Whether the standard for vacatur of a medical malpractice arbitration award procured by the fraud of a physician-fiduciary requires satisfaction of the extrinsic fraud rule or a showing that fraud could not have been discovered through diligence, rather than a simple showing that fraud had been committed, where the treating relationship is ongoing and the physician has a contractual obligation to provide a fair arbitration.
MARY McNAMARA (CSBN 147131)
SWANSON & McNAMARA LLP
300 Montgomery Street, Suite 1100
San Francisco, CA. 94108
Tel: 415/ 477 3800 (mmcnamara@swansonmcnamara.com)
Attorneys for Petitioners
Whether the standard for vacatur of a medical malpractice arbitration award procured by the fraud of a physician-fiduciary requires satisfaction of the extrinsic fraud rule or a showing that fraud could not have been discovered through diligence, rather than a simple showing that fraud had been committed, where the treating relationship is ongoing and the physician has a contractual obligation to provide a fair arbitration.
Petitioners respectfully ask this Court to review the unpublished decision of a panel of the Court of Appeal, First Appellate District, affirming the judgment of the San Mateo County Superior Court which confirmed an adverse medical malpractice award against them after denying their petition to vacate it on grounds of "corruption, fraud or other undue means" within the meaning of California Code of Civil Procedure Section 1286.2, subdivision (a)(1). A true and correct copy of the Order of the Court of Appeal, filed April 18, 2005, is attached as Exhibit 1 to this Petition.
This is a medical malpractice case involving limb amputation in which the physician parties procured an arbitration award during the course of treatment by misrepresenting the nature of blood work ups that they conducted and by concealing records that contradicted their litigation position at arbitration. Within the time period allowed for vacatur, the patient petitioned to vacate the unconfirmed award on the grounds that it was procured by his treating physicians via "corruption, fraud or other undue means" within the meaning of California Code of Civil Procedure Section 1286.2, subdivision (a)(1). The trial court denied the petition, resting its ruling on the extrinsic fraud rule. The Court of Appeal affirmed, holding that institution of a malpractice claim converts an on-going doctor/patient relationship into an arm's length adversarial relationship for purposes of arbitration, relieving physicians of the fiduciary duty of disclosure owed in treatment, and imposing on patients heightened vacatur rules which require proof that the fraud could not have been unearthed during the arbitration through exercise of diligence.
In divesting physicians of their duty of disclosure upon institution of a malpractice claim, the Court of Appeal's decision inappropriately extends legal principles designed for the marketplace to the realm of on-going fiduciary relationships. As such, the Court's decision contradicts the line of authority which imposes higher duties on fiduciaries in their dealings with beneficiaries and it runs counter to sound public policy requiring fiduciaries to continue to honor their core fiduciary duty of disclosure even where the beneficiary institutes legal proceedings against them.
Kaiser is the largest HMO and medical provider in California and in the United States. It has operations throughout northern and southern California and over eight million members nationwide. The issue in this appeal raises an important public policy question regarding the fairness and integrity of Kaiser's mandatory, medical malpractice arbitration system, which features a contractual promise to provide patients a fair arbitration. The question is especially important given that patients are captive in the Kaiser system, even after institution of malpractice claims, and are rarely in a position to search elsewhere for medical care. As such, they are abjectly dependent on their physicians to continue to comply with their duty of full disclosure.
The physician fraud perpetrated by Kaiser in this case deprived the patient of his day in court on the malpractice that was committed. The Court of Appeal held that the patient has no remedy in this case because his act of instituting a malpractice case released the physicians from their fiduciary duty of full disclosure. Such a result has no basis in the law and flouts the strong public policy protecting patients in the context of mandatory arbitration schemes.
This is a medical malpractice case against Kaiser Foundation Hospitals, Kaiser Foundation Health Plan, Inc. and Permanente Medical Group, Inc. ("Kaiser") by Gary Rushford and his wife Sharon Rushford arising out of Kaiser's amputation of Gary Rushford's right leg some seven years ago. The pertinent facts for purposes of this petition are as follows:
In 1998, Gary Rushford experienced a series of clotting episodes in the arteries of his right leg. Kaiser hospitalized him for thrombolysis treatment, but after each episode released him without adequate, or any, levels of anti-clotting medication. In July 1998, still without anti-clotting medication, Gary Rushford's condition had deteriorated to a point where Kaiser could no longer treat him with thrombolysis. At that time, Kaiser performed blood tests in an effort to determine if he had a hypercoagulable condition (i.e., abnormal clotting of the blood) that could be treated by anti-clotting medication. Kaiser's July 1998 blood tests were negative for such condition. In late July 1998, after a series of increasingly invasive surgeries, Kaiser amputated his right leg above the knee. (Order at pp. 2-3). Gary Rushford was placed on anti-clotting medication thereafter and remained on it for the next three years with no recurrence of clotting in his legs. (Id., at p. 3) 1
At the medical malpractice arbitration that followed, the Rushfords contended that the loss of Gary Rushford's leg was caused by a hypercoagulable condition which was controllable by anti-clotting medication and that Kaiser's failure to administer such medication constituted malpractice. Kaiser contended that it acted within the standard of care and that other conditions (i.e., conditions other than a hypercoagulable condition which was unresponsive to anti-clotting medication) caused the loss of Gary Rushford's leg. (Order at p. 5)
In discovery, Kaiser produced its blood test results for Gary Rushford. (Order at p. 5) After the close of evidence, but before issuance of the award, the arbitrator received from the Rushfords' attorney a letter from Gary Rushford's treating physician addressed to a Stanford consultant. The letter described Mr. Rushford's history of clotting problems and treatment and requested an evaluation for a hypercoagulable condition. (Id.) The request in this letter contradicted Kaiser's litigation position that a hypercoagulable state was not the cause of Mr. Rushford's condition. The arbitrator found that Kaiser had breached the standard of care in failing to treat with anti-clotting medication before amputating the leg (Order at p. 1) but the arbitrator also found that the evidence was evenly balanced on the issue of causation (i.e., that the failure to treat with anticlotting medication caused the condition resulting in amputation). Accordingly, the arbitrator ruled against the Rushfords for failing to carry their burden of proof on causation.
