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Issue of arbitrability to the arbitrator

Virginia Federal Court holds that parties to requirements contract agreed to confer the issue of arbitrability to the arbitrator.

In Innospec Ltd. v. Ethyl Corp., the United States District Court for the Eastern District of Virginia held that parties to a contract agree to arbitrate the issue of arbitrability when incorporating specific rules allowing for the arbitration of arbitrability into an agreement to arbitrate.  Writing for the Court, District Judge John A. Gibney, Jr. held that an American manufacturer of tetraethyl lead (“TEL”) would have to arbitrate its declaratory judgment action seeking a declaration that it could terminate a requirements contract with a British buyer.  As a matter of first impression in the Fourth Circuit, the Court held that the incorporation of the Rules of the London Court of International Arbitration in the arbitration provision of the parties’ supply contract offered clear and convincing evidence that the parties intended to arbitrate the issue of arbitrability.

Innospec, Ltd. (“Innospec”) is an American company engaged in the business of manufacturing and selling TEL.  Innospec entered into a requirements contract (the “Contract”) with the British company Ethyl Corporation.  The Contract contained an arbitration provision that, in pertinent part, stated:  “Any dispute between the parties with respect to this Agreement . . . may be submitted by either party for arbitration in London in accordance with the Rules of the London Court of International Arbitration by one arbitrator to be appointed by agreement between the parties.”  Innospec filed a declaratory judgment action in the United States District Court for the Eastern District of Virginia seeking a declaration that it had a right to unilaterally terminate the Contract due to unforeseeable economic conditions; namely, the weakening of the global appetite for leaded motor fuel.  Ethyl moved to compel the matter to arbitration and either stay proceedings or dismiss the claim outright.  Additionally, Ethyl asked the Court to determine the arbitrability of Innospec's claim.

The Court granted Ethyl’s Motion to Compel Arbitration, but declined to decide the issue of arbitrability.  In declining to reach the issue of arbitrability, the Court stated that it must determine from the terms of the Contract whether the parties intended to arbitrate the issue of arbitrability.  While acknowledging a general presumption in favor of arbitration, the Court stated that there is also a presumption against assuming that parties agreed to arbitrate the issue of arbitrability.  In order to overcome that presumption, parties must show a “clear and unmistakable” intent to arbitrate the issue of arbitrability.  The Court held that the Contract met the “clear and unmistakable” standard by incorporating the Rules of the London Court of International Arbitration, which confers upon the arbitrator jurisdiction to determine arbitrability.  The Court acknowledged that this issue had yet to be ruled upon by the Fourth Circuit, but found that a majority of circuit courts have held that the incorporation of specific rules that allow arbitrators to determine arbitrability meets the “clear and unmistakable” standard.  Therefore, the Court compelled arbitration of this matter, dismissing Innospec’s action without prejudice.

Innospec Ltd. v. Ethyl Corp., No. 3:14-cv-158, 2014 WL 5460413 (E.D. Va. Oct. 27, 2014), Available athttp://scholar.google.com/scholar_case?case=7080216707967463157&q=Innospec+Ltd.+v.+Ethyl+Corp.&hl=en&as_sdt=20000006&as_vis=1

Submitted by Marisa A. Trasatti and Wayne C. Heavener, Semmes, Bowen & Semmes

Districts EMTs acting in an emergency

District’s EMTs acting in an emergency during firefighter physical ability test protected by public duty doctrine

The decedent, Eric Allen, was a participant in the physical ability test (PAT) as part of his application to become a District of Columbia (“District”) firefighter.  As part of the PAT, the participants’ vitals were taken before and after the PAT by on-scene emergency medical personnel (“EMTs”), retained by the District of Columbia Fire and EMS Department (“FEMS”) for that purpose.  Prior to the PAT, Allen had his vitals taken, which were normal.  At the conclusion of the PAT run, however, Allen began to exhibit signs of illness.  The FEMS personnel called for the EMTs, who had set up their equipment in a nearby schoolroom, who indicated that they needed to get their equipment, including oxygen tank, from their ambulance.  When they arrived, Allen’s vitals were taken and he was given an EKG.  At that point, he was designated a “Priority 3,” the lowest priority, but the EMTs indicated that Allen needed to go to the hospital.  As there was an ambulance on the scene, a basic life support vehicle arrived and transported him to Greater Southeast Community Hospital.  While enroute, his priority level was not changed and, as a result, Allen waited in the emergency waiting room for over an hour.  His conditioned worsened and he was flown by helicopter to Washington Hospital Center, where he died of acute exertional rhabdomyolysis.

