Health Administration Responsibility Project

---

Arbitration

The FAA preempts state laws, and forbids stricter treatment of arbitration clauses than of any other contractual clauses. It also requires construction of ambiguities in favor of arbitration, rather than against the drafter. See Erickson v. Aetna.

However, state laws regulating arbitration only in an Insurance/HMO setting will probably not be preempted, since the FAA will itself be preempted by the McCarran-Ferguson Act. (15 USC 1011)

Once a patient has signed a mandatory arbitration agreement, it is very difficult to try a suit in court. Judges routinely send cases back to arbitration, even in the face of shocking abuse of the process, as in Engalla v. Permanente, which must be read to see the degree to which judges will admit a pattern of gross falsification and unconscionable abuse of arbitration, and yet send a case back to the same system for more of the same.
NOTE! 6/30/97: The California Supreme Court has overturned the above decision and decided that Engalla's contentions of fraudulent inducement must be decided by a REAL court, and not by the very arbitration whose validity is in question. Go Read it.
NOTE! 8/24/00: The California Supreme Court, in a non-HMO case, outlined the requirements for enforcement of a mandatory arbitration agreement in Armendariz v. Foundation Health, and here is an article by Cliff Palefsky who argued the case.
NOTE! 7/1/02: New ethics rules for arbitrators go into effect in California, especially relating to required disclosure and bases for disqualification. See them Here
The provisions for arbitrator disqualification established by these rules may not be waived or superseded by a private contract. An arbitrator's refusal to disqualify himself following a timely demand was the basis, in 2004, for vacatur in Azteca v. ADR.

These new rules for arbitrators can be found HERE! Be sure to demand that arbitrators follow the rules for Disclosure, or else disqualify them.

Here is an excellent report on arbitration in California, by the Calif. Research Bureau.
Here is a letter on Arbitrator Bias, a serious systemic problem
and an article on Arbitrator Fraud.
Here is a summary of arguments against mandatory arbitration.
Here is a page listing Mandatory Arbitration Horror Stories.
Here are Kaiser's instructions for its patients forced into arbitration.
Here is a Petition to the California Supreme Court to overturn an arbitration decision based on fraud and lying by the Doctor and the HMO.

Obviously, patients should never sign such an agreement. However they rarely know this at the time they sign up with an HMO, often don't even realize that Mandatory Arbitration is part of the contract, and almost invariably are in no position to bargain over the terms of the Adhesionary contract.

A mandatory arbitration clause can be attacked only by attacking the validity of the contract itself. An agreement to arbitrate can be invalidated only "upon such grounds as exist for the revocation of any contract." (Code Civ. Proc., § 1281.)

• Did the insured Knowingly Agree to arbitrate?
  • United Steelworkers v. Warrior & Gulf Navigation, 363 US 574 (1960)
  • Badie v. Bank of America, 67 Cal.App 4th 779
  • in Brady v. US (397 US 742, 748 (1970)) the US Supreme Court held that
    "Waivers of constitutional rights not only must be voluntary, but must be knowing, intelligent acts done with sufficient awareness of the relevant circumstances and likely consequences."
    It must be the rare consumer who has even read, much less understood, the arbitration clause buried in the fine print of his policy, much less the one signed by his employer!
• Were Statutory Notices given and signed?
  Three recent cases have held that if the enrollee didn't sign the arbitration clause as required by HSC §1363.1, arbitration can not be enforced!.
  • Zalezzi v. Pacificare (2003) 105 Cal.App.4th 573
  • Imbler v. Pacificare (2002) 103 Cal.App.4th 567
  • Smith v. Pacificare (2001) 93 Cal.App.4th 139
  Some of the earlier cases held §1363.1 preempted by the FAA, but the more recent ones realize it is protected by McCarran-Ferguson.

  An attorney, Chant Yedalian, brought a case against several HMOs, (Yedalian v. Kaiser Foundation Health Plan, Inc., et al. (L.A.S.C. Case No. BC 288469)), and in 2003 required Kaiser & PacifiCare to agree to the following statement:

