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Fiduciaries in NC Now Have a Duty to Identify & Explain Arbitration Agreements in Contracts

27 Mar 2017 4:30 PM | Lynette Pitt (Administrator)

by Michael W. Mitchell & Andrew P. Atkins, Smith Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP

The Supreme Court of North Carolina recently held that a doctor owed a fiduciary duty to a prospective patient prior to the formation of a doctor-patient relationship. The existence of that duty—previously unrecognized in North Carolina—allowed the Court to invalidate an arbitration agreement in the contract with the patient. The Court’s decision seems to redefine the law of fiduciary duty. And the scope of the Court’s decision necessarily reaches beyond arbitration agreements, and therefore could call into question the enforceability of other types of contract provisions whenever one party alleges the existence of a fiduciary duty.

In King et al. v. Bryant, et al.1 a patient in need of a medical procedure filled out and executed routine patient intake forms prior to treatment. Among those forms was an agreement to arbitrate any disputes arising out of the doctor’s medical treatment. The forms stated that execution of the arbitration agreement was not a prerequisite to medical treatment. After completing the forms, Mr. King, the patient, and Dr. Bryant, the doctor, formed a doctor-patient relationship. Dr. Bryant then performed the needed medical procedure; however, the procedure did not go well and Mr. King suffered complications and alleged injuries as a result. When Mr. King filed litigation in state court, Dr. Bryant moved to stay the litigation and enforce the arbitration agreement. While there was much procedural history, the primary question before the Supreme Court was whether the arbitration agreement was enforceable against Mr. King.

Typically, the enforceability of an arbitration agreement turns on an analysis of procedural and substantive “unconscionability.”2 However, here the Court departed from the typical analytical framework, stating “this case hinges upon the nature of the relationship that existed between Mr. King and Dr. Bryant at the time that the arbitration agreement was signed.” Notably, the Court did not focus on whether a doctor-patient relationship existed; rather, the Court looked at whether a fiduciary relationship existed separate and apart from the doctor-patient relationship. The Court held that a relationship of trust and confidence existed between the parties prior to the formation of the doctor-patient relationship, and therefore Dr. Bryant owed a duty to disclose all materials facts to Mr. King before he signed the agreement.

The Court relied on the fact that Mr. King “demonstrated sufficient trust and confidence in [Dr. Bryant] to provide Dr. Bryant with confidential medical information” before the doctor-patient relationship was formed, even though Mr. King provided that medical information contemporaneously with his execution of the arbitration agreement. Thus, according to the Court, if Dr. Bryant failed to disclose all material facts to Mr. King, and in so doing Dr. Bryant received a benefit from his nondisclosure, then he would have breached his fiduciary duties and committed constructive fraud.

The Court in fact held that was the case: Dr. Bryant breached his fiduciary duty to Mr. King, and therefore the arbitration agreement was unenforceable. The Court explained that no one directed Mr. King’s attention to the arbitration agreement, which was included in a stack of other documents, or attempted to explain the ramifications to him. While the Court noted that Mr. King never read the documents, it also seemed persuaded by the fact that he had limited education and experience interpreting legal documents.

The Court further held that Dr. Bryant breached his fiduciary duty for the purpose of obtaining dispute resolution procedures to his benefit. Curiously, the arbitration provision in the agreement did not favor either party to the agreement, and yet the Court did not find this fact to be relevant in the analysis of whether there was a breach of fiduciary duty. If Mr. King had received a benefit of equal value to Dr. King’s, then how could Mr. King have suffered harm that would give rise to a claim that invalidated the arbitration agreement?

The Court’s holding in King appears to presume, as a general proposition, that a bilateral right to arbitrate is nevertheless a benefit to only one of the parties, in this case the professional. Precedent from the United States Supreme Court, however, disapproves of an analysis that looks at whether one party benefits more than the other from arbitration.

In Concepcion, the United States Supreme Court considered an arbitration agreement that restricted class actions in arbitration.3 The Court in Concepcion recognized that such a restriction could benefit one party over the other, and the Court referenced arbitration provisions that do not provide for judicially-monitored discovery as another example.4 But the Court did not find unequal benefits to be a proper subject of consideration, even if it falls within the confines of a generally-applicable state law unconscionability analysis, because it simply is not compatible with the Federal Arbitration Act (the “FAA”).5 The primary purpose of the FAA is to “promote arbitration.”6 Accordingly, state law theories that “stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA are necessarily preempted.7

Two justices dissented in King, arguing that the majority had abandoned the Court’s traditional unconscionability analysis, that it had failed to understand how a fiduciary relationship is formed, that it had failed to acknowledge the preemptive effect of the FAA, and that it had mischaracterized arbitration as a benefit to only one of the parties to the agreement. One of the dissents noted that, even if this arbitration agreement favored Dr. Bryant, contracts of adhesion with arbitration agreements often favor one party over the other, and yet they are enforceable under the FAA. The dissent also noted that any contrary analysis necessarily takes issue with the arbitration agreement itself, simply because it is an arbitration agreement. The other dissent even characterized the majority’s opinion as merely a “rationalization” of state law to avoid arbitration. In sum, both dissents take the position that the majority’s state law analysis necessarily applies in a way that would disproportionately affect arbitration agreements and, therefore, such an analysis is preempted by the FAA.

The Court’s decision raises a significant risk that existing arbitration agreements could be unenforceable. The decision even has implications outside the arbitration setting, because it could just as easily apply to other types of contractual provisions. In fact, the Court expressly stated that its legal analysis would apply to other contractual provisions, not just arbitration agreements. The Court was essentially required to make this holding to avoid the reach of federal preemption under the FAA, which permits invalidation of arbitration agreements only under “generally applicable contract defenses” that also apply outside of the context of arbitration agreements.8

In situations where a fiduciary relationship could be alleged, parties must now give careful consideration to whether they should adopt additional procedures to ensure that their contractual agreements are properly executed and still enforceable. While this process will be most important in the context of arbitration provisions between professionals and their prospective clients/patients, by necessity the Court’s holding extends equally to other types of contract provisions. The Court offers no guidance as to what provisions, other than arbitration agreements, would reach the threshold of such significance that they must be disclosed and/or explained. The Court also offers no guidance as to how the other party’s level of sophistication or experience should affect the fiduciary’s obligations. Undoubtedly, these issues will be the subject of additional litigation.

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1 __N.C.__, 795 S.E.2d 340 (2017)
2 See, e.g., Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 655 S.E.2d 62 (2008)
3 See AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341-42, 131 S.Ct. 1740, 1747-48
4 Id. at 342-44, 131 S. Ct. at 1747-48
5 See id.
6 Id. at 346, 131 S. Ct. at 1749.
7 Id. at 352, 131 S. Ct. at 1753.
8 Id. at 349, 131 S. Ct. at 1746.

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