After the arbitrator rendered his decision, Gary Rushford tested positive at Stanford for a hypercoagulable condition that is controllable by anti-clotting medication. (Order at pp. 1, 6). It was in this manner that the Rushfords discovered that Kaiser had failed to perform a crucial test for hypercoagulable state, despite representations to the contrary.
Pursuant to California Code of Civil Procedure §1286.2, subd. (a)(1) (Section 1286.2(a)(1)),2 the Rushfords filed a petition to vacate the award on the grounds that it was procured by "corruption, fraud or other undue means." (Order at p. 6.) The Rushfords contended that Kaiser repeatedly misrepresented that they had performed all available blood tests to rule out the possibility that Gary Rushford had a hypercoagulable condition and misrepresented that all tests for a hypercoagulable condition were negative.
The trial court denied the Rushfords' petition to vacate the award, holding that the extrinsic fraud rule applied to this arbitration and finding that the Rushfords had an opportunity to conduct discovery as to the extent of Kaiser's testing thereby barring vacatur. (Order at pp. 12, 22)
The Court of Appeal affirmed the judgment of the trial court.
While the Court acknowledged that a fiduciary relationship exists between Petitioner Rushford and his treating physicians in the context of medical treatment, it held that, upon institution of the malpractice claim, the parties dealt at arm's length with each other in the arbitration proceedings. (Order at p. 20). In the context of this arm's length relationship, the Court held, vacatur was barred because Kaiser's fraud was intrinsic to the arbitration proceedings, or, alternatively, because Petitioners had failed to exercise diligence in unearthing the fraud.
The question of law as to what standard should control vacatur of unconfirmed arbitration awards in cases such as this is one of first impression. Neither this Court nor any Court of Appeal in a published opinion has considered it. Because of the enormous number of cases subject to Kaiser's mandatory arbitration system, the issue in this case raises an important question of law.
In arriving at its decision, the Court of Appeal applied both the traditional extrinsic fraud rule of vacatur and the three-pronged federal rule of vacatur as adopted by the Court of Appeal for the Second Appellate District in the non-fiduciary case of Pour Le Bebe, Inc. v. Guess? Inc. (2003) 112 Cal.App.4th 810.
Neither rule should control in the circumstances of this case, where a patient is in an on-going treating relationship with his physician during a proceeding which is an arbitration.
With respect to the extrinsic fraud rule, review is required not only because application of the rule in a doctor/patient setting is a novel one which raises an important question of law, but a conflict exists between the Courts of Appeal for the First and Second Appellate Districts as to the continued viability of the rule, especially in the context of arbitration cases in general. Many Court of Appeal cases recognize a "fiduciary exception" to the rule and procedural reform has led the federal courts to abandon it entirely for all cases. This Court should secure uniformity of decisionmaking in California and settle the important question of law in favor of holding that the extrinsic fraud rule does not apply in the context of arbitration cases involving claims of fiduciary breach.
With respect to Court of Appeal's application of the federal vacatur rule, which requires the movant to show 1) that fraud exists by clear and convincing evidence; 2) that the fraud was not discoverable upon exercise of reasonable diligence before or during the arbitration, and 3) that the fraud materially related to an issue in the arbitration, no California case applies these standards to actions involving fiduciaries, still less to fiduciaries who are in on-going fiduciary relationships at the time of the arbitration, and who are contractually bound by a covenant of fairness as Kaiser was here. Petitioners submit that the correct standard in such a case is one of a showing of fraud by a preponderance of the evidence, that the fraud was material to an issue at the arbitration and that there be no requirement to show diligence in investigation. Unless this Court settles the standard that applies in such cases, patients throughout California who, like Petitioners, are forced into arbitration and are captive in on-going treating relationships with the same doctors against whom they are arbitrating, will be denied the ability to make fundamental treatment decisions
(a) The Extrinsic Fraud Rule Should Not Apply in the Context of Unconfirmed Arbitration Awards
The extrinsic fraud rule provides that once a judgment is final, parties in a civil lawsuit ordinarily will not be permitted to set a final judgment aside and re-litigate the issues previously determined in the action, except in those cases where the fraud is extrinsic to the questions determined in the action. (Pico v. Cohn (1891) 91 Cal. 129, 133-134).