Allen’s parents brought a survival and wrongful death suit based on negligence against the District, Greater Southeast Community Hospital and the doctors who attended Allen at the hospital.  While the other defendants settled the claims against them, the District filed a motion to dismiss, which the court treated as a motion for summary judgment as discovery had been completed.  The court concluded there was no “special relationship” that would exempt the case from the “public duty doctrine,” which rendered the District immune.  The Plaintiffs appealed.

First, the District of Columbia Court of Appeals reviewed whether the public duty doctrine applied.  The Court initially noted “that this court has never addressed whether the public duty doctrine is applicable with respect to conduct by EMT personnel who are assigned to provide on-site vital-signs monitoring of firefighter candidates during administration of a PAT.” Allen, ___ A.3d at 3.  “The public duty doctrine ‘operates to shield the District and its employees from liability arising out of their actions in the course of providing public services.’”  Allen, ___ A.3d at 2.  The existence of a “special relationship” between the emergency personnel and the citizen renders of the doctrine inapplicable.  In holding that the public duty applied to the case, the Court noted that the EMTs stepped into their role as emergency responders when they were called to attend to Allen, and went to their ambulance to get the necessary equipment.  These actions were outside the intended roll requested for the PAT, which was limited to taking vitals before and after the test.  This roll as emergency responders was the type contemplated by the “public duty doctrine,” and therefore the District was immune.

The Court then determined that there was no special relationship between the District and Allen.  In order to establish a special relationship, or “special duty,” “a plaintiff must allege and prove two things: (1) a direct or continuing contact between the injured party and a governmental agency or official, and (2) a justifiable reliance on the part of the injured party.”  Allen, __ A.3d at 4, citing Klahr v. District of Columbia, 576 A.2d 718, 720 (D.C.1990).  The Court held that Allen, as a volunteer to the firefighter examinations, was similar to a 911 caller who emerges from the general public with whom emergency personnel had no special relationship.  The Court dismissed the relationship between FEMS and Allen as ongoing and continuous, as it would result in holding that FEMS had a “special” relationship with all 100 recruits.  The Court also held that the Plaintiffs had failed to show that Allen justifiably relied upon the EMTs in acting or failing to act in any way because of the presence of the EMTs.  As such, the special relationship exception to the public duty doctrine did not apply and the claim against the District was barred.  The Court affirmed the trial court’s grant of summary judgment in the District’s favor.

Judge Easterly filed a dissent chastising the Court for applying the public duty doctrine, and for determining issues of fact in a summary judgment motion.  Judge Easterly noted that the application of the public duty doctrine, as implemented by the majority opinion, conflicted with the jurisprudence on the District’s sovereign immunity and greatly expanded the application of the public duty doctrine without justification.  Judge Easterly requested that the opinion be revisited by the Court of Appeals en banc, to clarify the scope of the public duty doctrine, and evaluate if the doctrine should continue to be recognized in the District.

Allen v. District of Columbia,___ A.3d___ (2014), Available at: http://www.dccourts.gov/internet/documents/10-CV-1425.pdf

Submitted by Marisa A. Trasatti and Gregory S. Emrick, Semmes, Bowen & Semmes

Applying the Kapiloff factor test

Upon Applying the Kapiloff factor test, the District Court Abstained for Exercising Jurisdiction in a Declaratory Judgment Action and Granted Defendant’s Motion to Dismiss

In First Mercury Insurance Co. v. The Earleigh Heights Volunteer Fire Co. of Anne Arundel County, the United States District Court for the District of Maryland granted Defendant’s Motion to Dismiss Plaintiff’s filing seeking a declaratory judgment.  The Plaintiff, First Mercury Insurance Co. (“Mercury” or “Insurer”), initiated this action against Defendant Earleigh Heights Volunteer Fire Company of Anne Arundel County (“Fire Company”) to settle a question of insurance coverage that related to a tort action pending in the Circuit Court for Anne Arundel County.

The underlying tort litigation arose from a tragic accident that occurred during a carnival sponsored by the Fire Company and operated by Frank Joseph & Sons, Inc. d/b/a Jolly Shows, (“Jolly”).  A pedestrian was crossing Ritchie Highway to attend the carnival when a car fatally struck her.  Her surviving family filed a wrongful death action against the Fire Company and Jolly alleging both parties were negligent in failing to secure a safe crossing at a roadway adjacent to the carnival.  Mercury, Jolly’s insurer, defended Jolly, as an insured, and the Fire Company as a named “additional insured.”

