Weirton Med. Ctr., Inc. v. Cmty. Health Sys., No. 5:15-cv-00132 (N.D.W. Va. Dec. 12, 2017) [click for opinion]

Plaintiff Weirton Medical Center (“Weirton”), a hospital in West Virginia, entered into two related contracts with Defendant Quorum Health Resources, LLC (“Quorum”), for administrative services intended to assist Weirton in a financial turnaround (the “Interim CFO Agreement” and the “Turnaround Agreement”). Before the engagement term under the Turnaround Agreement was to end, Weirton terminated the Agreement and refused to pay Quorom’s invoices. Quorum forced an arbitration in accordance with the Turnaround Agreement, in which the arbitrator entered an award in favor of Quorum on all claims (the “First Award”).

Weirton then filed suit in the Northern District of West Virginia along with a motion to vacate the First Award. The court denied Weirton’s motion to vacate and granted Quorum’s motion to confirm the First Award. Two days after filing its motion to vacate the First Award, Weirton filed this action, asserting various claims against Quorum, Community Health Systems, Inc. (“CHSI”), and individual defendants. Again, Quorum and the individual defendants filed a joint motion to compel arbitration (the “Second Arbitration”) in accordance with the Interim CFO Agreement and the Turnaround Agreement, which motion was granted.

In the Second Arbitration, the defendants filed motions for summary disposition. The arbitrator granted summary disposition in favor of the defendants, finding that: (1) CHSI was not a proper respondent to the action and that Weirton failed to state claims against CHSI; (2) all of Weirton’s claims, except for the breach-of-contract claim against Quorum, were barred by res judicata or collateral estoppel; (3) Weirton’s breach-of-contract claim against Quorum was time-barred under the applicable Tennessee statute of limitations; (4) Weirton’s tort claims were alternatively barred by the gist-of-the-action doctrine; and (5) Weirton’s unjust enrichment claim was barred because of the parties’ contracts (the “Second Award”). Weirton then filed in a motion in its suit in the Northern District of West Virginia to vacate the Second Award, arguing that the arbitrator exceeded his powers in granting summary disposition and that the arbitrator manifestly disregarded applicable law.

First, the court held that the arbitrator had not exceeded his powers by disposing of the case on summary disposition. Weirton argued that the arbitrator exceeded his powers because neither West Virginia nor Tennessee’s Rules of Civil Procedure permit summary disposition. The court disagreed with Weirton’s argument, holding that an arbitrator is empowered to make decisions on procedural issues and courts will not question that determination so long as it has a “reasonable basis” in the parties’ agreement. Although the arbitration agreements provided for binding arbitration to be conducted under Tennessee and West Virginia law, neither of which permits summary disposition without an opportunity for discovery, both agreements also invoked the AAA rules with regard to procedural matters. Thus, the court concluded that the arbitrator’s decision to apply the AAA rules rather than the states’ Rules of Civil Procedure had a reasonable basis in the parties’ agreements and thus was entitled to deference.

The court went on to disagree with Weirton’s contention that the arbitrator manifestly disregarded both West Virginia and Tennessee law because he allegedly misapplied the law or otherwise made factual or legal errors. Weirton argued that this manifest disregard occurred in connection with (1) the arbitrator’s disposal of the case on summary disposition; (2) the arbitrator’s determination that all claims but one were barred by res judicata or collateral estoppel; (3) the arbitrator’s conclusion that one of Weirton’s claims was barred by the statute of limitations; and (4) the arbitrator’s determination that, if not barred by res judicata, a number of Weirton’s claims were barred by the gist-of-the action doctrine.

The court explained that it could vacate an arbitration award under the manifest disregard standard only when a plaintiff has shown that: (1) the disputed legal principle is clearly defined and is not subject to reasonable debate; and (2) the arbitrator refused to apply that legal principle. The court first held that, because Tennessee and West Virginia’s Rules of Civil Procedure did not apply to the issue of whether summary disposition was proper, the arbitrator did not manifestly disregard those laws. Turning to Weirton’s second argument, the court held that because the legal principal of res judicata is not “clearly defined” and is “subject to reasonable debate,” the arbitrator did not manifestly disregard that law. With regard to Weirton’s third claim, the court held that even if Weirton were correct that the arbitrator erroneously applied a tolling provision, it declined to vacate the award “simply because the arbitrator made legal or factual errors.” Finally, with regard to the gist-of-the-action doctrine, the court found that the arbitrator identified the proper doctrine and applied it, “rightly or wrongly,” to Weirton’s claims and, thus, did not manifestly disregard the law.

A version of this post originally appeared in the March 2018 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.


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