"Extrinsic" fraud in this context means fraud of a kind which keeps the unsuccessful party from having a trial at all, as opposed to having a trial which is rendered unfair by perjury or withholding of evidence. (Id.; see also, 8 Witkin, Cal. Procedure (4th ed. 1997) Attack on Judgment in Trial Court, § 223, p. 727 ["The most common ground for equitable relief [from a final judgment] is extrinsic fraud, a broad concept that covers a number of situations. Its essential characteristic is that it has the effect of preventing a fair adversary hearing, the aggrieved party being deliberately kept in ignorance of the action or proceeding, or in some other way fraudulently prevented from presenting his claim or defense"].)
The extrinsic fraud rule has long been criticized as difficult to apply and lacking in a sound basis in policy. (11 C. Wright & A. Miller, Federal Practice and Procedure (1973) p. 2868, at 240-241- "[It] rests on cloudy and confused authorities, its soundness as a matter of policy is very doubtful, and it is extremely difficult to apply."). The Restatement abandoned it (Rest.2d, Judgments §70) and it has been formally abolished by Congress. It is not applicable to a motion to vacate a federal judgment based on intrinsic fraud. See Fed.R.Civ.P 60(b)(3) [court may relieve a party from a final judgment for fraud whether denominated "intrinsic" or "extrinsic"]. Federal authorities question whether the extrinsic fraud rule remains authoritative even in a separately filed federal action and not just on motion in the same action. (Id.)
The extrinsic fraud rule grew out of cases where final judgments were entered after full trials, not cases where awards were entered after summary arbitration proceedings. The motive force behind the extrinsic fraud rule was the strong judicial policy favoring finality of judgments.
[T]here must be an end of litigation, and when parties have once submitted a matter, or have had the opportunity of submitting it, for investigation and determination in the same proceeding, it must be regarded as final and conclusive, unless it can be shown that the jurisdiction of the court has been imposed upon, or that the prevailing party, by some extrinsic or collateral fraud, has prevented a fair submission of the controversy.Where, as here, the proceeding at issue is an arbitration which produces an award not yet confirmed, the extrinsic fraud rule should not apply for the separate reason that no final judgment exists whose finality must be enforced. "An award that has not been confirmed or vacated [by the superior court] has the same force and effect as a contract in writing between the parties to the arbitration." (§ 1287.6.)
(Pico v. Cohn, supra, 91 Cal. at pp. 133-134.)
Although the Court of Appeal rejected this argument (Order at 14), a trio of cases from 1978 contains dicta that a more relaxed vacatur standard does apply when the award has not been confirmed as a judgment. See, e.g., Lamb v. Holy Cross Hospital (1978) 83 Cal. App. 3d 1007, 1011; [hospital and doctors concealment of medical records during arbitration constituted intrinsic fraud and patient's remedy was to petition trial court to "vacate the award" before it was confirmed and became a final judgment]; Rios v. Allstate Ins. Co. (1977) 68 Cal. App. 3d 811, 818-819 [insured's remedy against insurer who procured award by false testimony (intrinsic fraud) was to file a petition to vacate the award] and Mansdorf v. California Physicians' Service, Inc. (1978) 87 Cal. App. 3d 412 [citing with approval the language in Rios where defendant procured award by "what amounted to intrinsic fraud, and held that conduct could, and should, have been raised" by a petition to vacate under section 1286.2].
More recently, the Court of Appeal for the Second Appellate District in Pour Le Bebe, Inc. v. Guess? Inc. (2003) 112 Cal.App.4th 810 held that the extrinsic fraud rule should be abandoned in arbitration cases.3 (Without holding that the extrinsic fraud rule should be abandoned, the Court of Appeal in this case cited the Pour Le Bebe opinion favorably. Order at 16-17.) Recognizing the extrinsic fraud rule's roots as a measure geared toward finality of outcomes in fully-contested trials, the Pour Le Bebe court held that the parties to an arbitration are "not afforded the full panoply of procedural rights available to civil litigants." Accordingly, "courts generally take a more lenient approach when examining intrinsic fraud in the context of a motion to vacate an arbitration award" than courts would to a motion to vacate a final judgment. (Id, at 828-829.) The Pour Le Bebe court cited a number of federal cases 4 which deemed arbitration awards subject to vacatur for intrinsic fraud, including false testimony (id., at 829-30).
Petitioners note that Pour Le Bebe conflicts with other Court of Appeal cases which applied the traditional extrinsic fraud rule. For example, in the earlier case of Pacific Crown Distributors v. Brotherhood of Teamsters and Auto Truck Drivers, Local 70 (1986)183 Cal.App.3d 1138, the Court of Appeal for the First Appellate District applied the extrinsic fraud rule to vacate an award secured as a result of a new issue presented for the first time in a post-arbitration brief by a party which had previously stipulated that the issues were limited in a manner that excluded the newlyraised issue. The Court held that this conduct subverted the fairness of the hearing and "intentionally and fraudulently deprived [respondent] of its opportunity to present evidence in an arbitration . . . ." (Pacific Crown Distributors, supra, 183 Cal.App. at p. 1149.)