The Plaintiffs in the tort action, however, voluntarily dismissed their claims against Jolly. As a result, Mercury stopped defending Jolly and the Fire Company, although the latter was still a Defendant in the tort action.  Mercury communicated to the Fire Company that it ceased its defense because the remaining claims were solely against the Fire Company and did not arise out of the insured’s operations. Mercury claimed it did not have a duty to defend the Fire Company.

When the Fire Company disputed Mercury’s removal, Mercury filed a declaratory judgment action in this court asserting that it had no duty to defend and/or indemnify the Fire Company regardless of the dismissal of Jolly.  In response, the Fire Company filed a Motion to Dismiss arguing that the declaratory action should be litigated in state court where the Fire Company had previously (three months prior) filed a request for declaratory judgment on the same issue and the request is still pending.

With regard to the state action, the Fire Company filed a motion in the state declaratory action to consolidate the case with the tort action and, further, it requested a stay of the state declaratory action pending resolution of the tort action.[1]

For guidance, the court looked to the rules, case law and other statutes governing federal jurisdiction.  The court reiterated that federal courts may not exercise jurisdiction absent a statutory basis, but, when they have a basis, they must usually exercise it.  In other words, federals courts have a “virtually unflagging obligation . . . to exercise the jurisdiction given them” absent “exceptional circumstances” yet, the court explained that a different set of guidelines exist in the declaratory judgment context.  Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976). 

The Supreme Court reaffirmed this framework by stating that district courts have “greater discretion” to abstain from exercising jurisdiction “in declaratory judgment actions than that permitted under the ‘exceptional circumstances’” test that district courts must otherwise satisfy to abstain.  Wilton v. Seven Falls. Co., 515 U.S. 277, 286 (1995).  In other words, the “normal principle that federal courts should adjudicate claims within their discretion yields to considerations of practicality and wise judicial administration” in the declaratory judgment context. Wilton, 515 U.S. at 288.

In declaratory judgment actions, federal courts’ jurisdiction springs from the Declaratory Judgment Act, 28 U.S.C. § 2201 (a) that, in its statutory language, reflects a “textual commitment to discretion.”  Wilton, 515 U.S. at 286.  The Act provides that where a federal action that seeks only discretionary declaratory relief is before a federal court, and there is a parallel proceeding pending in a state court, the district court may either stay the suit in favor of state court action or abstain from exercising jurisdiction by dismissing the federal suit.  Myles Lumber Co. v. CNA Fin. Corp., 233 F.3d 821, 823 (4th Cir. 2000). 

The Fourth Circuit has instructed district courts that such an abstention, referred to as a Wilton/Brillhart abstention, is appropriate when it will settle legal issues and afford relief.  Specifically, the Fourth Circuit noted that when there is a related state court proceeding pending, courts should also bear in mind considerations of “federalism, efficiency, and comity.”  Penn-America Ins. Co. v. Coffey, 368 F.3d 409, 412 (4th Cir. 2004).

The Fourth Circuit set forth a balancing test that included several factors, referred to as the “Kapiloff factors,” to assist district courts in evaluating whether to exercise their discretion as to declaratory judgment actions.  The factors include: (1) whether the state has a strong interest in having the issues decided in its courts; (2) whether the state court could resolve the issues more efficiently than the federal courts; (3) whether the presence of the “overlapping issues of fact or law” might create unnecessary “entanglement” between state and federal courts; and (4) whether the federal action is mere “procedural fencing,” in the sense that the action is merely the product of forum shopping.  United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 493-94 (4th Cir. 1998).

In the case at bar, the court found that the facts weighed in favor of granting Defendant’s motion to dismiss the Federal action in light of the pending state court action.  In reaching this conclusion, the court applied each of the above factors.

With regard to the first factor, the court found that although Maryland had an interest in having the matter of insurance coverage decided in state court, that the state interest was not strong enough to weigh against the exercise of federal jurisdiction.  While many factors of the case connected it to the state, including that the coverage involved conduct occurring in Maryland that allegedly caused damages to Maryland residents, the court honed in on the legal issues.  The Fire Company failed to frame the legal issues present, i.e., contract interpretation and agency, as complicated or non-standard legal matters.  The court noted that in order for this factor to weigh in favor of the state, the question of law must involve more than a routine application of “settled principles of law.”

