Opinion ID: 2519923
Heading Depth: 2
Heading Rank: 1

Heading: PacifiCare's Challenge to the Validity of the June 2000 HSA

Text: The trial court's order states: PacifiCare essentially contends and asserts that the [June 2000] HSA is invalid and unenforceable. PacifiCare acknowledges that it seeks to have the June 2000 HSA declared void ab initio and to have the parties' rights under the 1994 HSA enforced as if the later contract never existed. Under the authority of Bertero, supra, 216 Cal.App.2d 213, 30 Cal.Rptr. 719, the trial court ruled that PacifiCare waived its arbitration rights by repudiating the very contract from which those rights originated. Bertero, apparently, has never been disapproved or criticized by any subsequent decision or secondary authority. In Bertero, an employee and his employer signed a written employment contract and a written modification of that contract, both of which contained an arbitration clause. Although they adhered to the contractual terms for several years, the employer eventually sent the employee a letter claiming the modified contract was invalid and unenforceable. The employee sued to enforce the contract and the employer sought to compel arbitration. ( Bertero, supra, 216 Cal.App.2d at pp. 214-216, 30 Cal.Rptr. 719.) Relying on Corbin on Contracts and decisions from other states, Bertero held that the employer's repudiation of the entire employment contract deprived it of any right to rely on any provision of the contract, including its arbitration clause: [T]o say in ... a letter that the contract is `invalid and unenforceable' could mean only that it created no rights or duties which either party could stand upon. ( Bertero, supra, 216 Cal.App.2d at p. 220, 30 Cal.Rptr. 719.) Bertero rejected the argument that the letter meant that the employee's asserted right to contract benefits was invalid but that the employer's right to arbitration was not invalid, remarking, No more precise and emphatic language could have been chosen to notify Bertero that the company was declaring its independence without qualification or reservation. [¶] ... [¶] ... When National said `the agreement' was not enforceable, it was saying that the portion relating to arbitration was not enforceable. ( Id. at pp. 220-221, 30 Cal.Rptr. 719.) Thus it is not because National has repudiated its promise to pay Bertero's salary, but because it has repudiated its promise to arbitrate, that Bertero was justified in resorting to the courts. ( Id. at p. 221, 30 Cal.Rptr. 719.) Although Bertero appears to support a waiver finding here, significant developments in the law have occurred since 1963 when that case was decided. Both federal and California law now hold that, in the absence of a specific attack on an arbitration agreement, such agreement generally must be enforced even if one party asserts the invalidity of the contract that contains it. Significantly, a few years after Bertero the United States Supreme Court decided Prima Paint v. Flood & Conklin (1967) 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 ( Prima Paint ). That decision recognized the principle that  except where the parties otherwise intend  arbitration clauses as a matter of federal law are `separable' from the contracts in which they are embedded, and that where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud. ( Prima Paint, supra, 388 U.S. at p. 402, 87 S.Ct. 1801 quoting and thereafter adopting the view of the Second Circuit Court of Appeals.) In concluding that federal courts may consider a claim of fraud in the inducement of an arbitration clause itself, but not a claim of fraud in the inducement of the contract generally, the high court sought to honor the plain meaning of [the FAA] and also the unmistakably clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts. ( Prima Paint, supra, 388 U.S. at p. 404, 87 S.Ct. 1801.) The logic of Prima Paint has led many courts, including this one, to hold that contractual arbitration clauses generally must be enforced where one of the parties seeks rescission of the entire contract on the basis that it allegedly was induced by fraud, mistake, or duress, or where an alleged breach of a warranty or other promise justifies the aggrieved party in putting an end to the contract. (E.g., Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 319, 322-323, 197 Cal.Rptr. 581, 673 P.2d 251 [fraudulent inducement claim is subject to arbitration]; Large v. Conseco Finance Servicing Corp. (1st Cir.2002) 292 F.3d 49, 53 [mere assertion of statutory right of rescission does not undo obligation to take rescission claim to arbitration]; Burden v. Check Into Cash of Kentucky, LLC (6th Cir.2001) 267 F.3d 483, 489-490 [claim of illegality]; Coleman v. Prudential Bache Securities, Inc. (11th Cir. 1986) 802 F.2d 1350, 1352 [claims of fraudulent inducement and coercion]; Mesa Operating Ltd. Partnership v. Louisiana Intrastate Gas Corp. (5th Cir. 1986) 797 F.2d 238, 244 [claim of illegality]; see also Rosenthal v. Great Western Fin. Securities Corp., supra, 14 Cal.4th at p. 415, fn. 8, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) As we explained, the central rationale of Prima Paint was that an arbitration clause is separable from other portions of a contract, such that fraud in the inducement relating to other