Baylor Health Care System v. Beech Street Corporation

Filing 6

MEMORANDUM OPINION AND ORDER granting 1 Baylor Health Care System's Application for Appointment of Arbitrator filed by Baylor Health Care System, and granting 5 Unopposed MOTION for Leave to File Sur-Reply filed by Beech Street Corporation. (Ordered by Chief Judge Sidney A Fitzwater on 5/15/2013) (Chief Judge Sidney A Fitzwater)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
BAYLOR HEALTH CARE SYSTEM,
Plaintiff,
VS.
BEECH STREET CORPORATION,
Defendant.

§
§
§
§ Misc. No. 3:13-MC-054-D
§
§
§
§
§

MEMORANDUM OPINION
AND ORDER
Baylor Health Care System (“BHCS”) and Beech Street Corporation (“Beech Street”)
are at an impasse concerning the appointment of the third arbitrator to a panel that will
arbitrate the parties’ contract dispute. Pursuant to the parties’ arbitration agreement, BHCS
applies to the Chief Judge of this court for the appointment of a third arbitrator. For the
reasons that follow, the court, acting under 9 U.S.C. § 5, grants the application.
I
BHCS and Beech Street are in the preliminary stage of arbitrating a contract dispute
regarding Beech Street’s contract to negotiate on BHCS’s behalf with health insurance plans.
Their contract includes an arbitration agreement (the “Agreement”). The Agreement
provides, in pertinent part, for a panel of three arbitrators to arbitrate unresolved claims or
controversies. Under the Agreement, each party appoints one arbitrator and the two
arbitrators appoint a third. The appointment procedure begins when one party makes a
demand for arbitration and identifies the arbitrator the party has chosen. The opposing party

then has 45 days after receipt of the demand to appoint a second arbitrator and notify the
other party of the appointment. If the opposing party fails to appoint an arbitrator and
provide the required notice, “the Party making the demand shall have the right to apply to
the Chief Judge of the United States District Court for the Northern District of Texas—Dallas
Division for an appointment of an Arbitrator.” P. App. Exh. A at 22. The Agreement
provides:
[t]he two Arbitrators appointed or selected as set forth in [the
preceding section] shall appoint a third Arbitrator as soon as
practicable, or, if they do not do so within forty-five (45)
calendar days after notice is given to the Parties of the
appointment of the second Arbitrator, any Party may apply to
the Chief Judge of the United States District Court for the
Northern District of Texas—Dallas Division for an appointment
of a third Arbitrator.
Id.
BHCS filed a demand for arbitration in August 2012 and appointed the first arbitrator.
Beech Street provided notice to BHCS in October 2012 that it had appointed the second
arbitrator. The two party-appointed arbitrators cannot agree on a third arbitrator. In April
2013 BHCS applied to this court for the appointment of a third arbitrator.1 Beech Street

1

This miscellaneous matter was initially assigned to another district judge and then
transferred to the undersigned as Chief Judge. The Chief Judge of this court does not
necessarily have his duty station in the Dallas Division. But because the undersigned does
have his duty station in the Dallas Division, the court need not resolve whether the “Chief
Judge of the United States District Court for the Northern District of Texas—Dallas
Division” is the same judge as the Chief Judge of this court, or instead is the most senior
judge in precedence of the judges whose duty stations are in the Dallas Division. In this
instance, each position is held by the same judge.
-2-

opposes the application on the ground that it is not necessary, and, in the alternative, requests
that the court appoint an arbitrator who does not work or reside in Texas.2
II
The court first considers whether it has authority to appoint an arbitrator.3
Beech Street does not challenge the court’s authority to appoint an arbitrator; instead,
it posits that the court should refrain from making an appointment because there is another
option available to the parties.4 BHCS maintains that § 5 of the Federal Arbitration Act
2