The next factor, however, the court found weighed heavily in favor of dismissing the action so that it could be resolved in state court.  The court found that the matters overlapped and, further, that a federal declaration that an insurer had no duty to indemnify could be rendered moot by a later state verdict for the insured.  Additionally, the Fire Company’s assertion that it will only seek indemnification after resolution of the tort action if there was a judgment against it gave the court reason to conclude that allowing the litigation to continue in state court would be the more efficient avenue of resolution.

Similarly, the next factor weighed in favor of dismissing the action, as there were several overlapping issues of fact and law that would create unnecessary entanglement between federal and state courts.  The court found that the federal and state courts would consider the same issues, albeit perhaps under different standards, rendering state and federal entanglement impossible to avoid.

Last, the fourth factor weighed in favor of dismissing the Federal declaratory action as well.  The court found evidence to support that the Insurer filed the action in order to avoid being summoned to state court as the Insurer brought the action after a state action had been pending for months.

The court abstained from exercising jurisdiction and granted the Defendant’s motion to dismiss Plaintiff’s declaratory judgment action so as to allow the tort and coverage claims litigation to continue to state court.

First Mercury Insurance Co. v. The Earleigh Heights Volunteer Fire Co. of Anne Arundel County, No. ELH—14—3156 (D. Md. December 22, 2014), Available at: http://cases.justia.com/federal/district-courts/maryland/mddce/1:2014cv03156/293086/13/0.pdf?ts=1419083808

Submitted by Marisa A. Trasatti and Sarah M. Grago, Semmes, Bowen & Semmes

New Years Resolutions for Associates: Part 3: Building Your Community

As a new lawyer, I found marketing utterly mystifying.  How was I supposed to approach a complete stranger, usually much older than me, and ask them to entrust me with their legal work?  The answer is you don’t.  Cold calling is not a viable strategy.

 

Instead, build your network, one person at a time. The people who will be sending you business in 10 to 20 years are your peers today.  To that end, consider the following:

 

1.         Everyone counts.  Your assistant, your receptionist, the person who cuts your hair, your neighbor, the parents of your children’s classmates.  You never know when that person will end up in a position where they can influence who gets legal work, even if they do not presently work in an industry you are targeting.  A good way to develop this skill is to assess how you treat the staff in your firm – do you treat them the same way you treat the senior partner?  If not, you should.  Do not be blinded by hierarchy. 

 

2.         Show genuine interest in people as individuals, don’t hustle them.  It will take time, but if they get to know you and trust you, good things may follow.  If they don’t know you or trust you, nothing will follow.  Buy and read Dale Carnegie’s How to Win Friends and Influence People (http://amzn.to/1B1vZRg).  It’s culturally dated, but still relevant today. 

 

3.         Stay on their radar.  Several years ago my firm switched to electronic holiday cards.  I hate them, and some of my colleagues feel similarly and simply don’t bother to send them anymore, but I still do.  And, every year I get back anywhere from 10 to 30 e-mails thanking me and checking in – work may not follow, but at least they are thinking of me.  If they are not thinking of me, I’ll never get work from them.  Staying on the contact’s radar means more than holiday cards.  If you see a case or article that would interest them, shoot them a copy with a personal note.  Do it individually, not to a string of bcc’s. 

 

4.         Build and maintain your contact list.  Whether it’s Outlook, a paper Rolodex, or enterprise CRM software, make it a habit the first time you cross someone’s path to enter and save their contact information.  Use that information with restraint and don’t be a pest while you stay visible. 

 

5.         Do something non-law related in your community.  You’ll feel better, and you’ll meet great long term contacts.  Whether its related to your children, a social or political cause, a participatory sports or outdoor activity, a church, the Chamber of Commerce, or otherwise, go spend time with people who share your interests but are not necessarily lawyers.  In short, get a life.  It will give you something to talk about with clients and prospective clients.

 

6.         Become active in a legal or insurance industry organization.  Whether it’s your local Bar Association or a national one, all these organizations are run by volunteers.  There are never enough volunteers to accomplish all the organization’s goals.  Don’t ask for a glory job at the outset; volunteer to do the most thankless job in the organization, do it well, and the prominent roles and the professional stature that accompanies them, will follow in short order. 

 

7.         Never burn your bridges.  No matter how unpleasant an interaction, stick to the high road, remain civil and professional, and don’t alienate the other person.  For all you know, some years from now, you may be addressing them as “Your Honor.”  Or, that person may be the new General Counsel or Vice President of Claims of a major client.  