contractual terms does not render an arbitration clause unenforceable, even when such fraud might justify rescission of the contract as a whole. ( Rosenthal v. Great Western Fin. Securities Corp., supra, 14 Cal.4th at p. 416, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) By entering into the arbitration agreement, the parties established their intent that disputes coming within the agreement's scope be determined by an arbitrator rather than a court; this contractual intent must be respected even with regard to claims of fraud in the inducement of the contract generally. ( Ibid. ) In light of Prima Paint and its progeny, we disapprove Bertero v. Superior Court, supra, 216 Cal.App.2d 213, 30 Cal.Rptr. 719, to the extent it holds that a party's assertion of the invalidity of an entire contract categorically waives that party's right to arbitrate pursuant to a provision in that contract. Here, the June 2000 HSA names PacifiCare and Saint Agnes as contracting parties and reflects the signatures of both parties' agents. Neither party challenges its assent to the June 2000 HSA; nor does either specifically challenge the arbitration clause contained therein. Indeed, PacifiCare filed a declaration claiming it had performed its obligations according to the terms of the June 2000 HSA prior to notifying Saint Agnes and others in March 2001 that it considered the contract terminated due to a condition subsequent. Consequently, the record makes reasonably clear PacifiCare's position that it could properly view the June 2000 HSA as terminated or void due to an event transpiring after its effective date. On this record, Prima Paint's recognition of the separable nature of arbitration agreements compels us to conclude that the arbitration clause in the June 2000 HSA is sufficient to require arbitration of Saint Agnes's claims relating to that contract. Seizing on PacifiCare's allegations in the Los Angeles lawsuit that the June 2000 HSA is void ab initio and PacifiCare's concession that it seeks damages for breach of the 1994 HSA as if the later contract never existed, Saint Agnes argues this situation falls within an exception to the Prima Paint line of cases. Specifically, Saint Agnes points to authorities holding or recognizing that because arbitration is a matter of contract, a party cannot be required to submit to arbitration any dispute that it did not agree to so submit. (E.g., Rosenthal v. Great Western Fin. Securities Corp., supra, 14 Cal.4th 394, 58 Cal.Rptr.2d 875, 926 P.2d 1061; Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348, 72 Cal.Rptr.2d 598; Sandvik AB v. Advent International Corp. (3d Cir.2000) 220 F.3d 99; Three Valleys Municipal Water District v. E.F. Hutton & Co., Inc. (9th Cir.1991) 925 F.2d 1136.) In those cases, the issue was not whether the underlying contract was merely voidable, but rather whether any contract had ever existed. ( Rosenthal v. Great Western Fin. Securities Corp., supra, 14 Cal.4th at pp. 416-417, 58 Cal.Rptr.2d 875, 926 P.2d 1061 [parties opposing arbitration claimed contracts were void for fraud in their execution or inception]; Banner Entertainment, Inc. v. Superior Court, supra, 62 Cal.App.4th at pp. 358-361, 72 Cal.Rptr.2d 598 [while evidence showed plaintiff's oral agreement to specified dealings with defendant, it failed to show any agreement, oral or otherwise, to arbitrate]; Sandvik AB v. Advent International Corp., supra, 220 F.3d at p. 100 [party moving for arbitration alleged that individual who signed agreement on its behalf lacked authority to do so]; Three Valleys Municipal Water District v. E.F. Hutton & Co., Inc., supra, 925 F.2d at p. 1138 [party resisting arbitration claimed contract was invalid because unauthorized individual signed it].) The decisions Saint Agnes cites have a logical rationale: If a party can show that it did not know it was signing a contract, or that it did not enter into a contract at all, both the contract and its arbitration clause are void for lack of mutual assent. (See Rosenthal v. Great Western Fin. Securities Corp., supra, 14 Cal.4th at pp. 416-417, 58 Cal.Rptr.2d 875, 926 P.2d 1061; Banner Entertainment, Inc. v. Superior Court, supra, 62 Cal.App.4th at pp. 358-359, 72 Cal.Rptr.2d 598; Sandvik AB v. Advent International Corp., supra, 220 F.3d at pp. 106-108; Three Valleys Municipal Water District v. E.F. Hutton & Co., Inc., supra, 925 F.2d at pp. 1140-1141.) But that rationale has no application here because, notwithstanding PacifiCare's use of certain legal terminology, neither PacifiCare nor Saint Agnes denies its knowing and voluntary agreement to the June 2000 HSA and the terms it contained. Moreover, PacifiCare's petition to compel arbitration reflects its apparent position that it considered itself bound to perform under the June 2000 HSA at least until March 2001, when it notified Saint Agnes that the contract was terminated. Accordingly, this is not a case where mutual assent to the subject contract and its terms was lacking. In sum, we conclude that PacifiCare's legal challenge to the validity of the June 2000 HSA is not inconsistent with an intent to invoke arbitration pursuant to that contract. Contrary to Saint Agnes's contentions, PacifiCare's repudiation as such does not amount to a waiver of its contractual arbitration rights.