In light of the conflict amongst the divisions of the appellate courts as to application of the extrinsic fraud rule in arbitration cases, and in light of the policy reasons undermining application of the rule to unconfirmed arbitration awards, review is necessary in order to secure uniformity of decision. Petitioners submit that this Court should follow the reasoning in Pour Le Bebe and the federal cases insofar as it supports the abandonment of the extrinsic fraud rule in arbitration cases.
The Court of Appeal recognized that, in what it termed "very limited circumstances," the "courts have applied the exception or found extrinsic fraud where there is a fiduciary relationship between the parties and one party conceals or misrepresents information that does not preclude the other party from participating in the proceedings, but does prevent the party from fully presenting his or her case." (Order at 18.) The Court went on to suggest however, that these cases were limited to instances such as dissolution proceedings, where one spouse conceals assets from the other in a manner not discernible through reasonable investigation. (Id. at 18-19, emphasis added, citing In re Marriage of Stevenot (1984) 154 Cal.App.3d at pp. 1060-1068 and cases cited therein; Kuehn v. Kuehn (2000) 85 Cal.App.4th 824, 832; In re Marriage of Modnick (1983) 33 Cal.3d 897, 905-906.) Despite this statement, the Court appeared to concede that the case of Estate of Anderson (1983) 149 Cal. App. 3d 336, rehearing denied; petition to Supreme Court denied, was a case where reasonable investigation would have uncovered the fraud and thus, that the fiduciary exception does not require diligence on the part of the beneficiary. (Order at 19.)
In Estate of Anderson, an executor bank concealed and misstated facts regarding the sale of estate property and related tax issues from beneficiaries even though it gave actual notice of the hearing to the beneficiaries. The Court's characterization of the cases notwithstanding, it is well-settled that:
The failure to perform the duty to speak or make disclosures which rests upon one because of a trust or confidential relation is obviously a fraud, for which equity may relieve from a judgment thereby obtained, even though the breach of duty occurs during a judicial proceeding and involves false testimony and this is true whether such fraud be regarded as extrinsic or as an exception to the extrinsic fraud rule.Indeed, it is precisely because fiduciaries are held to far higher standards of conduct than arm's length actors, that courts have vacated judgments where they have been obtained on the basis of even intrinsic fraud. (Estate of Sanders (1985) 40 Cal. 3d 607, 615 [some courts deem the fiduciary's fraud to constitute 'extrinsic' fraud, while other courts hold a fiduciary's fraud constitutes an 'exception' to the extrinsic fraud rule, but in either case, however denominated, fiduciary fraud constitutes grounds for vacating a judgment].)
(Freeman, Judgments (5th ed. 1925), Section 1235, p. 2576, cited in In re Marriage of Modnick, supra 33 Cal. 3d at pp. 905-906 [husband's false testimony at trial and failure to disclose assets is grounds for vacating final judgment as a fiduciary has a duty to make full disclosure of all material facts].
In sum, the very sine qua non of the fiduciary relationship is that it is one of trust and confidence which entitles the beneficiary to rely on the fiduciary's honesty and honor without having to verify his representations. In the seminal case of Meinhard v. Salmon (1928) 249 NY 458, Chief Justice Cardozo set forth the lofty standards to which fiduciaries are held:
Many forms of conduct permissible in a workaday world for those acting at arm's length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of the courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.
Meinhard v. Salmon, supra, 249 NY at p. 464 (citation omitted).
In considering the test which should apply for purposes of vacatur in the particular circumstances of this case, Petitioners urged the Court of Appeal to apply a general fairness standard, in this context, that vacatur is permitted upon a showing of fraud even if the unsuccessful party cannot show that he could not have discovered the lie. The Court of Appeal rejected this argument, holding instead that, if the extrinsic fraud rule did not control, the three part federal standard adopted by the Pour Le Bebe court should apply.
The three part federal standard is that set forth in the case of Bonar v. Dean Witter Reynolds, Inc. (11th Cir. 1988) 835 F.2d 1378 which the Pour Le Bebe court set forth as follows:
First, the movant must establish the fraud by clear and convincing evidence. [Citations.]
Second, the fraud must not have been discoverable upon the exercise of due diligence prior to or during the arbitration. [Citations.]
Third, the person seeking to vacate the award must demonstrate that the fraud materially related to an issue in the arbitration. [Citations.]
Pour Le Bebe, supra, 112 Cal.App.4th at 830 (quoting Bonar v. Dean Witter Reynolds, Inc., supra, 835 F.2d at p. 1383).
The Court of Appeal noted that the Pour le Bebe court, in applying principles of statutory construction, "specifically rejected" a "general fairness" interpretation of section 1286.2(a)(1). (Order at 17.) The Court of Appeal noted that the Pour le Bebe court concluded '"[i]f the Legislature intended to permit an arbitration award to be vacated whenever the prevailing party engages in tactic that might in any way seem unfair, it would not have used the specific examples of fraud and corruption to describe the type of "undue means" it had in mind." (112 Cal.App.4th at p. 827)'. (Order at 17.)
Petitioner's argument was not that vacatur should be permitted on any showing of unfairness, however. It was that vacatur should be permitted in fiduciary cases on a showing of fraud, made by a preponderance of the evidence, without having to meet the burden of showing he could not have ferreted out the fraud (the so-called diligence prong of the Bonar test). There is nothing in the language of section 1286.2(a)(1) which prohibits such an interpretation (the section is silent as to the standard of proof required for vacatur). Indeed, a reading of section 1286.2(a)(1) requiring a simple showing of fraud comports with the general understanding of the words "fraud," and "corruption" as used in the section. The Legislature intended that arbitration of medical malpractice be judicially encouraged.5 Willful concealment of relevant evidence by a party serves only to tear away at the arbitration process.