New Years Resolutions for Associates: Part 2-Basic Quality Control

Lawyers learn early to produce quality substantive work product.  There is more to producing quality work, however, than ensuring the law cited is good law, and the document has been spell-checked. 

 

Here are five things every litigation attorney, young and old, should do:

 

1.         Proofread the pleading caption.  It’s amazing how often typographical errors appear in captions.  When I was in law school, I worked for a lawyer who had a case dismissed because of a typo in the case number on a required filing.  As they say in the satellite television commercials, “Don’t be that guy.” 

 

2.         Proofread the service list on a mail-served pleading.  Despite all the systems in place to capture changes, far too often address changes, new parties and new attorneys don’t make it into service\ lists, especially when they are simply pulled from the last filing the attorney or firm has made. 

 

3.         Proofread the “white noise” portions of correspondence – the address, the subject line and the cc or bcc recipients.  Again, these are often pulled from prior correspondence without any critical examination of what’s being said.

 

4.         Pause before you hit the “send” button.  This has two parts:

 

            a.         Read the addressees  line.  Many of us have our e-mail programs set to auto populate names and e-mail addresses after a couple of keystrokes.  Computers are dumb and if you are not careful, the auto populated name won’t be the intended recipient.  I probably get two to four misdirected e-mails a month where I need to notify the sender and delete them. 

 

            b.         If the e-mail to which you are responding is accusatory, insulting or otherwise provocative, save the draft and wait until tomorrow morning.  Nothing is gained by a hasty reply, and your brilliant ripostes will not look nearly as brilliant tomorrow morning.  Also, to borrow in concept from George Bernard Shaw, don’t wrestle with a pig, both of you will get dirty, but only the pig will have fun. 

 

5.         Think twice before using “reply all.”  Usually, it isn’t necessary. 

 

In Part 3:  Building Your Community

Defendants Removal is Frustrated by Plaintiff's Multiple Amendments to Complaint

Defendant’s Removal Is Frustrated by Plaintiff’s Multiple Amendments to Complaint and an Action that Was Proceeding in Three (3) Courts Simultaneously

In Johnson v. Citibank, N.A., No. PWG-14-3024 (U.S. District Court of Maryland, December 5, 2014), the Court examined a complicated case of unsuccessful federal removal.  After initially filing a case pro se in Maryland State District Court setting forth, inter alia, violation of the Fair Credit Billing Act (“FCBA”), Plaintiff prayed a jury trial and amended his claimed damages, and so the case was transferred to the Maryland State Circuit Court, where the complaint was thereafter amended several additional times. 

Defendant sought to remove the case to the Maryland Federal Court on the basis of federal question jurisdiction based on the FCBA.  Defendant filed a notice of removal and provided notice to Plaintiff and the State District Court—but not to the State Circuit Court.  While the docket reflected that the case had been transferred from the State District Court to the State Circuit Court after the jury demand was prayed, the Defendant’s attorney was advised by the State Court Clerk that the case file remained with the State District Court, and therefore, the Defendant filed the notice of removal with the State District Court instead of the State Circuit Court.  After the notice of removal was filed, Plaintiff again amended the Complaint and stripped the Complaint of its federal claims.  Plaintiff moved to remand the case back to State Court on the grounds that there was no case pending in the State District Court to remove after the jury demand was filed. 

In ruling on the motion to remand, the Court disagreed with the Plaintiff’s argument, and found that although jurisdiction transferred from State District Court to State Circuit Court with the filing of the jury demand, the case remained pending and was removable to this court.  However, because Defendant did not provide notice to the State Circuit Court (in which the case was pending) until after Plaintiff amended his complaint to remove all of his federal claims, there was no basis for federal jurisdiction at the time that the removal was effected. 

Specifically, the Federal Court held that jurisdiction of the case was immediately transferred from the State District Court to the State Circuit Court upon the filing of the jury demand, and so the Notice of Removal ought to have been filed in the State Circuit Court.  The Court sympathized with Defendant who was left in a “state of limbo” in which the State Circuit Court had jurisdiction over the case but the State District Court retained custody of the physical case file.  Although Defendant timely filed its Notice of Removal in the Maryland Federal Court within thirty (30) days of being served with process, and immediately served a copy of the Notice of Removal on Plaintiff, the removal was not effective unless and until Defendant “[p]romptly . . . file[d] a copy of the notice with the clerk of such State court” as required by 28 U.S.C. § 1446(d).  Defendant did not strictly comply with 28 U.S.C. § 1446(d), but the Court noted that failure of notice to the state court is a procedural defect that does not defeat federal jurisdiction, and that several courts have found substantial compliance with 28 U.S.C. § 1446(d) where a state court has actual notice of the removal notwithstanding a defendant’s failure properly to file a notice of removal.

