Hague v. Hallmark Cards, Inc.

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No. 106,470

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

JANA HAGUE,
Appellee,

v.

HALLMARK CARDS, INCORPORATED,
and
UNION SECURITY INSURANCE COMPANY,
a/k/a ASSURANT EMPLOYEE BENEFITS,
Appellants.


SYLLABUS BY THE COURT

1.

The Federal Arbitration Act, 9 U.S.C. § 1 et seq. (2006), applies when a case
involves a written agreement and interstate commerce. The Act establishes a strong
federal policy in favor of arbitration. Under the Act, once it has been determined that
there is a valid agreement between the parties to arbitrate disputes, arbitration should be
ordered unless the arbitration clause is not susceptible of an interpretation that covers the
dispute at issue. Doubts should be resolved in favor of arbitration.

2.
On the facts of this case, an arbitration agreement that applied to claims "under the
law" and "arising out of the employee's employment" requires arbitration of the
employee's claims for employer-provided disability benefits, unpaid wages, and other
damages all arising out of the employment.

Appeal from Douglas District Court; MICHAEL J. MALONE, judge. Opinion filed August 24, 2012.
Reversed and remanded with directions.

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Jeffrey D. Hanslick and Curtis R. Summers, of Husch Blackwell LLP, of Kansas City, Missouri,
for appellants.

James L. Wisler and Ryan Rising, of Wisler Law Office, of Lawrence, for appellee.

Before BRUNS, P.J., MARQUARDT and LEBEN, JJ.

LEBEN, J.: After her employer denied disability benefits to her, Jana Hague sued
the company, Hallmark Cards, Inc., for breach of contract and for unpaid wages. But she
was subject to an agreement with Hallmark that required arbitration of any claims "under
the law" and "arising out of the employee's employment."

Hague contends that there are exclusions from the arbitration requirement that can
be found in Hallmark documents, including that claims objecting to Hallmark policies
aren't subject to arbitration. But what Hague has filed in court is a lawsuit, not an
objection to Hallmark policies, and her agreement with Hallmark requires that legal
claims be arbitrated. We therefore reverse the district court's ruling that her claims were
not subject to arbitration, and we return the case to the district court with directions to
stay further proceedings in the lawsuit and to compel arbitration.

FACTUAL BACKGROUND

Hague began suffering health problems in 2008, and she took a leave of absence
from her employment at Hallmark Cards, Inc. Hallmark provides short-term disability
benefits to its employees under a company-funded program, and Hallmark initially
approved Hague's application for short-term disability benefits. But after additional
review, Hallmark denied further benefits. Hallmark's decision was supported by Union
Security Insurance Company, which Hallmark hired to review short-term disability
benefit requests. Hague didn't return to work, and Hallmark fired her.

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We have not detailed Hague's health problems or the reasons that Hallmark gave
for denying her short-term disability benefits. That's because the issues of this lawsuit
relate only to the proper forum within which to determine the merits of Hague's legal
claims—before an arbitrator or in court—and not to the merits themselves.

Hague filed suit against Hallmark. She asked that the court determine that she
should have received further short-term disability benefits and that the court award her
back benefits plus interest, penalties, and attorney fees. She characterized her claims as
"claims filed to recover unpaid employee benefits," a claim for "breach of contract," and
a claim for "violations of the Kansas Wage Payment Act."

Hallmark moved to dismiss or stay the lawsuit, putting it on hold while the parties
arbitrated their dispute. Hallmark claimed that Hague's claims were subject to mandatory
arbitration under Hallmark's dispute-resolution program.

Hague argued that the dispute-resolution program didn't require her to arbitrate her
claims, and the district court agreed. The district court cited a provision in the short-term
disability policy that it quoted as saying: "STD [short-term disability] claims are not a
covered claim under the DRP [dispute-resolution program]." The district court held that
"any conflicting language'" in the dispute-resolution policy must be "construed against
Hallmark," apparently because Hallmark chose the language.

Hallmark has appealed to this court. We have jurisdiction to hear the appeal under
9 U.S.C. § 16(a)(1)(A), (B) (2006).

