Wednesday, February 24, 2016

Arb Judgment Survives Illegality Challenge

Epic Medical Mgm’t LLC v. Paquette, No. B261541 (D2d8 Jan. 28, 2016)

A doctor and his practice management company got into a dispute that went to arbitration. The management company won. But the doctor moved to vacate the award on the grounds that the contract, as interpreted by the arbitrator, was an illegal kickback agreement for patient referrals, and thus that it was beyond the arbitrator’s power to award any damages based on it. The doctor also claimed that the arbitrator’s interpretation created a brand new agreement, which was beyond her power, and that she improperly limited the doctor’s testimony. The trial court denied the motion and the Court of Appeal affirms.

So far as the “new agreement” claim goes, arbitrators generally don’t have the power to invent new agreements between the parties. But they can interpret existing agreements, including by finding that the parties orally modified written agreements or that their conduct evidenced implied consent to changes in terms. Which is what happened here. The arbitrator found that the parties implicitly agreed to a payment structure that was different than that in the written agreement. Indeed, they acted in accord with that change for three years. So that’s not a grounds to vacate.

As to the point about illegality, California recognizes an extremely limited exception to the enforceability of arbitration awards when enforcing the award would contravene a strong statutory or public policy to the extent it overcomes the presumption in favor of arbitration of disputes. (E.g., confirming an arbitrator’s injunction to enforce a California non-compete.) The doctor points to Business & Professions Code § 650(a), which prohibits patient referral fees for doctors. But § 650(b) has an exception for fee splits between doctors and management companies commensurate with the value of the services provided. Since that is basically what the award in this case did, it isn’t subject to the exception.

Finally, on the doctor’s testimony, the doctor didn’t provide an offer of proof as to what the excluded testimony would have been and how that would potentially have affected the result. Because the record didn’t reflect that the doctor was prohibited from giving testimony bearing on his liability, vacation of the award isn’t warranted.


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