Although Defendant promptly provided notice of removal to the State District Court, it did so after jurisdiction transferred to the State Circuit Court.  The State Circuit Court was not made aware of the removal until Defendant filed its Motion to Stay State Proceedings over a month after the Notice of Removal was filed in this Court and over two (2) weeks after Plaintiff filed his Fifth Amended Complaint which eliminated his federal law claims.  Removal was effected on the date that the Motion to Stay State Proceedings was filed in State Circuit Court, and not before.

The delay between filing the Notice of Removal in the Federal Court and providing notice to the State Circuit Court was crucial because the validity of a removal must “be determined according to the plaintiffs’ pleading at the time of the petition for removal.”  Were removal complete on the day the Notice of Removal was filed in Federal Court, there is no question that Plaintiff’s FCBA claim would provide a basis for federal jurisdiction.  But, Plaintiff filed three amended complaints in State Circuit Court since that date, which eliminated the federal claims.  The Court did recognize that Plaintiff likely manipulated the Complaint to avoid federal jurisdiction, however, such liberal amendments are permitted in State Court, and so in this case, the amendments removing the federal claims were able to defeat removal based on the procedural irregularity with the filing of the Notice of Removal in the wrong Maryland State Court.  Accordingly, the case was remanded back to State Court.

Johnson v. Citibank, N.A., No. PWG-14-3024 (U.S. District Court for Maryland, December 5, 2014), Available athttp://www.mdd.uscourts.gov/Opinions/Opinions/Johnson%20v%20Citibank%20Mem%20Op%20on%20Remand.pdf

Submitted by Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes

New Years Resolutions For Associates: Part 1-Understanding the Logistics of Litigation Practice

When I started practicing law, I was told “Lawyers don’t type.”  That didn’t last long – three years later, I was the office guinea pig for giving computers to lawyers.  My handwriting has deteriorated ever since. 

 

But, this isn’t about typing or computers.  Every lawyer needs to know how to perform the tasks usually performed in larger firms by support staff to transform the lawyer’s intellectual work product into an actual court filing.  Only by understanding the logistical demands of an actual filing can the attorney ensure he or she is giving the support staff what they need when they need it.

 

With that preface, here are four things every young litigation lawyer needs to have done at least once:

 

1.         Make a paper court filing at the clerk’s office, ideally one requiring the payment of filing fees (without billing the client for your time).

 

2.         Make an electronic court filing from start to finish, preferably one with multiple documents and exhibits..

 

3.         Perform the printing, copying, and mail service of a complex discovery or motion pleading (ideally, one including exhibits), including execution of the Certificate of Service. 

 

4.         Find a document in a litigation support database. 

 

Why?  First, some day the attorney may need to perform these acts when there is no available support staff.  Second, every one of these tasks takes longer than many of us expect.   Giving the staff the necessary lead time is essential and there is no better way to learn how long these tasks take, and what obstacles may surface in the process, than doing it yourself. 

 

In Part 2:  Quality Control

Short-Term Disability Claim Administrator Abuses Discretion

Short-Term Disability Claim Administrator Abuses Discretion in ERISA Case When It Fails to Access Readily Available Information That May Confirm Plaintiff’s Theory of Disability

In Harrison v. Wells Fargo Bank, N.A., No. 13-2379 (U.S. Court of Appeals for the Fourth Circuit, December 5, 2014), the Court determined that Defendant abused its discretion by terminating the Plaintiff’s short term disability benefits.  Specifically, the Court held that Defendant did not give the Plaintiff’s claim a full and fair review pursuant to the Employee Retirement Income Security Act (“ERISA”).

Factually, Plaintiff worked for Defendant Wells Fargo as an Online Customer Service Representative.  In 2011, she was diagnosed with an enlarged thyroid and large mass that extended into her chest causing chest pain and tracheal compression.  She had a thyroidectomy surgery first, and a second chest surgery was scheduled for approximately two (2) months later to address the chest mass.  Wells Fargo paid Plaintiff short-term disability benefits for three (3) weeks after the first surgery, but terminated benefits prior to the second surgery, since it determined that three (3) weeks was the typical recovery period for this type of operation.  Additionally, while Plaintiff was facing her surgeries, her husband died unexpectedly, triggering a recurrence of depression and post-traumatic stress disorder (PTSD) related to the death of her mother and her children in a house fire in 2004.  Her primary care physician doubled her dosage of antidepressants and referred her to a psychologist for additional treatment.  Between those two (2) surgeries, Plaintiff sought continued short-term disability benefits on the basis of both physical and psychiatric complaints.