On May 13, 2013 Beech Street filed an unopposed motion for leave to file a surreply.
The court grants the motion. Because the proposed surreply is attached to the motion for
leave, the court has been able to consider it and determine that it does not change the result
or reasoning of this decision. The court is therefore deciding BHCS’s application without
granting BHCS leave to file a final reply brief, which would be the normal procedure when
a surreply is allowed. See Springs Indus., Inc. v. Am. Motorists Ins. Co., 137 F.R.D. 238,
239-40 (N.D. Tex. 1991) (Fitzwater, J.).
3

For purposes of this decision, the undersigned declines to make the appointment in
his individual capacity as Chief Judge according to the Agreement, and instead does so under
the authority of the Federal Arbitration Act. See infra note 7. The undersigned does not
suggest that a judicial officer named in a private parties’ contract should or should not act
when requested to do so in an individual capacity.
4

Beech Street proposes that the parties approach the American Health Lawyers
Association (“AHLA”) for a list of potential arbitrators. The parties could privately rank
each potential arbitrator and then AHLA could make the final decision on whom to appoint.
BHCS responds that Beech Street’s proposal asks the court to rewrite the Agreement, which
is prohibited under 9 U.S.C. § 5. Section 5 provides, in relevant part, that “[i]f in the
agreement provision be made for a method of naming or appointing an arbitrator or
arbitrators or an umpire, such method shall be followed.” See also BP Exploration Libya
Ltd. v. ExxonMobil Libya Ltd., 689 F.3d 481, 491 (5th Cir. 2012) (“Courts will not hesitate
to vacate an award if arbitrators are not selected pursuant to the method specified in an
arbitration agreement.” (citing Bulko v. Morgan Stanley DW Inc., 450 F.3d 622, 625 (5th Cir.
2006)). The court declines to adopt Beech Street’s proposal because imposing it on the
parties would violate § 5. See Bulko, 450 F.3d at 625 (collecting cases that vacated
arbitration decisions for choosing arbitrators by different means than provided for in
-3-

(“FAA”), 9 U.S.C. § 5, grants the court subject matter jurisdiction to appoint an arbitrator,
but does not explain how. See P. Br. 2-3 (“This Court has subject matter jurisdiction over
this controversy pursuant to 9 U.S.C. § 5, which states that ‘upon the application of either
party to the controversy the court shall designate and appoint an arbitrator or arbitrators or
umpire, as the case may require[.]’”).
Courts have “very limited” jurisdiction under the FAA to intervene in the arbitral
process before an award. BP Exploration Libya Ltd. v. ExxonMobil Libya Ltd., 689 F.3d
481, 490-91 (5th Cir. 2012).
9 U.S.C. § 5 authorizes a court to intervene to select an
arbitrator upon application of a party, in three instances: (1) if
the arbitration agreement does not provide a method for
selecting arbitrators; (2) if the arbitration agreement provides a
method for selecting arbitrators but any party to the agreement
has failed to follow that method; or (3) if there is a lapse in the
naming of an arbitrator or arbitrators.
Id. at 491 (citation and internal quotation marks omitted).5 Although BHCS does not specify

contract).
5

9 U.S.C. § 5 provides, in relevant part:
If in the agreement provision be made for a method of naming
or appointing an arbitrator or arbitrators or an umpire, such
method shall be followed; but if no method be provided therein,
or if a method be provided and any party thereto shall fail to
avail himself of such method, or if for any other reason there
shall be a lapse in the naming of an arbitrator or arbitrators or
umpire, or in filling a vacancy, then upon the application of
either party to the controversy the court shall designate and
appoint an arbitrator or arbitrators or umpire, as the case may
require, who shall act under the said agreement with the same
-4-