ANALYSIS

We must determine whether the claims Hague has made in her lawsuit are subject
to arbitration under Hallmark's dispute-resolution program. Two overriding
considerations guide us in this process. First, the Federal Arbitration Act, 9 U.S.C. § 1 et
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seq. (2006), applies here, and under that statute "[a]ll doubts concerning the scope of
arbitrable issues should be resolved in favor of arbitration." Packard v. Credit Solutions
of America, Inc., 42 Kan. App. 2d 382, Syl. ¶ 4, 213 P.3d 437 (2009). Second, we must
independently review the provisions that call for arbitration to determine whether they
apply. 42 Kan. App. 2d at 384. When we do, we find that Hallmark's dispute-resolution
program document clearly requires that Hague's claims be arbitrated.

We Apply the Federal Arbitration Act, Which Strongly Favors Arbitration.

The Federal Arbitration Act applies when a case involves a written agreement and
interstate commerce. See 9 U.S.C. § 2 (2006). The United States Supreme Court has held
that the Act was intended to have the broadest possible reach under the Commerce
Clause. See Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56-57, 123 S. Ct. 2037, 156 L.
Ed. 2d 46 (2003).

Hague argues that some concepts of Kansas law should be applied here,
specifically canons of contract interpretation like construing ambiguities against
Hallmark as the drafter of the documents. But Hague makes no argument that the Federal
Arbitration Act is inapplicable. The Act applies generally to employment agreements,
Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 118-19, 121 S. Ct. 1302, 149 L. Ed. 2d
234 (2001), and other courts have applied the Act when considering whether Hallmark's
dispute-resolution program required arbitration of an employee's claim against Hallmark.
E.g., Rangel v. Hallmark Cards, Inc., No. 10-4003-SAC, 2010 WL 781722, at *3-4 (D.
Kan. 2010) (unpublished opinion); Kenney v. Hallmark Cards, Inc., No. 08-CV-2134-
CM, 2009 WL 102682, at *2 (D. Kan. 2009) (unpublished opinion); Morrow v. Hallmark
Cards, Inc., 273 S.W.3d 15, 20 (Mo. App. 2008). We apply it here.

The Federal Arbitration Act establishes a strong federal policy in favor of
arbitrating disputes. KPMG LLP v. Cocchi, 565 U.S. ___, 132 S. Ct. 23, 25, 181 L. Ed.
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2d 323 (2011). Thus, as our court noted in Packard, all doubts about the scope of what
issues are subject to arbitration "should be resolved in favor of arbitration." 42 Kan. App.
2d 382, Syl. ¶ 4. As the United States Supreme Court has directed, ambiguities as to the
scope of the arbitration clause itself are resolved in favor of arbitration. Volt Info.
Sciences v. Leland Stanford Jr. U., 489 U.S. 468, 475-76, 109 S. Ct. 1248, 103 L. Ed. 2d
488 (1989). Accordingly, when interpreting provisions that determine the scope of the
arbitration agreement, normal state-law canons of contract construction—such as
construing ambiguous provisions against the party that drafted it—generally are trumped
by the Act's policy in favor of arbitration. Dialysis Access Center, LLC v. RMS Lifeline,
Inc., 638 F.3d 367, 382 (1st Cir. 2011); see Volt Info. Sciences, 489 U.S. at 475-76;
Moses H. Cone Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 74
L. Ed. 2d 765 (1983); Gulf Ins. Co. v. Neel-Schaffer, Inc., 904 So. 2d 1036, 1049-50
(Miss. 2004).

For the presumption in favor of arbitration to apply, of course, there must first be a
valid agreement between the parties. Granite Rock v. Intern. Broth. of Teamsters, 561
U.S. ___, 130 S. Ct. 2847, 2858, 177 L. Ed. 2d 567 (2010). If so, and if there's a
provision in the parties' agreement that seems to require arbitration, then arbitration
should be ordered "'unless it may be said with positive assurance that the arbitration
clause is not susceptible of an interpretation that covers the asserted dispute. Doubts
should be resolved in favor of coverage.' [Citations omitted.]" AT&T Technologies v.
Communications Workers, 475 U.S. 643, 650, 106 S. Ct. 1415, 89 L. Ed. 2d 648 (1986).

Here, Hague doesn't dispute that there's a valid agreement between herself and
Hallmark: she sets out the sole issue on appeal as whether her claim is a "covered claim,"
and thus subject to arbitration, under Hallmark's dispute-resolution program. (Although
not contested here, the Kansas federal court has found that Hallmark's current dispute-
resolution program creates a valid, contractual arbitration agreement between Hallmark
and its employees because both employer and employee are required to arbitrate. Rangel,
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2010 WL 781722, at *5; Kenney, 2009 WL 102682, at *2-3.) With the general principles
of the Federal Arbitration Act in mind, we turn next to consider whether Hallmark's
dispute-resolution program requires the arbitration of Hague's claims.