As one court has held when construing a statute similar to section 1286.2(a)(1), "corruption," as used in the vacatur statutes, was defined as illegality, a vicious and fraudulent intention to evade the prohibitions of the law, something against or forbidden by law, moral turpitude, or exactly the opposite of honesty, involving intentional disregard of law from improper motives, or an act done with an intent to give some advantage inconsistent with official duty and the rights of others. (Teamsters Local Union #11 Affiliated with International Brotherhood of Teamsters, etc. v Abad (1975) 135 NJ Super 552, revd on other grounds 144 NJ Super 239 [arbitration award vacated under "corruption" prong of statute, where employer consciously withheld employee's production records from arbitration over propriety of employee's discharge]).
The court added that since another provision of the statute allowed for vacating an award in the event of "corruption in the arbitrators," the corruption mentioned in the first provision must have referred to corruption on the part of one of the parties to the arbitration procedure.
It is important to note that both Pour le Bebe and Bonar involved commercial actors who stood at arm's length from their opponents and who were not subject to an over-arching contractual duty to provide a fair arbitration to the opposing party.6 Pour le Bebe involved a licensing dispute between two major corporations where one corporation sought to vacate an adverse arbitration award on the grounds that counsel for the other corporation had a conflict in representing the first corporation; Bonar involved a dispute between a securities broker (Dean Witter) and investors in which the broker sought to vacate an adverse award on the grounds that an expert witness for the investors committed perjury. Under these circumstances, petitioners conceded, the three-part federal vacatur test well may be appropriate.
Petitioners submit that, where, as here, one party owes fiduciary duties to the other, where the fiduciary relationship is on-going at the time of arbitration, and where the fiduciary also owes a contractual duty to provide a fair arbitration, that party should not be permitted to obtain an award through fraud even if a skeptical opponent dealing at arm's length might have rooted out the fraud during arbitration. The Court of Appeal rejected this argument.
Although the Court of Appeal acknowledged that "a fiduciary relationship exists between Rushford and his treating physicians in the context of his medical treatment," the court held that Petitioners nonetheless labored under a duty to investigate Kaiser's representations as to treatment on the reasoning that, "once appellants filed their medical malpractice claim, the parties dealt at arm's length with each other in the arbitration proceedings. (See In re Marriage of Heggie (2002) 99 Cal.App.4th 28, 35)." Petitioners submit that the Court's reasoning was wrong.
As the Court of Appeal recognized, physicians stand in a fiduciary relationship with their patients. (See, e.g., Stafford v. Shultz, (1954) 42 Cal. 2d 767, 775-779 [amputation case].) The relationship of patient and physician "is a fiduciary one of the highest degree. It involves every element of trust, confidence and good faith." Lockett v. Goodill (1967) 71 Wash.2d 654, 656; see also Lownsbury v. VanBuren (2002) 94 Ohio St. 3d 231, 235 ("The physician-patient relationship is a fiduciary one based on trust and confidence and obligating the physician to exercise good faith."). The courts recognize the unique vulnerability of a patient in medical treatment. (Cobbs v. Grant (1972) 8 Cal.3d 229 [patients "abjectly dependent" on his doctor for information required to make informed medical decision].)
The physician's fiduciary duties include following:
the duty of confidentiality (Business & Professions Code § 2263),
the duty of loyalty (State ex rel. McCloud v. Seier (Mo. 1978) 567 S.W.2d 127, 128; Wargo v. Buck (1997) 123 Ohio App. 3d 110, 122), and, most important
in the context of this case,
the duty of disclosure (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 131; Arato v. Avedon (1993) 5 Cal.4th 1172,1188; Pashley v. Pacific Elec. Co. (1944) 25 Cal.2d 226, 235).
With respect to the duty of disclosure, in Garlock v. Cole (1962) 199 Cal. App. 2d 11, 16-17, the court held that a doctor owes a fiduciary duty to not misrepresent the patient's medical condition, and the failure of a physician to disclose the true medical facts would constitute the "most palpable fraud." The court stated that where there is an ongoing treating relationship after malpractice is committed, the patient is entitled to rely on the representations of his treating physicians and there is no duty for the patient to investigate the truth of his doctor's representations. (Id at 16-17.) The Garlock court stated: "[I]t is recognized that in cases involving such a relationship facts which would ordinarily require investigation may not excite suspicion, and that the same degree of diligence is not required." (Id., at 16-17 [citation omitted]). In Stafford v. Shultz, supra, 42 Cal. 2d 767, 775-779, a case where the patient's leg was amputated by doctors who made misrepresentations concerning the patient's medical condition and failed to disclose the doctor's failure to perform diagnostic procedures before misrepresenting that the mode of treatment would be effective, this Court held that treating doctors have a fiduciary duty to fully disclose to the patient the true medical facts regarding his medical condition and physical injuries.
