Dec. 21, 2018 – Two neurosurgeons will head back to circuit court to determine whether their contractual dispute must go to arbitration, now that the Wisconsin Supreme Court has reversed an appeals court decision that the dispute must be arbitrated.

In Midwest Neurosciences Associates LLC v. Great Lakes Neurosurgical Associates LLC, 2018 112 (Dec. 19, 2018), the supreme court concluded (5-1) that the circuit court must first decide what contract controls before deciding if the dispute must arbitrated.

“[W]e conclude that it is the court’s duty to determine whether a contract calls for arbitration,” wrote Justice Annette Ziegler for the majority.

 "[W]hen a dispute exists as to whether a second contract without an arbitration clause supersedes a first contract with such a clause, the determination of arbitrability must be decided in the first instance in the circuit court rather than the arbitrator.”

The Fallout

Dr. Yashdip Pannu and Dr. Arvind Ahuja, both neurosurgeons in Milwaukee, signed an operating agreement in 2005, which amended a previous operating agreement to admit Dr. Pannu as a member of Midwest Neurosciences Associates, LLC (Midwest).

Dr. Ahuja, who owned Neurosurgery and Endovascular Associates, S.C. (NEA), also formed Midwest, which helped members operate their separate medical neurosurgical practices. Dr. Pannu executed the operating agreement as president of Great Lakes Neurosurgical Associates, LLC, which was his sole medical practice.

The operating agreement contained an arbitration clause, which said any disputes with respect to the terms and conditions of the operating agreement would go to arbitration.

The operating agreement also contained a noncompete clause, which placed restrictions on the physicians’ practice locations and facilities. Less than a year later, Dr. Pannu also signed an “ancillary restrictive covenant agreement,” with similar terms.

The second agreement did not contain an arbitration clause, and it did not specifically incorporate, by reference, the arbitration clause of the operating agreement.

In 2015, Great Lakes (Pannu) and NEA (Ahuja) were two of three members of Midwest, and both Dr. Pannu and Dr. Ahuja were running their practices from the Midwest office.

However, the members voted to dissolve Midwest, and agreed that NEA (Ahuja) would buy out the other two members’ interests. Great Lakes (Pannu) was required to vacate the Midwest location. Apparently, the members changed their minds, because they subsequently voted to rescind the vote to dissolve Midwest.

The buyout was still on the table. The parties contemplated a “redemption agreement,” which outlined the terms for how Midwest (Ahuja) would buy out Great Lakes (Pannu), including the purchase price.

It also specifically released Dr. Ahuja and Dr. Pannu from the noncompete restrictions signed in the operating agreement and the ancillary restrictive covenant agreement. However, the redemption agreement did not contain any arbitration clause.

Dr. Pannu signed the redemption agreement. Dr. Ahuja never signed the redemption agreement and says he never agreed to the terms, including the term that released the Midwest members from the noncompete provisions in the prior agreements.

Great Lakes (Pannu) vacated the Midwest office but moved into a different office in the same facility and shared the space with another physician not affiliated with Midwest.

Then Dr. Ahuja informed Dr. Pannu that Midwest was terminating Great Lakes (Pannu) as a member of Midwest, which Dr. Ahuja had the power to do under the operating agreement. He also told Pannu that he was violating the noncompete provisions of the operating agreement and the ancillary restrictive covenant agreement.

To Court We Go

Midwest (Ahuja) filed a lawsuit, arguing that Dr. Pannu was violating the noncompete, and asked the circuit court to compel arbitration under the operating agreement. Great Lakes (Pannu) filed a response with affirmative defenses and counterclaims.

Great Lakes (Pannu) argued that the redemption agreement was a valid contract that released him from the noncompete agreements, and it was binding because Midwest (Ahuja) manifested his intention to sign it and allowed Great Lakes to partially perform.

Great Lakes (Pannu) also argued that the parties were not entitled to arbitration, and in any event, the circuit court needed to decide whether the redemption agreement was valid first. The redemption agreement, Pannu argued, contains no arbitration clause and releases Great Lakes from claims that Dr. Pannu is violating the noncompete clauses.

The Ozaukee County Circuit Court, Judge Paul Malloy, concluded that Dr. Ahuja made an offer by which he intended to be bound when Midwest’s lawyer sent an email to Dr. Pannu (and Dr. Ahuja) and said it was a “final agreement.” The judge said Dr. Pannu accepted the offer when he signed the agreement and then sent it back with a check.

Judge Malloy, on summary judgment, ruled that the redemption agreement was valid and thus Pannu was not bound by any noncompete agreement, and the operating agreement containing the arbitration clause was inapplicable to Dr. Pannu.

In 2017, an appeals court reversed, concluding that the circuit court should have compelled arbitration to determine whether arbitration was required.

Supreme Court Majority

A supreme court majority reversed the appeals court, concluding that the circuit court should not compel arbitration before deciding whether arbitration is required. That is, majority said the circuit court must make the determination of arbitrability.

“[W]e are presented with the question of the court’s role when the parties once contracted to arbitrate, but the court is presented with a later written contract that does not contain an arbitration clause,” Justice Ziegler wrote.

“Fundamental principles clearly militate in favor of the ability to freely contract, even if that changes the forum of dispute resolution. Which contract controls is seminal to a determination of whether arbitration must be enforced,” Ziegler continued.

The circuit court concluded, on summary judgment, that the redemption agreement was valid and thus arbitration was not required. But the five-justice majority said there were genuine issues of material fact concerning whether the redemption agreement was valid, and the issue should not have been decided on summary judgment.

Thus, the supreme court remanded the case for the circuit court to reconsider the validity of the redemption agreement, which will lead to a determination of arbitrability.

Justice Shirley Abrahamson concurred.

Justice Abrahamson agreed that if valid, the redemption agreement would release Great Lakes (Pannu) from the agreement to arbitrate.

However, she disagreed with how the majority arrived there, saying “the majority fails to set forth a clear analytical framework through which the legal issues presented in the instant case should be resolved and mishandles federal case law in the process.”

Justice Rebecca Bradley dissented.

She said the majority “nullifies the parties’ arbitration agreement by creating a new rule bestowing on the judiciary the power to decide arbitrability even though the parties agreed an arbitrator would resolve this issue.”

“I would honor the parties’ contractual agreement to let the arbitrator to decide what, if any, impact the partially-executed Redemption Agreement had on the existence and validity of the Operating Agreement,” Justice R. Bradley wrote.