## Facts

- Wilfredo Engalla enrolled in an employer-sponsored Kaiser health plan containing a mandatory binding arbitration clause for malpractice claims.
- Kaiser’s enrollment materials and contract provisions represented arbitration as quick and inexpensive, with a hearing in several months and a three-arbitrator panel to be appointed within 60 days of service of a claim.
- Engalla alleged Kaiser physicians negligently failed to timely diagnose lung cancer; he served an arbitration demand on May 31, 1991.
- Despite repeated requests to expedite due to Engalla’s declining health, Kaiser delayed participating in selection of the neutral arbitrator; the neutral was agreed to 144 days after service, and Engalla died the next day.
- After Engalla’s death, his counsel sought a stipulation preventing Kaiser from benefiting from the death in applying damages limitations; Kaiser refused.
- The family withdrew from arbitration and sued in court for malpractice and breach of the arbitration agreement, opposing Kaiser’s petition to compel arbitration.
- The family presented evidence that Kaiser’s self-administered arbitration system historically failed to meet the promised timeline, including internal data indicating panel appointment averaged about two years and almost never occurred within 60 days.

## Issues

1. Whether alleged misrepresentations and omissions about the speed and operation of the arbitration system could constitute fraud in the inducement of the arbitration agreement sufficient to deny a petition to compel arbitration.
2. Whether Kaiser’s delays in administering the Engalla arbitration could constitute waiver of the right to compel arbitration.
3. Whether the court or the arbitrator decides fraud in the inducement of the arbitration provision and waiver of the right to arbitrate.

## Decision

- The California Supreme Court reversed the Court of Appeal and remanded to the superior court for further proceedings.
- The Court held there was sufficient evidence from which a trier of fact could find fraud in the inducement of the arbitration agreement based on discrepancies between Kaiser’s representations and its known record of delay, but factual disputes required trial-court resolution.
- The Court held there was substantial evidence from which a trier of fact could find waiver based on Kaiser’s dilatory conduct in the specific arbitration, but waiver also required trial-court fact-finding.
- The Court held that claims of fraud directed at the arbitration provision (or arbitration system) and claims of waiver are threshold matters for courts to decide before compelling arbitration.

## Legal Principles

- A court may deny a petition to compel arbitration when the arbitration provision itself was induced by fraud; fraud directed at the arbitration clause or arbitration system is for judicial determination.
- Waiver of the right to arbitrate may be found from conduct inconsistent with arbitration, including delay or obstruction in moving the arbitration forward; waiver is typically a question of fact based on the totality of circumstances.
- Evidence of an administrator’s historical practices, including persistent noncompliance with contract time limits, can support inferences about knowledge, materiality, and intent relevant to fraud in the inducement.
- Self-administration of arbitration is not invalid per se; the legal question is whether what was promised about the process materially differed from how it actually operated and whether that difference supports fraud or waiver.

## Conclusion

The court held that trial courts must decide fraud and waiver defenses to arbitration and that evidence Kaiser promoted a speedy process while routinely delaying panel formation, together with case-specific delay affecting the claimant, could support denial of a motion to compel arbitration after factual determinations on remand.


Engalla v. Permanente Med. Grp., Inc., 15 Cal. 4th 951 (Cal. 1997)