inc. ("Tacoma") were medical service providers for Regence BlueShield ("Blueshield").(fn21) Both companies treated Blueshield's insureds and received compensation for their services according to participating provider agreements.(fn22)

In April 1995, Kruger executed an agreement with Blueshield wherein Kruger agreed to provide medical care to Blueshield's insureds.(fn23) In exchange, Blueshield agreed to compensate Kruger for treating Blueshield's insureds and to reimburse Kruger for medical devices used during surgery.(fn24) The agreement contained an arbitration clause that required the parties to arbitrate any disagreement.(fn25) The agreement also forbade either party from resorting to litigation after the arbitration process.(fn26)

A dispute arose in early 2000 regarding Kruger's compensation.(fn27) Blueshield forced Kruger to accept lower pay rates than Kruger had previously received, while Blueshield continued to pay other service providers higher rates for similar services.(fn28) Additionally, Kruger claimed Blueshield owed Kruger $10,000 in reimbursements for medical devices.(fn29) Instead of proceeding with arbitration, as required by the contract, Kruger sued Blueshield for breach of contract in Snohomish County Superior Court.(fn30)

Kruger argued the arbitration provision was invalid because it compelled binding arbitration to the exclusion of judicial remedies.(fn31) Kruger relied on the Revised Code of Washington § 48.43.055(fn32) ("RCW") and the Washington Administrative Code § 284-43-322(4)(fn33) ("WAC"), which allowed arbitration provisions as long as the provisions did not exclude judicial remedies.(fn34) Kruger argued the RCW and the WAC should be applied according to the language of the McCarran-Ferguson Act.(fn35) The McCarran-Ferguson Act prohibited any act of Congress from superseding any state law enacted to regulate the business of insurance.(fn36) Kruger argued the RCW and the WAC were state insurance regulations that should be applied to invalidate the Kruger-Blueshield arbitration provision.(fn37)

Blueshield responded by filing a motion to compel arbitration based upon the parties' agreement.(fn38) Blueshield argued the Kruger-Blueshield agreement was governed by the Federal Arbitration Act(fn39) ("FAA"), which established a federal policy favoring arbitration.(fn40) Blueshield argued Kruger should be required to arbitrate its claim based upon Kruger's agreement to do so.(fn41) The court denied Blueshield's motion to compel arbitration without explanation.(fn42)

Blueshield appealed to the Court of Appeals of Washington, Division One, arguing the trial court erred in denying its motion to compel arbitration.(fn43) The court of appeals reversed the trial court's denial of Blueshield's motion to compel arbitration.(fn44) Chief Judge Ronald E. Cox, writing for the majority, addressed the applicability of the FAA notwithstanding the language of the McCarran-Ferguson Act.(fn45) The court determined the McCarran-Ferguson Act did not apply to the Kruger-Blueshield case because the Kruger-Blueshield agreement did not relate to the business of insurance.(fn46) The court reasoned that because the agreement was an agreement for the sale of goods and services, the agreement did not involve the business of insurance.(fn47) Additionally, the court reasoned the agreement involved the providing of medical services for compensation and did not involve underwriting or the spreading of risk; therefore, the court reasoned the agreement did not impact the business of insurance.(fn48) The court determined that because the Kruger-Blueshield agreement did not involve the business of insurance, the McCarran-Ferguson Act did not protect the RCW and the WAC from preemption by the FAA, and, therefore, the court upheld the Kruger-Blueshield arbitration provision.(fn49) Kruger filed a petition for a writ of certiorari, and the Washington Supreme Court granted it and consolidated the proceedings with those in another case on appeal involving the same issues: Tacoma Orthopaedic Surgeons, Inc. v. Regence Blueshield.(fn50)

Tacoma had also entered an agreement with Blueshield to treat Blueshield-insured patients and, as did Kruger, had executed a participating provider agreement containing an arbitration clause.(fn51) The Tacoma-Blueshield arbitration provision required the parties to arbitrate any dispute prior to seeking a judicial remedy.(fn52) A dispute arose when Blueshield continually reduced amounts paid to Tacoma for services provided.(fn53) Although the agreement between the parties required arbitration of all disputes, Tacoma sued Blueshield in Pierce County Superior Court for breach of the implied covenant of good faith and fair dealing and breach of contract.(fn54) Blueshield responded by filing a motion to compel arbitration, which the court granted.(fn55)

Tacoma appealed the trial court's decision to the Washington Court of Appeals, Division Two.(fn56) On January 11, 2005, the court of appeals affirmed the decision of the trial court to uphold the arbitration clause set forth in the agreement between Tacoma and Blueshield.(fn57) Judge Elaine M. Houghton, writing for the majority, affirmed the trial court's decision to compel arbitration, reasoning because the arbitration clause did not forbid subsequent litigation, the agreement was not in violation of the RCW and the WAC.(fn58)

Tacoma filed a petition for a writ of certiorari with the Supreme Court of...