  "The case was settled. The settlement is confidential. However, I can say Kaiser Health Plan and PacifiCare California agreed to include an additional paragraph in the letter certain members will receive after they have indicated an intent to sue or arbitrate, or have exhausted administrative appeals, respecting their claims. That paragraph will state, among other things, that whether arbitration provisions are enforceable or are unenforceable will be determined by the application and interpretation of various laws, including California Health & Safety Code section 1363.1, which pertains to required disclosures of arbitration provisions. That paragraph will also state that additional information regarding the California laws pertaining to arbitration of healthcare claims can be accessed on the internet at the California Department of Managed Health Care’s web site (http://www.hmohelp.ca.gov/)."
  The lesson is - don't assume that arbitration is automatically enforceable. Make sure that the disclosures complied with HSC §1363.1, to wit:
  §1363.1. Any health care service plan that includes terms that require binding arbitration to settle disputes and that restrict, or provide for a waiver of, the right to a jury trial shall include, in clear and understandable language, a disclosure that meets all of the following conditions:
  • (a) The disclosure shall clearly state whether the plan uses binding arbitration to settle disputes, including specifically whether the plan uses binding arbitration to settle claims of medical malpractice.
  • (b) The disclosure shall appear as a separate article in the agreement issued to the employer group or individual subscriber and shall be prominently displayed on the enrollment form signed by each subscriber or enrollee.
  • (c) The disclosure shall clearly state whether the subscriber or enrollee is waiving his or her right to a jury trial for medical malpractice, other disputes relating to the delivery of service under the plan, or both, and shall be substantially expressed in the wording provided in subdivision (a) of Section 1295 of the Code of Civil Procedure.
  • (d) In any contract or enrollment agreement for a health care service plan, the disclosure required by this section shall be displayed immediately before the signature line provided for the representative of the group contracting with a health care service plan and immediately before the signature line provided for the individual enrolling in the health care service plan.
• Are Plaintiff's claims beyond the scope of arbitration?
  • AT&T v. Comm. Workers of Amer., 475 US 643 (1986)
  • Ericksen et al v. 100 Oak St., 35 Cal3d 312 (1983)
  • Mansdorff v. Cal. Physicians Svc., 87 Cal.App3d 412 (1978)
  • Cobler v. Stanley et al, 217 Cal.App3d 518 (1990)
  • A California Appellate court has held that adult children are not bound by the parents' signing of a mandatory arbitration clause in a suit for wrongful death. See Buckner v. Tamarin, 98 Cal.App.4th 140 (2002)
  • So who WILL be bound by the patient's agreement to arbitrate?
    • an agent can bind a principal -
    • spouses can bind each other -
    • a parent can bind a Minor child.
• Has Defendant involuntarily Waived the right to demand arbitration?
  • Delayed more than 5 or 6 months in filing the petition?
    • Kaneko v. Citi-Park, 202 Cal.App.3d 1220 (1988)
    • Davis v. Continental Airlines, 59 Cal.App 4th 205 (1997)
    • Sobremonte v. Sup. Ct. 61 Cal.App 4th 980 (1998)
    • Sarchett v. Blue Shield of CA, 43 Cal3d 1 (1987)
  • Delayed beyond time specified in agreement?
    • See: Platt v. Adelson, 6 Cal4th 307 (1993)
    • Butchers Union v. Farmers Market, 67 Cal.App.3d 905 (1977)
  • Taken steps inconsistent with arbitration, such as getting discovery?
    • Berman v. HealthNet
    • Hayworth v. City of Oakland, 129 Cal.App 3d 723, 729-730
    • also see Davis & Sobremonte, above.
  • Neglected to raise it as an affirmative defense?
• Can the contract be shown to be void or voidable?
  • e.g.: See Engalla - contract void for fraud.
• Can the contract or clause be shown to be unconscionable?

  Unconscionability is generally defined as the absence of meaningful choice for one party plus contract terms that are unreasonably one-sided. (Ilkchooyi v. Best, (1995) 37 Cal.App.4th 395, 409.) The concept includes both procedural and substantive elements: The procedural element "concerns the manner in which the contract was negotiated and the circumstances of the parties at that time." (Kinney v. United Healthcare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329.) It involves oppression "arising from an inequality of bargaining power which results in an absence of meaningful choice" or surprise due to the hidden nature of the offensive terms. (Ibid.) The procedural aspect of unconscionability often arises in connection with an adhesion contract (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 984), but an adhesion contract is not a prerequisite to a finding of unconscionability (see, e.g., Graham v. Scissor-Tail (1981) 28 Cal.3d 807, 828; A&M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 485-488; but see, Pitchley v. Nortech Waste (July 9, 1999) C029714).

  • Restricts available remedies
    • Armendariz v. Foundation Health, 24 Cal 4th 83, 103-104 (2000)
    • Stirlen v. Supercuts, 51 Cal.App 4th 1519 (1997)
    • Kinney v. United Healthcare, 70 Cal.App 4th 1322 (1999)
    • Graham Oil v. Arco, 43 F3d 1244 (9th Cir. 1994)
    • Paladino v. Avnet, 134 F3d 1054 (11th Cir. 1998)
  • Contract allowed HMO to rearbitrate adverse arbitration decision
    • Cal. Bus. Law Rep., July 1993 at 23
    • Beynon v. Garden Grove
    • Macejiewski v. Alpha Systems, Cal. 4th App. Dist., #G021588, 8/5/99
  • Requires insured but not insurers to arbitrate their claims. eg: Armendariz
  • Requires selection of non-neutral arbitrator. eg: Armendariz, Scissortail
  • Provides for only minimal discovery. eg: Armendariz
  • Requires insured to pay unreasonable arbitration fees
    • Armendariz
  • attack unsuccessful
    • Spinello v. Amblin Enter., 29 Cal.App 4th 1390 (1994)
• Can you seek an injunction against misrepresentation of the Quality of Care?
  Broughton v. Cigna
  The California Consumers Legal Remedies Act provides a private cause of action for deceptive advertising, and doesn't allow waiver by the consumer. Since an arbitrator cannot issue an injunction, a mandatory arbitration clause will be void with respect to such a complaint. The related plea for damages was severed.
• The Calif. Supreme Court partially reversed the above case. It held that any action for damages under CLRA was subject to the arbitration clause of the contract, but the injunction claim could be heard in a court. It remanded for a consideration of whether a statutory claim (under CLRA) could be considered related to Interstate commerce, so whether Calif. law was to be preempted by the Federal Arbitration Act. Stay Tuned!
• If a state can be induced to pass a law limiting arbitration for insurance contracts only, in the Insurance Code, there is good reason to believe that it would be protected from the strictures of the FAA by the McCarran-Ferguson Act, since the FAA doesn't specifically relate to insurance.