which circumstance applies here to confer jurisdiction on the court to appoint an arbitrator,
the court concludes that it has the authority under the FAA to make the requested
appointment because there has been “a lapse in the naming of an arbitrator.” 9 U.S.C. § 5.
“Lapse” means “a lapse in time in the naming of the arbitrator or in the filling of a
vacancy on a panel of arbitrators, or some other mechanical breakdown in the arbitrator
selection process.” BP Exploration Libya, 689 F.3d at 491-92 (quoting In re Salomon
S’holders’ Derivative Litig., 68 F.3d 554, 560 (2d Cir. 1995)) (internal quotation marks
omitted). BP Exploration Libya held that § 5 authorized the district court to exercise
appointment power because the parties “h[ad] reached an impenetrable deadlock over the
appointment of arbitrators to hear their dispute.” Id. at 492. The deadlock arose because the
arbitration involved three parties who each sought to appoint an arbitrator, but the agreement,
like the one here, provided for a three-arbitrator panel consisting of only two party-appointed
arbitrators and one neutral arbitrator selected by the other two. See id. As the court
explained,
[t]he parties attempted to resolve the impasse for months,
floating numerous ideas to no avail. Absent judicial
intervention, the breakdown in the parties’ appointment process
might indefinitely delay arbitration proceedings, the exact
scenario Congress sought to avoid in enacting § 5 by providing
parties recourse to the courts. Accordingly, there was a lapse
under 9 U.S.C. § 5, authorizing the district court to intervene
and exercise appointment power.

force and effect as if he or they had been specifically named
therein[.]
-5-

Id. at 492-93 (citation and internal quotation marks omitted).
A similar impasse has arisen here. BHCS filed the instant application after more than
five months had elapsed since the parties appointed arbitrators. The arbitrators have not
agreed on any of the at least 14 candidates whom they have considered.6 The deadlock
apparently concerns the parties’ disagreement over whether the arbitrator should be one who
works and resides in Texas. Because the parties have been unable to resolve this difference
and several months have elapsed, the court holds that a lapse has occurred, which grants the
court authority under 9 U.S.C. § 5 to appoint an arbitrator.7
III
The court now turns to the parties’ contentions regarding whom to select as the third
arbitrator.
Beech Street requests that the court appoint an arbitrator who does not reside or work
in Texas because BHCS has a large presence in Texas and thus it will be difficult to find an
arbitrator with experience in the health care industry who lacks ties, conflicts of interest, or

6

These candidates include seven whom the American Arbitration Association
(“AAA”) suggested after a request by Beech Street’s arbitrator. He requested arbitrators who
worked and resided outside of Texas, but through an alleged misunderstanding the AAA
provided a list of only Texas arbitrators.
7

The court concludes that a lapse has occurred within the scope of 9 U.S.C. § 5, even
though the Agreement expressly authorizes the Chief Judge to appoint the third arbitrator,
meaning that the undersigned as Chief Judge could make the appointment under the terms
of the Agreement itself. Because the undersigned declines to make the appointment in his
individual capacity as Chief Judge, see supra note 3, the Agreement no longer provides an
available method for appointing an arbitrator, and this lapse authorizes the court under § 5
to appoint an arbitrator.
-6-

bias relating to BHCS. BHCS responds that a Texas arbitrator would be more qualified and
cost-effective since the underlying dispute is governed by Texas law, which would be more
familiar to a Texas-based arbitrator, and an arbitrator who resides in Texas would
presumably have less travel costs and expenses.
The court concludes that both parties’ concerns can fairly and adequately be addressed
by appointing Honorable Jeff Kaplan (Ret.), JAMS, 8401 North Central Expressway, Suite
610, Dallas, Texas 75225 (214-744-5267) (“Judge Kaplan”), as the third arbitrator. Judge
Kaplan was until recently a magistrate judge of this court. He enjoys an excellent reputation
as a learned and careful jurist. His intellect and thorough preparation will enable him to
familiarize himself with the subject matter and issues of the parties’ dispute. The court has
confirmed that Judge Kaplan is aware of no conflict or other reason that would prevent him
from serving impartially as the third arbitrator.
*

*

*

Accordingly, the court grants BHCS’s application for appointment of arbitrator and
appoints Judge Kaplan as the third arbitrator.
SO ORDERED.
May 15, 2013.

_________________________________
SIDNEY A. FITZWATER
CHIEF JUDGE

-7-