As Congress considers limiting ERISA preemption for tort lawsuits against MCOs, and the United States Supreme Court reviews the construction of ERISA as it applies to preemption of medical malpractice claims, MCOs rightfully worry that repetitions of $80 million jury verdicts will inflate the cost of health care. While a federal limitation on damages would address this problem, it is politically unrealistic and raises constitutional problems. A better alternative is the use of existing state and federal laws encouraging and legitimizing arbitration. This timely California Supreme Court case analyzes which types of claims should be subject to arbitration and which should not.
Arbitration is attractive to litigants, especially businesses, because it can reduce the cost of legal services to resolve a dispute, it can resolve disputes more quickly, and it can limit the risk of "runaway" jury awards. As a public policy matter, arbitration can also deny fundamental rights through coercive arbitration agreements, can limit the effect of remedial statutes, can allow important policy matters to be resolved without public scrutiny, and can be subject to capture by the process if the parties do not have the same bargaining power. For these reasons, many courts have been reluctant to authorize arbitration of disputes that involved public policy issues or did not involve clear agreement between parties of equal bargaining power.
Plaintiff made a claim for common law medical malpractice and also made claims for damages and injunctive relief under the Consumer Legal Remedies Acts (CLRA). The trial Court authorized arbitration of the medical malpractice claim but found that the claims under the CLRA were not subject to arbitration. This was affirmed by the appeals Court.
The California Supreme Court began its analysis by noting that the United States Supreme Court has been a driving force behind increasing the scope of arbitrable disputes through its interpretations of the Federal Arbitration Act (FAA). That statute reads:
A written provision in . . . a contract evidencing a transaction involving [interstate] commerce to settle by arbitration the controversy thereafter arising out of such contract or transaction, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract¼[The FAA, and section 2 in particular] was intended "to revers[e] centuries of judicial hostility to arbitration agreements," [citation] by plac[ing] arbitration agreements upon the same footing as other contracts.
Plaintiff argued that this did not apply to the claims under the CLRA because it contained an antiwaiver provision intended to prevent business from contracting around the protections of the statute. Defendants argued that the antiwaiver provision was preempted by the FAA.
The California Supreme Court reviewed the leading United States Supreme Court decision in Southland v. Keating, 465 U.S. 1 (1984), the appeal of a California Supreme Court case that had upheld the antiwaiver provision of a law regulating financial services. The United States Supreme Court held that this was preempted by the FAA, holding, "In enacting § 2 of the [FAA], Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration." (Southland, supra at 10.) This was reiterated in Perry v. Thomas, 482 U.S. 483 (1987), which struck down a California law insulating claims for the collection of wages from arbitration and Doctor's Associates v. Casarotto, 517 U.S. 681 (1996), which struck down a notice provision that applied only to arbitration agreements, holding that the states could not pass laws that singled out arbitration agreements for special restrictions. The Court's rationale in these cases is that parties are not giving up substantive rights in arbitration but are just choosing a different forum to resolve disputes. Arbitration would not be applicable in situations where there is an "inherent conflict between arbitration and the [statute's] underlying purposes," or where Congress, explicitly or through legislative history, does not intend for arbitration to apply.
In this case, plaintiff claimed that since an arbitrator cannot enter a permanent injunction, as provided for in the statute, arbitration would frustrate the purpose of the statute. To resolve this claim, the Court looked to the plaintiff's role under the CLRA and found that plaintiff was acting as a private attorney general protecting public rights. Finding that arbitration is intended only to resolve private rights disputes, the Court held that the FAA did not preempt the antiwaiver clause of the FAA and that plaintiff was entitled to seek injunctive relief in the courts. The California Supreme Court did find that plaintiff's damages claims were private claims and thus subject to arbitration. The Court noted, however, that this was not the end of potential judicial review of the plaintiff's claims. The plaintiff could also seek review of the arbitration award if it did not comply with the statutory intent.
This is an important case for all health care claims and will take on great significance if Congress or the United States Supreme Court limits ERISA preemption of state tort claims against MCOs. The majority opinion has a good review of the applicable law and the case also contains a lengthy dissent and concurrence.
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