Pacificare Health Systems, Inc., et al. v. Book, Jeffrey, et al. (04/07/2003)

Questions presented: Whether a district court must compel arbitration of a plaintiff's racketeering claims under a valid arbitration agreement even if that agreement does not allow an arbitrator to award punitive damages, leaving to the arbitrator the decision of what remedies are available to the RICO plaintiff in arbitration?

BY SARAH REID, MEDILL NEWS SERVICE

Horror stories from doctors, nurses and patients abound about health maintenance organizations that focus less on health and more on making cutbacks in order to increase profits.

For example, a 27 year-old man from Central California was given a heart transplant, and was discharged from the hospital after only four days because his HMO wouldn't pay for additional hospitalization. The mans HMO also refused to pay for the bandages needed to treat the man's infected surgical wound. The young man died.

And according to a 2002 report from The Record in Bergen County, N.J., a pediatrician had a case of a two-year-old child with a grossly swollen lymph node in the neck. Concerned that the toddler's illness might be life-threatening, the doctor wanted to test the child and analyze the results that day in his office.

The family's HMO, however, wouldn't let him do the test. They advised that the toddler's blood sample would have to be sent to an outside laboratory for testing, or the child would have to be taken to a hospital and have an emergency room physician do the test.

The doctor tested the child at his office anyway and learned on the spot that treatment wasn't necessary.

"I saved them several thousand dollars in hospital bills, and they denied payment for a $20 blood test," the doctor said.

As a result of these kinds of experiences, hundreds of lawsuits have been brought against HMOs by patients, nurses and doctors across the country. At any given time there may be a multitude of cases waiting to be heard in many different jurisdictions. This is where the judicial panel on multi-district litigation comes in.

The MDL in Washington D.C. is responsible for monitoring cases of a similar focus and certifying class actions when the panel deems them most appropriate.

In 2000 a number of doctors filed suits against 15 defendants, including several big HMOs, accusing them of perpetrating fraud on patients, committing extortion against doctors and violating the federal Racketeer Influenced and Corrupt Organizations Act (RICO), among other charges. These cases were eventually certified as a class action by the MDL Panel.

One of the complaints from a group of doctors, including Dennis Breen of California and Jeffrey Book of Miami, argued that it was unfair that they should be forced to arbitrate all of their disputes with UnitedHealth and PacifiCare, because the arbitration contracts limited the amount of damages an arbitrator could award.

The PacifiCare agreements stated that an "arbitrator shall have the power to grant all legal and equitable remedies and award compensatory damages provided by [State] law, except that punitive damages shall not be awarded." One of Uniteds agreements stated that "arbitrators shall have no authority to award any punitive or exemplary damages," and another agreement stated that "arbitrators shall have no authority to award extracontractual damages of any kind, including punitive or exemplary damages."

"Basically United and PacifiCare had gotten too cute in the arbitration clauses of their contracts," said Joe Whatley, an attorney for the doctors in this case.

A federal judge in Miami agreed with Whatley and ruled that the doctors did not have to arbitrate their racketeering claims.

Under the RICO provision, a plaintiff can collect as much as three times the damages awarded, and the judge said in his ruling that the HMOs arbitration limits would prevent arbitrators from awarding damages to that level.

"The contract basically made RICO unenforceable," Whatley added.

On March 14, 2002, the 11th Circuit Court of Appeals affirmed, holding that physicians who have contracts with PacifiCare Health Systems Inc. and UnitedHealth Group Inc. can be part of a class action suit against HMOs even though there are arbitration clauses in their contracts. The court said that the RICO cases do not have to go to arbitration because the language in the contracts doesn't govern the conspiratorial behavior that doctors accuse the health plans of engaging in.

"Here the alleged fraudulent scheme does not differentiate between doctors with contracts and those without, and the RICO claims are unrelated to any of the contractual relationships that exist between the doctors and the HMOs," the court said.

In response, the companies appealed to the U.S. Supreme Court, arguing that the lower courts decision undermines the "critical role" the Federal Arbitration Act plays in promoting alternative dispute resolution.

"By concluding that federal courts can override the decisions of private parties to forego certain rights or remedies as part of an arbitration agreement, the Court of Appeals has undermined a basic premise of the FAA that parties can contract to resolve their disputes in arbitration on such terms as they see fit," the companies said in their petition to the Supreme Court.

They also argued that while most of the arbitration agreements limit punitive damages, none specifically prohibits trebled damages or "extracontractual damages." On this basis the companies suggested that the trebled damages might still be awarded under the category of extracontractual damages if an arbitrator found them to be appropriate.

The companies also said that the appeals court decision conflicts with the opinions of other courts and said that arbitrators, rather than the court, should decide what solutions are available to plaintiffs under the racketeering law.

On Oct. 15, 2002, the Supreme Court agreed to hear the case, and on April 7, 2003, the Court reversed, holding 8-0 that it was premature for the courts to decide what an arbitrator would do.

Instead, the Court, in an opinion written by Justice Antonin Scalia, remanded with an order to go to arbitration.

Justice Clarence Thomas took no part in the consideration or decision of the case.