Keep Control during the Arbitration Process.

• Try to get a panel not biased toward the HMO.
  • Arbitrators depend on HMO for repeat business.
  • Demand Full disclosure by arbitrators, per CCP 1281.9
    • Have they been Party arbitrators for opponent?
    • Kaiser v. Coburn
    • How often have they served as Neutral Arbitrators
    • Who has paid them?
    • How much of their income depends on opponent?
  • Find previous decisions
  • Rather than accepting one of the pre-vetted arbitrators presented by the HMO, you might counter with selections from your local Superior court's list of arbitrators used for court-ordered arbitration. In Los Angeles the list is on-line at
    http://www.lasuperiorcourt.org/adr/rptAdrPanel.asp?Referer=Index.
    You might check how to find them in your own county.
    If the HMO refuses to select from the court's list, that's telling you that they don't want arbitrators they can't control, and might be a reason to ask the court to appoint the arbitrator.
  • Some Lawyers' Organizations have local Civil Registers online. Once you've found an arbitrator's name, you can find the cases he's been on, and then call the attorney of record to get information on the arbitrator. In Los Angeles, member of the L.A. County Bar can go to www.lacba.org, and click on "Searchable Civil Register".
• Keep control of the Pace of arbitration.
  • Sue for breach immediately on their missing any deadline.
  • Courts may direct choice of arbitrator
• You CAN get depositions and document discovery if there was personal injury or death, under Calif. CCP 1283.05, even if the section was not incorporated into the arbitration agreement.

What are grounds for vacating an arbitration award? Under Calif. CCP 1286.2:

• The award was procured by corruption or fraud
• There was corruption in any of the arbitrators.
• Misconduct of a neutral arbitrator causing substantial prejudice.
• Arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision.
• Refusal of the arbitrators to postpone the hearing upon sufficient cause, causing substantial prejudice.
• Refusal of the arbitrators to hear material evidence, causing substantial prejudice.
• Other conduct of the arbitrators contrary to Cal. Arbitr. Statute.
• Arbitrator failed to give disclosure under CCP 1281.9, but failed to disqualify himself when requested.
• Note that disregarding or misapplying controlling law is NOT of itself grounds for vacating the award!

After Arbitration, what are bases for a Trial de novo?

• Corruption of the arbitration process
• Even then, Judges are likely merely to order a new arbitration.
• The contract may specify grounds for court review of arbitration decisions. LaPine v. Kyocera

Defeat defense attempts to relitigate

• Contract allowed HMO to rearbitrate an adverse arbitration decision. Calif. court enforced the award.
  Beynon v. Garden Grove
• Contract allowed either side to litigate if arbitration award was over $25,000. Calif. court found this unreasonably favored the provider and was against public policy. Enforced Arbitration award.
  Saika v. Gold

ERISA and Arbitration

In Chappel v. Laboratory Corp., 9th Circuit, 11/14/2000, the SPD had a mandatory arbitration clause which had to be invoked by a beneficiary within 60 days of denial of his in-house appeal. The Denial letter didn't tell him that, and the court held that he could sue for breach of fiduciary responsibility, but with his only remedy being that he could file for the arbitration late.

Chappel also claimed that the clause was unenforceable because it required he pay half of the costs, imposed a 60 day staute of limitations, and didn't provide for attorneys fees, terms much less favorable than under ERISA itself. However, the court had rejected an identical claim in Graphic Communications Union, 917 F.2d at 118889.

Though the court had held in Craft v. Campbell Soup, 177 F.3d 1083 (1999) that the FAA didn't apply to employment contracts, it held that arbitration clauses were enforceable under regular contract law.

But now there's good news.

The new (Nov. 2000) ERISA regulation 29 CFR 2560-503-1(c)(4) says that arbitration of claims under §502(a) cannot be mandatory, and cannot be binding! Don't let your ERISA HMO tell you otherwise!

• General Provisions - 1280-1280.2
• Enforcement of Arbitration - 1281-1281.96
• Conduct - 1282-1284.3
• Enforcement of Awards
  • Confirmation, Correction, Vacation - 1285-1287.6
  • Limitations of Time - 1288-1288.8
• Judicial Proceedings
  • Petitions & Responses - 1290-1291.2
  • Venue, Jurisdiction, & Costs - 1292-1293.2
  • Appeals - 1294-1294.2
• Arbitration of Medical Malpractice - 1295