Ruling shows importance for early discovery into arbitration

In March 2018, a long-term storage freezer holding invaluable reproductive tissue failed: A lab technician at the cryogenic storage facilities at Pacific Fertility Center in San Francisco noticed liquid on the floor under a storage tank that housed thousands of frozen eggs and embryos belonging to hundreds of individuals and families. The liquid nitrogen levels in "Tank 4" had dropped to unsafe levels, destroying or jeopardizing the eggs and embryos stored in the tank.

The would-be parents who were victims of the incident received email notice of the disaster at 4 a.m. on a Sunday, one week later. No one provided clear answers about what had happened. Mixed messages circulated about whether any of the reproductive tissue remained viable. In the year since then, the victims have lived with grief and doubt, and have faced excruciating decisions.

Defendants Seek to Compel Arbitration

In the weeks following the Tank 4 incident, many of the would-be parents filed lawsuits. In addition to the fertility clinic, the plaintiffs also sued Prelude Fertility, a company that had recently taken over the tissue storage responsibilities inside the clinic -- unbeknownst to the clinic's patients -- and Chart, Inc., the tank manufacturer. Once it became clear that the incident had occurred on Prelude's watch, its conduct became a major focus in the case.

One of the first lawsuits was a proposed class action filed in the Northern District of California and assigned to Judge Jacqueline Scott Corley. In re Pacific Fertility Center Litig., 3:18-cv-01586. Almost immediately, the fertility clinic filed a motion to compel arbitration, invoking arbitration provisions in informed consent documents signed by the plaintiffs and clinic physicians.

Prelude Fertility and Chart joined in seeking arbitration. Both argued that they too could avail themselves of the arbitration provisions, even though they were not parties to the contracts. As the tank manufacturer, Chart's relationship with the clinic did not present a close question from the plaintiffs' perspective as to whether its claims were arbitrable. Prelude's relationship with the clinic, by contrast, required further scrutiny.

Parties Conduct Early Arbitration Discovery

Prelude argued it could invoke arbitration because it was an agent of the fertility clinic and was thus a third-party beneficiary of the contracts.

Given the early timing of the arbitration motion, the plaintiffs had virtually no way to test Prelude's claim that it was an agent. Discovery had not begun. The transaction between the clinic and Prelude had been private. So the nature of the transaction was opaque. The plaintiffs decided to request early discovery targeting facts relevant to arbitration.

Arbitration Discovery Proves to Be Key

The documents the defendants were required to produce shed light on Prelude's responsibility for the tissue storage. The contracts between Prelude and the clinic completely changed the complexion of the arbitration briefing.

While Prelude argued it was an agent of the clinic (and thus entitled to arbitration), the contracts told a different story. The contracts between Prelude and the clinic affirmatively disavowed any agency relationship, and instead said in plain English that Prelude and the clinic were "independent contractors" and "are not, and will not be deemed to be ... agents of each other."

This discovery doomed Prelude's argument, and there is strong legal precedent for allowing such arbitration-specific discovery to take place -- for just this type of reason. In Murphy v. DirectTV, a third party moved to compel arbitration as an agent, but like here the underlying contract disavowed agency. 724 F.3d 1218, 1232-33 (9th Cir. 2013). This led the 9th U.S. Circuit Court of Appeals to not only hold the third party was "not entitled to compel arbitration as [an] agent," but also to remand for consideration of "whether sanctions are an appropriate response to counsel's apparent violations of the duty of candor." Id. at 1232-33, 1233 n.9 (citing Model Rule of Prof'l Conduct 3.3(a)).

In Pacific Fertility, the court allowed the plaintiffs to amend their complaint to formally include the new information. This led Prelude to abandon its agency agreement entirely, choosing instead to start over with wholly new arguments for arbitration.

Judge Corley rejected those arguments as well, and ruled that the plaintiffs' claims against Prelude could proceed in court. (Prelude has since taken an appeal.)

Lessons Learned

Any lawyer who represents plaintiffs in complex cases knows the difference between defenses raised on the pleadings versus defenses raised at later stages of the litigation. Often the story told in the motion to dismiss fades away -- having been dismantled by later-produced evidence.

As the Pacific Fertility example shows, the same lesson applies to arbitration motions. Without discovery, a defendant seeking arbitration may be tempted to paint a picture that would not hold up to scrutiny if more facts were known. The solution is for litigants and courts to follow the lead of the Pacific Fertility court, which allowed reasonable discovery tailored to the key issues related to arbitration. It made the difference in Pacific Fertility and likely will again in some other case soon.

The authors collaborated in the briefing and argument of the In re Pacific Fertility litigation arbitration motions.