Hallmark's Dispute-Resolution Program Requires Arbitration of Hague's Claims.

We start with the four-page agreement that sets out the terms of Hallmark's
dispute-resolution program. It describes the program as "a structured dispute resolution
process that consists" of four sequential parts, with binding arbitration as the final step:
 "Level 1—Open Door Process," where "an employee and the management team
attempt to resolve the employee's dispute."
 "Level 2—Final Internal Review," where "the Company's designees will review
the employee's written complaint and other relevant documentation and issue a
written decision."
 "Level 3—Nonbinding Mediation," where "an independent mediator helps the
employee and the Company open lines of communication in an attempt to
facilitate resolution."
 "Level 4—Binding Arbitration," where "an independent arbitrator provides the
employee and the Company with a ruling on the merits of the employee's covered
claims."

That describes the process but doesn't tell us what's covered. Separate sections
describe "Covered Claims" and "Excluded Claims." Only "covered claims" can reach
Level 4, binding arbitration, and these include claims arising out of the employee's
employment that give rise to a legal claim for breach of contract, for unpaid wages, or for
other compensation:
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"Covered Claims

"While employees may submit any timely-filed employment-related dispute at Levels 1
and 2, only covered claims will be accepted and processed at Level 3 and 4. Covered
claims are those claims arising out of the employee's employment that the Company may
have against the employee or that the employee may have against the Company and/or
individual employees acting within the scope of their employment regarding alleged
unlawful or illegal conduct on the part of the Company and/or individual employees
acting within the scope of their employment that give rise to a claim under the law
including, but not limited to, the following:

. . . .

 "Claims for breach of contract or covenant (express or implied).

. . . .

 "Claims for unpaid wages or other compensation." (Emphasis added.)

We must also check to see whether Hague's claims have been excluded from the
arbitration process. Excluded claims include ones for benefit under ERISA benefit plans
and ones that seek to establish, modify, or object to a Hallmark company policy:

"Excluded Claims

The following claims shall be excluded from the DRP [dispute-resolution program]:

 "Claims for benefits under a Company benefit plan covered by
ERISA . . . .

. . . .

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 "Claims that seek to establish, modify, or object to the Company's
policies (including, but not limited to, compensation, vacation and short-
term disability) except claims that allege discriminatory application or
impact of such policies."

Hague does not contend that the short-term disability benefits are covered by ERISA, but
she does contend that her claims are excluded because she objected to some of the
procedures under which Hallmark administered its short-term disability benefits.

If we consider only the terms of the dispute-resolution plan itself, Hague's claims
are a "covered claim" subject to the full dispute-resolution process, including Level 4
arbitration on the merits of the claim. Hague contends she was contractually entitled to
the short-term disability benefits, and she sued Hallmark for breach of contract to get
them. Claims "under the law" arising out of a person's Hallmark employment are
covered, and breach of contract claims are explicitly included, as are claims for unpaid
wages or other compensation. Hague also explicitly set out a claim in her petition under
the Kansas Wage Payment Act for unpaid wages.

Hague contends that her clams are nonetheless excluded as ones that "seek to
establish, modify, or object" to Hallmark policies. She emphasizes that she objected to
Hallmark's use of an insurance company to help review the claims because she contends
it had a conflict of interest.

But Hague's lawsuit cannot be premised on any attempt by her to "establish" or
"modify" a Hallmark policy. Only Hallmark can create an employee benefit that the
employee might then have some entitlement to; an employee can't establish a benefit
program without the employer's agreement. Nor can an employee "modify" an existing
employee benefit so as to expand the employee's rights without the company's agreement.
If an employee can't establish or modify a company policy—and then claim legal
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entitlement to the newly established or modified benefit—the mere objection to a
company policy doesn't create any legal entitlement for the employee, either.

Hallmark's dispute-resolution program reasonably excludes employee attempts to
establish, modify, or object to Hallmark policies from mandatory arbitration. No
company is obligated to give an arbitrator the authority to create or modify policies that
would cost the company money or place other burdens upon it without its agreement.

So far, based only on the document that establishes the dispute-resolution
program, it appears that Hague's claims are covered and subject to arbitration. We turn
next to the provision within Hallmark's "Career Rewards" booklet that sets out the terms
of its short-term disability benefits at the time of Hague's employment.