Similarly, in Bowman v. McPheeters (1947) 77 Cal. App. 2d 795, 800-801, the court ruled that a physician is prohibited from misrepresenting the nature and extent of a patient's medical condition or injury and lulling the patient into ignorant security. This is because as "fiduciaries it was the duty" of the physicians to "make a full and fair disclosure" to the patient of "all facts which materially affected his rights and interests". In Nelson v. Gaunt, (1981) 125 Cal. App. 3d 623, the court held that the patient had the right to maintain both an action for fraud as well as malpractice against the physician who made false and misleading statements to the patient and concealed material information relevant to the patient's medical condition and medical treatment.
As one authority on the law of fiduciary duty has noted, once it arises, the duty of disclosure must be discharged. R. Chalos, The Law of Fiduciary Duties (2000), § 3:41.
The duty of disclosure is unlike the other duties that make up the fiduciary bundle in that it cannot be modified in the same way as the others. The other duties may be modified either by agreement in advance or by agreement after the fact, or by court order. They may be waived. But while the duty of disclosure may be modified prospectively by legislation . . . it is not amenable to voluntary modification by the parties. Instead, it must be discharged before any cestui can waive it and before a court can declare it discharged.
(Id., emphasis added).
The Court of Appeal held that "once appellants filed their medical malpractice claim, the parties dealt at arm's length with each other in the arbitration proceedings." (Order at 20.) The Court cited only In re Marriage of Heggie (2002) 99 Cal.App.4th 28, 35 in support of this proposition. In re Marriage of Heggie has no application to this case whatsoever. It involved a dissolution proceeding between a husband and wife, and accordingly, a fiduciary relationship that was in the process of being terminated. Here, by contrast, the fiduciary relationship was on-going and Petitioners were as "abjectly dependent" on Kaiser's disclosure of medical judgments, representations and opinions as they always had been.
There is no authority for the proposition that a physician in an on-going relationship with his patient can absolve himself of all of his fiduciary obligations, particularly the central obligation of disclosure, and act in his own interest merely upon institution of adverse proceedings against him. Indeed, what little authority there is on the topic of a fiduciary's duties in the context of adversarial proceedings brought by a beneficiary is against the position taken by the Court of Appeal. For instance, in Sapp v. Superior Court of State, in and for Los Angeles County (1953) 119 Cal.App.2d 645, a dissolution case, the Court held that even though the husband/wife relationship terminates as a matrimonial one, the spouse who manages the community assets occupies a position of trust which is not terminated as to assets remaining in his hands. That spouse retains his fiduciary duty to account to the other spouse for the community property when the spouses are negotiating a property settlement (Id., 119 Cal.App.2d at p. 653). In Wells Fargo Bank v. Superior Court (Boltwood) (2000) 22 Cal.4th 201, this Court considered the question of limits on a trustee's duty of disclosure where attorney-client communications of the trustee are at issue. In Boltwood, a bank trustee petitioned to settle its accounts and resign as co-trustee of a trust where the beneficiaries had accused the bank of misconduct. The beneficiaries contended that they were entitled to privileged communications between the bank and its attorney retained in the matter of the petition.
The question before the Court was whether the trustee's duty to keep its beneficiaries reasonably informed created an exception to the attorney-client privilege set forth in the Evidence Code (section 954). This Court held that because the privileges set forth in the Evidence Code are legislative creations which the courts have no power to expand or admit exceptions to, the fiduciary's duty of disclosure did not require it to reveal its own attorney-client communications which had occurred in the course of the fiduciary's defense. (Id., 22 Cal at p. 206.) Importantly, the Court rested its conclusion on the fact that the attorney-client privilege was a creature of statute which was not susceptible to modification by the Court. The Court explicitly noted that "[i]n most of the other jurisdictions in which this question has arisen, courts have given the trustee's reporting duties precedence over the attorney-client privilege. . . . But those courts consider themselves free, in a way we do not, to create exceptions to the privilege." (Id., 22 Cal at p. 208.) "What courts in other jurisdictions give as common law privileges they may take away as exceptions. We, in contrast, do not enjoy the freedom to restrict California's statutory attorney-client privilege based on notions of policy or ad hoc justification." (Id., 22 Cal at p. 209.)
Petitioners submit that, where as here, no statutory provision supervenes over the fiduciary duty to disclose, the fiduciary remains bound by his duties even in the context of adverse litigation. The rationale for the fiduciary exception to the extrinsic fraud rule is that where a duty is owed to the other party and is breached during litigation, the policy of allowing a defrauded party to seek relief outweighs the policy in favor of finality of judgments. This is because the confidential relationship gives rise to a fiduciary duty that must be honored even during an adversarial litigation between the fiduciary and the party to whom the duty is owed. In such an instance, the fiduciary owes the other party a duty of honesty and full disclosure of all material facts. (In re Marriage of Modnick (1983) 33 Cal. 3d 897, 904-905 [husband testified falsely at trial and failed to disclose assets and judgment was set aside as the wife was deprived of the ability to fully present her case].)
An additional reason for refusing to relax fiduciary standards exists in this case and every case where an HMO controls the arbitration process used by its patients: Kaiser owed an independent, contractual duty to provide a fair arbitration to Mr. Rushford.
