Wednesday, February 19, 2003

Supreme Court

The Supreme Court gets back into gear on Monday, and will presumably issue a bunch of decisions next week. There are also two weeks of oral arguments starting on Monday, with a few very interesting ones in the mix. The first is Pacificare Health Systems v. Book. This case will either turn out to be VERY important, or not. (How's that for a prediction?) The big question lurking here is whether companies can simply declare themselves immune from punitive damages in many sorts of cases, by foisting upon their employees and customers an "arbitration agreement" that prohibits the awarding of punitive damages. But it's quite possible the case will end with a fact-specific whimper rather than a bang.

The case is brought by doctors against various HMOs, raising lots of claims, including a federal RICO claim. RICO, you recall, is the federal statute that was supposedly drafted to cover organized crime but whose language covers a lot of wrongdoers besides the Sopranos. It provides for tripled damages, which are in some ways a lot like punitive damages. Some of the docs had arbitration agreements with some of the HMOs (i.e., agreements that if they had a dispute, they would resolve it before an arbitrator rather than file a lawsuit in court). Some of the arbitration agreements said that the arbitrator couldn't award punitive damages, and one had an arbitration agreement prohibiting the awarding of any non-contractual damages. The question here is whether these limitations on remedies make the arbitration agreements unenforceable as to the RICO claim – that is, whether the limitations on arbitrator-awardable damages so undermine the purposes of the federal statute, that the plaintiffs can bypass arbitration and file a lawsuit instead. Slightly more precisely, the question is whether a court in the first instance can declare the arbitration agreement unenforceable and allow the plaintiff to sue in court instead – or whether the plaintiff must first go to arbitration and argue to the arbitrator about the meaning and effect of the arbitration agreement, with the possibility of judicial review after the arbitration is over.

The Eleventh Circuit ruled for the doctors, holding that yes indeed they could bypass arbitration because the arbitrator wouldn’t be allowed to award the statutorily-mandated relief. The Circuit basically said, "see our earlier opinion in Paladino," and Paladino suggests that an arbitration agreement is unenforceable if it prohibits the arbitrator from awarding the full relief that is available under a federal statute.

There are four most-plausible outcomes here, I think:

(1) that the Court says that these arbitration agreements are ambiguous as to whether they would preclude the arbitrator from awarding the relief that Congress provided for in the RICO statute, and that the claims ought to go to arbitration in the first instance so that the arbitrator can interpret the agreements in that regard;

(2) that the Court says that the relief-limiting provisions are unambiguous and invalid, but the claims ought to go to the arbitrator in the first instance so that the arbitrator can interpret the contracts to see whether the relief-limiting provisions can be severed from the remainder (leaving the duty to arbitrate intact, but striking down the limitations on relief);

(3) that the Court says that the relief-limiting provisions are invalid and therefore there is no duty to arbitrate because the invalid provisions can't be severed from the rest of the arbitration agreement, leaving the whole agreement null and void; or

(4) – the REALLY EXTREMELY BAD possible outcome – the Court could declare that the relief-limiting provisions really do preclude the awarding of full statutory relief but are perfectly ok, legal, and enforceable nonetheless.

I think that the plaintiff-respondents would win only under #3, and the combined likelihood of 1, 2 and 4 about 51 percent. So I shakily say "REVERSE." I am NOT predicting #4, and will wail and gnash my teeth if it turns out to be the horrible holding of the case. I should also note that the plaintiff-respondents are represented by my former colleague Joe Whatley, and I wish him the best of luck. My own personal view, for what it's worth, is that the Court should affirm.

posted by sam 1:05 PM 0 comments

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