Hallmark's short-term disability plan provided for continuation of an employee's
pay for up to 6 months. After that, a long-term disability plan provided the potential for
another 6 months of payments. The short-term benefits were provided entirely at
Hallmark's expense, and Hallmark's policy provided that its own "Medical Department"
was "solely responsible" for determining whether an employee qualified for short-term
benefits. Long-term benefits were provided through a voluntary employees' beneficiary
association under Section 501(c)(9) of the Internal Revenue Code, and the long-term plan
was administered by Union Security Insurance Company. But one condition for receipt of
long-term benefits was that the employee had to first qualify either for short-term
disability benefits or workers compensation benefits.

Things become a bit confusing because the short-term disability program has its
own "appeal process." We will set it out in full because the district court relied upon one
sentence in it (misquoted a bit) for its conclusion that Hague's lawsuit wasn't subject to
arbitration. The key features are that the appeal provided through the short-term disability
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program only considers "whether proper procedures were followed" and only includes
Level 2, the process for internal review within Hallmark:

"SHORT-TERM DISABILITY POLICY

. . . .

"CASE MANAGEMENT PROVISIONS AND APPEAL PROCESS

"Eligibility for STD [short-term disability] benefits is case managed. If an
absence extends beyond established medical guidelines or if there is no clear medical
rationale for work restrictions, the treating physician's office may be contacted by the
Medical Department to determine whether there are extenuating circumstances that
would justify a period of incapacity longer than the period determined by the Medical
Department.

"If a reasonable medical explanation for exceeding established medical
guidelines is not provided and the employee remains off of work for three or more days
beyond the length of time the Medical Department has determined to be appropriate, the
employee may request a third-party review. Provided the employee timely signs and
returns a consent form to the Medical Department[,] . . . trained medical personnel at an
outside case management firm will review records that were timely submitted and
determine the appropriate period for STD benefits. STD benefits will not be paid during
the third-party review until the results of the review are provided to the Medical
Department.

"If the employee is not satisfied with the results of the third-party review and/or
the case management process, and the employee wants to pursue a claim, the employee
must file a request for a Level 2—Final Internal Review under the Hallmark Dispute
Resolution Program (DRP). However, this review will only consider whether proper
procedures were followed (it is not a medical review) and the decision will be upheld if it
is reasonable. The employee's claim is not a covered claim under the DRP and therefore
the employee's claim will not be eligible for review at Levels 3 or 4 of the DRP. For more
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information about the DRP, see the Problem Solving section of this booklet." (Emphasis
added.)

So what did the short-term disability policy add to our understanding? It contains
its own appeal process, one that applies only to whether proper procedures were
followed. That procedure-only appeal involves only one step—the one described in the
dispute-resolution program as Level 2, in which a designated Hallmark representative
will consider the employee's appeal, review relevant documents, and issue a written
decision. In addition, this procedure-only appeal is not a "covered claim" under the
dispute-resolution program and the employee doesn't have the ability to obtain binding
arbitration on whether proper procedures were followed.

But nothing in the short-term disability policy's grant of a procedural appeal
purports to amend the document that established and governs the Hallmark dispute-
resolution program. That document, as we have already noted, provides for the resolution
of claims "under the law" arising out of a person's Hallmark employment, including
claims for breach of contract, for unpaid wages, and for other compensation. And those
are the claims being pursued by Hague.

We noted previously that the district court quoted the Hallmark short-term
disability policy as saying: "STD [short-term disability] claims are not a covered claim
under the DRP [dispute-resolution program]." The actual sentence in the short-term
disability policy's section on appeals read: "The employee's claim is not a covered claim
under the DRP and therefore the employee's claim will not be eligible for review at
Levels 3 or 4 of the DRP." In context, "[t]he employee's claim" here referred to the
employee's claim that proper procedures weren't followed in denying short-term
disability benefits; the only "claim" being discussed in the paragraph was the employee's
Level 2 appeal over the procedures that had been used to deny short-term disability
benefits.
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Hague wants to read "[t]he employee's claim" to refer to the employee's
substantive legal claim for short-term disability benefits, along with any related relief
(like attorney fees, which she sought in her petition) that the employee might later seek in
a lawsuit. We can't do so given the context of the paragraph and the admonition that
doubts about the scope of an arbitration provision should be resolved in favor of
arbitration.

Hague's claims are subject to arbitration under her employment agreement, which
includes the Hallmark dispute-resolution program. We therefore reverse the district
court's order and remand the case with directions to grant Hallmark's motion to stay
further proceedings in the lawsuit and to compel arbitration.