Defendant denied Plaintiff’s continued receipt of short-term disability benefits between the surgeries.  Plaintiff filed an internal appeal of the adverse claims decision.  She noted that she continued to have chest pain from the recent thyroid surgery and suffered emotional trauma from the death of her husband.  Her primary care physician and thoracic surgeon provided additional documentation to this effect.  Plaintiff also provided Wells Fargo with the contact information for her psychologist.  Additionally, Plaintiff also provided a detailed letter from her sister, who was her primary caretaker, outlining Plaintiff’s continuing pain, disability, and severe panic attacks.

During the appeal process, Defendant sought an independent psychological peer review of Plaintiff.  The psychological reviewer did not contact Plaintiff’s psychologist; he determined that the evidence in the record suggested that the recent events could have triggered PTSD; and he overall concluded that in the absence of psychiatric/psychological records or a telephone conference with Plaintiff’s psychologist, no opinion could be provided on whether Plaintiff’s psychiatric status limited Plaintiff’s functional capacity.  Wells Fargo upheld its previous decision to deny benefits.

Plaintiff filed an ERISA lawsuit claiming that Defendant abused its discretion in denying her short term disability benefits.  Defendant moved for summary judgment.  The trial court found there was insufficient evidence of disability under the plan and granted summary judgment in favor of the Defendant.  Plaintiff appealed to the Fourth Circuit.

The Fourth Circuit held that Defendant abused its discretion because it failed to contact Plaintiff’s psychologist when it was on notice that Plaintiff was seeking treatment for mental health conditions and when it had the psychologist’s contact information, as well as properly signed release forms from Plaintiff.  Here, the Defendant “chose to remain willfully blind to readily available information that may well have confirmed [Plaintiff’s] theory of disability.”  The Court recognized that “the primary responsibility for providing medical proof of disability undoubtedly rests with the claimant,” but also observed that the plan administrator cannot ignore medical information that may confirm the Plaintiff’s theory of disability where “there is no evidence in the record to refute that theory.”  Claim administrators should “notify a claimant of specific information that they were aware was missing and that was material to the success of the claim.”

Under past precedent, claim administrators are not under a duty to secure evidence supporting a claim for disability benefits when there is reliable evidence that a claimant is not, in fact, disabled.  In such cases, however, there is typically sufficient evidence in the record to refute the claimant’s theory of disability.  The present case, however, was distinguishable, as even the Defendant’s peer reviewer stated that the record was incomplete and his opinion as to whether the Plaintiff’s psychiatric status limited her functional capacity could not be provided.  The Defendant was “repeatedly” put on notice that Plaintiff was seeking psychiatric treatment, and even though the Defendant commissioned a psychiatric peer review, the psychiatric peer reviewer never contacted Plaintiff’s treating psychologist for further information that he determined was needed to render an opinion.  Unlike in prior cases, the record in this case did not refute Plaintiff’s claim of disability.

Even though Defendant was on notice that Plaintiff was receiving treatment for potential debilitating psychological trauma, it never made clear to Plaintiff that records from her psychologist were missing and needed.  Defendant noted “vaguely” and “deep into a long letter” that Plaintiff should provided relevant medical information “without ever once mentioning” the Plaintiff’s psychologist by name.  Instead, Defendant “should have made clear that records from [the psychologist] were absent from the record and necessary to perfect [Plaintiff’s] claim.”  Here, the Defendant breached its fiduciary duty to Plaintiff because it “neither sought readily available records” that “might have confirmed her theory of disability” nor “informed her in clear terms that those records were necessary.”  Accordingly, the judgment of the trial court was reversed and the claim was returned to Defendant for proceedings consistent with this decision.

Harrison v. Wells Fargo Bank, N.A., No. 13-2379 (U.S. Court of Appeals for the Fourth Circuit, December 5, 2014), Available athttp://www.ca4.uscourts.gov/Opinions/Published/132379.P.pdf

Submitted by Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes

Bad Law from the Eleventh Circuit

Yesterday, the Eleventh Circuit decided St. Paul Mercury Ins. Co. v. FDIC.  While the case is disappointing to industry-side lawyers who handle D&O coverage disputes involving failed banks, the court’s ambiguity analysis should be of greater concern.. 