In Engalla v. Permanente Medical Group, Inc., et. al. (1997) 15 Cal. 4th 951; 980- 989, this Court held that Kaiser owes its members contractual obligations to conduct a fair arbitration and may not engage in fraudulent conduct intrinsic to an arbitration. This Court in Engalla harshly criticized Kaiser's system, noting the wide "gap between its contractual representations and the actual workings of its arbitration program". (Id., at 986-987.) Justice Kennard's concurring opinion states that it is the essential role of the courts to determine whether a medical malpractice patient has received a fair arbitration, and where unfair conduct procures Kaiser a favorable award, then it is the duty of the trial court to vacate the award. (Id, 988-989.) Citing Section 1286.2, Justice Kennard further stated that where there is unfair procedural or substantive conduct during a private arbitration that "affects the arbitration award, it may form the basis for vacating the award as one 'procured by corruption, fraud or other undue means." (Id., 988-989 [emphasis added].)
Kaiser's Blue Ribbon Advisory Panel formed in response to this Court's criticism in Engalla of Kaiser's arbitration system, concludes under the Section "Arbitration and the Duty of Kaiser Permanente": "Imposing a mandatory arbitration system means that Kaiser Permanente is implicitly representing to its members that the system is fair, reasonable and just. We strongly believe Kaiser Permanente must honor this representation." The duties outlined by the panel include a "duty to guarantee… essential fairness." Contractual arbitrations must operate with a minimum level of integrity -- otherwise arbitration would cease to qualify as an adequate mechanism to secure individual redress for damages. Hines v. Anchor Motor Freight, Inc. (1976) 424 U.S. 554, 568 [finality clause of arbitration contract was unenforceable and arbitration decision was set aside due to union's breach of duty to its member during the arbitration]. An award procured by false testimony must be vacated where a participant breaches a contractual duty owed the other party. (Hines. supra, 424 U.S. at 568-571). Accordingly, Kaiser's fraud during its contractually-imposed arbitration process deprives it of arm's length status.
This case presents an important issue of first impression going to the heart of the fairness and integrity of mandatory arbitration schemes in medical malpractice cases. Review is necessary in order to settle the question of the standard for vacatur of medical malpractice arbitration awards procured by fraud where the treating relationship is ongoing and the physician has a contractual obligation to provide a fair arbitration. Petitioners submit that the appropriate standard in these cases is one of a simple showing that fraud had been committed, rather than satisfaction of any heightened vacatur standard. Accordingly, the Petition for Review should be granted.
DATED: May 31, 2005
Respectfully submitted,
Sharonrose Cannistraci, Esq.
Mary McNamara, Esq.
Attorneys for Petitioners
CALIFORNIA STATE CASES
Arato v. Avedon
(1993) 5 Cal.4th 1172, 1188 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Bowman v. McPheeters
(1947) 77 Cal. App. 2d 795, 800-801. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Cobbs v. Grant
(1972) 8 Cal.3d 229 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Coon v. Nicola
(1993) 17 Cal.App.4th 1225 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, n.5
Engalla v. Permanente Medical Group, Inc., et. al.
(1997) 15 Cal. 4th 951; 980-989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30, 31
Estate of Anderson
(1983) 149 Cal. App. 3d 336 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Estate of Sanders
(1985) 40 Cal. 3d 607 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Garlock v. Cole
(1962) 199 Cal. App. 2d 11, 16-17 . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 25
In re Marriage of Heggie
(2002) 99 Cal. App. 4th 28, 35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 27
In re Marriage of Modnick
(1983) 33 Cal. 3d 897, 904-905 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Lamb v. Holy Cross Hospital
(1978) 83 Cal. App. 3d 1007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Mansdorf v. California Physicians' Service, Inc.
(1978) 87 Cal. App. 3d 412 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Moore v. Regents of University of California
(1990) 51 Cal. 3d 120, 131 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Nelson v. Gaunt
(1981) 125 Cal. App. 3d 623 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Pacific Crown Distributors v. Brotherhood of
Teamsters and Auto Truck Drivers, Local 70
(1986)183 Cal.App.3d 1138 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-16
Pashley v. Pacific Elec. Co.
(1944) 25 Cal.2d 226, 235 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Pico v. Cohn
(1891) 91 Cal. 129 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 12-13
Pour Le Bebe, Inc. v. Guess? Inc
(2003) 112 Cal.App.4th 810. . . . . . . . . . . . . . . . . . . . . . . 9, 14-15, 19-20, 22
Rios v. Allstate Ins. Co.
(1977) 68 Cal. App. 3d 811 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Rosenfeld v. Superior Court
(1983) 143 Cal.App.3d 198 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, n.5
Sapp v. Superior Court of State, in and for Los Angeles County
(1953) 119 Cal. App. 2d 645, 653 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Stafford v. Shultz
(1954) 42 Cal. 2d 767, 775-779 . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-24, 25
Wells Fargo Bank v. Superior Court (Boltwood)
(2000) 22 Cal.4th 201, 206, 208, 209 . . . . . . . . . . . . . . . . . . . . . . . . . 28, 29
OTHER STATE CASES
Kloss v. Edward D. Jones & Co.
