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August 04, 2021 Practice Points

Sixth Circuit Rejects Application of AAA Healthcare Policy

This ruling has significant implications for many disputes involving healthcare, consumer, and employment matters.

By Mark Kantor

On June 25, 2021, a divided panel of the Sixth Circuit ruled that the American Arbitration Association (AAA) did not have the authority to make the “gateway” decision of arbitrability under the AAA’s Healthcare Policy Statement. Instead, that decision had to be made by the arbitrator. The ruling has significant implications for future arbitrations involving patient healthcare, consumer and employment disputes.

In Ciccio et al v. SmileDirectClub, LLC, No. 20-5833 (US 6th Cir. June 25, 2021), the majority overturned the AAA’s decision to apply its Healthcare Policy to deny arbitration to claims against SmileDirectClub, an organization that provides dental services. Under the AAA Healthcare Policy:

the AAA does not administer healthcare arbitrations between individual patients and healthcare service providers that relate to medical services, such as negligence and medical malpractice disputes, unless all parties agreed to submit the matter to arbitration after the dispute arose. . . . or if . . . a court order directs such a dispute to arbitration . . . (emphasis added.)

A group of plaintiffs sued SmileDirectClub for false advertising. The federal court held that an arbitration agreement in SmileDirectClub’s customer contract applied, and it ordered plaintiff Nigohosian to arbitrate. The other plaintiffs then voluntarily dismissed their claims. Former plaintiff Johnson then filed an arbitration claim against SmileDirectClub on behalf of a class of SmileDirectClub’s patients.

An AAA administrator stated that that AAA’s Healthcare Policy required the parties to sign post-dispute arbitration agreements unless a court had compelled arbitration. Plaintiff Johnson refused to sign such a post-dispute agreement, and Nigohosian never initiated arbitration herself. Instead, the plaintiffs refiled their claims in federal court. SmileDirectClub objected on the grounds that the parties had agreed to arbitrate their disputes and that the agreement required an arbitrator to decide the merits of any dispute, “including any gateway issues about whether the dispute was arbitrable.”

The district court disagreed. It ruled that SmileDirectClub and Johnson “got what they bargained for” because the dispute had been “resolved using the rules of the [AAA].” Consequently, the district court determined that Johnson could pursue his claims in federal court while Nigohosian was bound by the prior court order compelling arbitration and was required to arbitrate her claims. 

 SmileDirectClub appealed. A divided panel of the Sixth Circuit ruled that, “The text of the [parties’ arbitration agreement] confirms that the parties didn’t intend to allow an administrator to short-circuit arbitration by refusing to appoint an arbitrator to answer this initial gateway question.” The majority stated:

It is unclear what the administrator was doing. There are two ways to view his decision. Perhaps the administrator independently interpreted the Agreement and read it to incorporate the Healthcare Policy Statement, which led the administrator to conclude that the parties did not intend to arbitrate the instant dispute without a post-dispute agreement or court order. Or perhaps the administrator was simply applying AAA’s Healthcare Policy Statement because he concluded that this case concerns healthcare and the AAA follows this policy no matter what a particular agreement says or what particular parties intended.

“Either way,” said the majority, “the end result was contrary to the text of the Agreement and the FAA.” Arbitrators and arbitral administrators “are distinct.” It is the arbitrator, not the administrator, who decides the merits of a dispute including what the parties intended by their agreement. And if, instead of interpreting the parties’ arbitration agreement, the AAA was applying its own “sound policy,” then that conduct too would contravene applicable law:

Although the AAA may choose for itself which claims it will arbitrate, it is not at liberty to “impose its own view of sound policy” regarding when or how parties should be allowed to arbitrate independent of the parties’ own choices in their contract.

The dissent argued that the AAA’s decision was consistent with the parties’ agreement:

Turning to the plain language of the agreement, the threshold question of what the agreement incorporated is readily apparent: [disputes] shall be resolved using the rules of the American Arbitration Association. . . . As part of the AAA rules, the AAA maintains consumer protocols that ensure a fair process in healthcare disputes. The Healthcare Policy Statement’s incorporation into the agreement was clear to anyone who read the AAA’s rules. The parties made their decision to abide by the rules when they signed the contract incorporating rules that included the Healthcare Policy Statement, but in my colleagues’ view, those rules may simply be disregarded if they interfere with requiring the parties to proceed with the arbitration.

Whether one agrees with the majority or the dissent, this ruling has significant implications for many disputes involving healthcare, consumer, and employment matters. The AAA has adopted due process protocols and policy statements regarding how the AAA will handle applications for arbitration in those areas. The majority’s ruling could deny the AAA the authority to apply those policies and to refuse to take cases that do not comply with those protocols and policy statements. Instead, application of those policies would be allocated to an arbitral panel. This could result in significant delay and expense while the panel is constituted and briefed before a decision on the applicability of these due process protocols and policies crystallizes.

Given its importance, this case may be headed towards en banc review by the Sixth Circuit or a certiorari petition to the U.S. Supreme Court.

Mark Kantor is a member of the College of Commercial Arbitrators in Washington, D.C.

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