 

According to the Eleventh Circuit, the fact that other courts disagree regarding the correct interpretation of policy language means it’s ambiguous.  That is a gross oversimplification.  But, it’s part of a disturbing trend as other courts reach similar conclusions.  See e.g., St. Paul Mercury  v. Hahn, 2014 WL 5369400 (C.D. Cal. 2014); Annotation, 4 A.L.R.4th 1253 (collecting cases).  The superficial “courts disagree, so it must be ambiguous” mode of analysis is wrong because each case involves the application of specific policy language to a specific factual pattern.  For example, in the failed bank D&O litigation context, many of the cases cited to show judicial disagreement regarding the Insured vs. Insured exclusion involve materially different policy language, because there is little uniformity in policy terms.  When courts simply tally conflicting decisions without considering whether they are on point, they err. 

 

Ambiguity doesn’t exist in the abstract.  It exists when there are multiple reasonable interpretations of contractual language in the context of the particular case.  As one California decision explained:

 

The [courts disagree] argument is unpersuasive. Different jurisdictions apply different rules governing the issue of textual ambiguity, and so may reach different results which are not necessarily logically inconsistent. The mere fact that judges of diverse jurisdictions disagree does not establish ambiguity under the particular principles which govern the interpretation of insurance contracts in California (see typed opn. at pp. 212–213).

 

ACL Technologies, Inc. v. Northbrook Prop. & Cas. Co., 17 Cal.App.4th 1773, 1787, n. 39 (1993). 

 

One flaw in the analysis by the 11th Circuit here, by the Central District of California in Hahn and by other courts is they did not analyze the following factors:  (a)was the policy language the same; (b)was the context of the court’s analysis similar; and (c)is the law being applied the same?  Without at least that level of congruence, the fact that courts hearing different cases reach different results does not mean the language at issue in a particular case is susceptible to multiple reasonable interpretations in that particular case.  Judicial disagreement does not compel a finding of ambiguity.  Just as juries are instructed not to make a decision based on the number of witnesses who testify on one side or the other, courts should not substitute counting conflicting decisions by other courts in place of analysis of the particular language at issue in the context of the particular case.  

A Sensible Class Action Decision

Too often the plaintiff-side class action bar focuses on the number of potential plaintiffs and ignores the fact that their identities may not be readily ascertainable, and that common issues may not predominate.  A recent decision from the California Court of Appeal is a breath of fresh air on that issue. 

 

It’s a truism, not always grounded in fact, that “Nobody pays retail” when it comes to health care.  Dagmar Hale, who was uninsured when she visited the Emergency Room at Sharp Grossmont Hospital in San Diego, didn’t see things the same way. 

 

Ms. Hale, despite being granted a discount off of retail pricing by Sharp Healthcare, filed a class action against Sharp on behalf of everyone who visited the ER without insurance.  She contended the “regular” rates at Sharp were unreasonable, unconscionable and illegal.  Following a previous appeal and prior certification of the class, Sharp moved to decertify the class.  The trial court agreed to decertify and the appellate court affirmed.  Hale v. Sharp Healthcare.

 

What’s interesting from a defense perspective, is how Sharp was able to defeat class certification.  From a review of its records, Sharp was able to identify roughly 120,000 patients who arrived in the ER claiming they were uninsured.  But, because California law prohibits hospitals from discussing financial issues with patients until after the patient is admitted and treated, Sharp explained that some of the “uninsured” really were not uninsured.  And for many others, Sharp gave or agreed to significant discounts from its retail rates, often resulting in payments less than those made on behalf of insured patients.  But, Sharp explained to the court that it could not ascertain which ostensibly uninsured patients really were uninsured, and not granted discounts, without individual review of the records of each of the 120,000 patients.  The court accepted that explanation, found the class was not ascertainable, and that individual issues, not class issues predominated. 

 

From a defense perspective, it’s refreshing to see that the court did not hold Sharp to an unreasonable standard of recordkeeping and instead accepted the inherent limitations of Sharp’s computerized records.  Too often, plaintiffs and courts expect a degree of IT sophistication and omniscience from corporate defendants which simply isn’t present in computer systems designed to meet the needs of regulators, auditors, and others, not the needs of plaintiff’s lawyers.  In Hale v. Sharp Healthcare, the court recognized that the parties can only work with the records as they exist, and if the manual review of the records of 120,000 patients was necessary to determine both class membership and damages, the class was not ascertainable, nor did common issues predominate. 

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