(2002) 310 Mont. 123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, n. 6
Lockett v. Goodill
(1967) 71 Wash.2d 654, 656 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Lownsbury v. VanBuren
(2002) 94 Ohio St.3d 231, 235 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Meinhard v. Salmon (1928) 249 NY 458 . . . . . . . . . . . . . . . . . . . . . . . 18-19
State ex rel. McCloud v. Seier
(Mo. 1978) 567 S.W.2d 127, 128 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Teamsters Local Union #11 Affiliated
with International Brotherhood of
Teamsters, etc. v Abad (1975) 135 NJ Super 552
revd on other grounds 144 NJ Super 239 . . . . . . . . . . . . . . . . . . . . . . . . . 21
Wargo v. Buck
(1997) 123 Ohio App.3d 110, 122 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FEDERAL CASES
Bonar v. Dean Witter Reynolds, Inc.
(11th Cir. 1988) 835 F.2d 1378 . . . . . . . . . . . . . . . . . . . . . . . 15, n.4, 19-20
Dogherra v. Safeway Stores, Inc.
(9th Cir. 1982) 679 F.2d 1293
cert denied 459 U.S. 990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, n.4
Hines v. Anchor Motor Freight, Inc.
(1976) 424 U.S. 554, 568, 568-571 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Intern. Broth. Teamsters, Local 519 v. U.P.S.
(6th Cir. 2003) 335 F.3d 497 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, n.4
Newark Stereotypers' U. No. 18 v. Newark
Morning Ledger Co.
(3d Cir. 1968) 397 F.2d 594 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, n.4
OTHER AUTHORITIES
8 Witkin, Cal. Procedure
(4th ed. 1997) Attack on Judgment in Trial Court, § 223 . . . . . . . . . . . . . 11
11 C. Wright & A. Miller
Federal Practice and Procedure p. 2868 (1973) . . . . . . . . . . . . . . . . . . . . 12
22 A.L.R. 4th 366 (1983, updated December 2003)
What Constitutes Corruption, Fraud, or Undue
Means in Obtaining Arbitration Award Justifying
Avoidance of Award Under State Law . . . . . . . . . . . . . . . . . . . . . . . . 14, n.3
Business & Professions Code § 2263 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
California Code of Civil Procedure § 1286.2(a)(1) and § 1287 . . . . passim
Fed.R.Civ.P 60(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Freeman, Judgments
(5th ed. 1925), Section 1235, p. 2576 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Ian R. MacNeil, American Arbitration Law
(1992) 15- 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, n.6
Jerold S. Auerbach, Justice Without Law?
(1983) 101-114 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, n.6
Margaret M. Harding, The Redefinition of Arbitration
by Those with Superior Bargaining Power
1999 UTAH L. REV. 857 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, n.6
R. Chalos, The Law of Fiduciary Duties
(2000) § 3:41 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Rest.2d, Judgments §70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1 The facts of the course of treatment are set forth more fully in the Court of Appeal's Order at pages 2-4.
2 All further unspecified statutory references are to the Code of Civil Procedure.
3 Other states have long held that false testimony and intrinsic fraud constitute grounds for vacating an arbitration award. (See 22 A.L.R. 4th 366 (1983, updated December 2003), entitled "What Constitutes Corruption, Fraud, or Undue Means in Obtaining Arbitration Award Justifying Avoidance of Award Under State Law.)
4 Among others, the court cited to Intern. Broth. Teamsters, Local 519 v. U.P.S. (6th Cir. 2003) 335 F.3d 497 [false testimony grounds for vacating an award]; Newark Stereotypers' U. No. 18 v. Newark Morning Ledger Co. (3d Cir. 1968) 397 F.2d 594, 598 ["We may assume that the obtaining of an award by perjured testimony would constitute fraud under [9 U.S.C.] § 10(a)]; Dogherra v. Safeway Stores, Inc. (9th Cir. 1982) 679 F.2d 1293, 1297; cert denied 459 U.S. 990 ["Obtaining an [arbitration] award by perjured testimony constitutes fraud" and grounds for vacating the award]; Bonar v. Dean Witter Reynolds, Inc. (11th Cir. 1988) 835 F.2d 1378 [award vacated in part to delete damages testified to by expert witness who gave false testimony in stating credentials].
5 Section 1295 of Title 9.1 was adopted in 1975 to alleviate the escalating costs of medical malpractice insurance premiums (and resulting problems of health care availability) due to the surge of medical malpractice actions and high jury awards. (Rosenfeld v. Superior Court (1983) 143 Cal.App.3d 198). Its basic function was to establish uniform language and mandate the conspicuous appearance of arbitration clauses in medical services contracts. The result is to bind patients to arbitration contracts that could otherwise be challenged as adhesion contracts. (Coon v. Nicola (1993) 17 Cal.App.4th 1225.)
6 Historically, arbitration was designed as a method of alternative dispute resolution between merchants of equal sophistication and bargaining power. (See, e.g., Kloss v. Edward D. Jones & Co. (2002) 310 Mont. 123, 142 n. 3 (Nelson, J., concurring); see also Jerold S. Auerbach, Justice Without Law? 101-114 (1983); Ian R. MacNeil, American Arbitration Law 15- 25 (1992); Margaret M. Harding, The Redefinition of Arbitration by Those with Superior Bargaining Power, 1999 UTAH L. REV. 857, 857 (1999).) dy>