Agreements to Arbitrate Medical Malpractice Claims: Positive Law

August 21, 2013

Can a healthcare provider make an arbitration agreement with patients for resolving future malpractice disputes?

This question has no straightforward answer. As an initial matter, one needs to separate individual arbitration agreements between doctors and patients from group health plans for employees. A group health plan that obligates employees to arbitrate medical malpractice claims is valid and enforceable: see Madden v. Kaiser Foundation Hospital, 552 P.2d 1178 (Cal. 1976). The plan’s designers—employers on one side and MCOs/HMOs on the other side—have roughly equal bargaining powers and cannot easily take advantage of one another. Their preference for arbitration is part of a well thought-through deal that includes an attractively priced health benefits package for employees (such deals do not always promote the employees’ best interest, but this is a story for another occasion: see here).

With individual arbitration agreements things are markedly different. Courts often view such agreements as contracts of adhesion that patients have no choice but to sign. Driven by this vision and the desire to protect patients against unfairness, courts refuse to compel arbitration on a patient: see, e.g., Rodriguez v. Superior Court, 98 Cal.Rptr.3d 728, 735-38 (Cal. App. 2 Dist. 2009) (refusing to enforce a statutorily permitted agreement to arbitrate medical malpractice claims upon finding that the patient did not waive her right to a jury trial knowingly and voluntarily).

This approach aligns with the traditional common law rule that precludes contracting around medical liability on public policy grounds (see, e.g., Tunkl v. Regents of the Univ. of Cal., 383 P.2d 441, 447 (Cal. 1963); Tatham v. Hoke, 469 F. Supp. 914, 919 (W.D.N.C. 1979), Porubiansky v. Emory Univ., 275 S.E.2d 163, 169 (Ga. Ct. App. 1980)), but conflicts with Section 2 of the Federal Arbitration Act (FAA), according to which written arbitration agreements “shall be valid, irrevocable, and enforceable.” This section, as interpreted in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), does not allow state courts to nullify arbitration agreements on the theory that consumers and other weak plaintiffs can receive proper redress only from courts (by utilizing class action or another proceeding that eradicates the defendant’s litigation advantage). State courts consequently cannot set aside arbitration agreements based solely on the differences between arbitration and court proceedings (my colleague and an FAA expert, Myriam Gilles, wrote two important articles on that issue: see here and here).

Importantly, Section 2 still allows state courts to set aside arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” As clarified by the Supreme Court is the AT&T decision, the FAA “permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability” (id. at 1746). For example, a state court can nullify an arbitration agreement that denies an aggrieved patient remedies to which she is entitled under the law. This is exactly what happened in a recent Florida Supreme Court case, Franks v. Bowers, — So.3d —, 2013 WL 3064807 (Fla. 2013) (discussed in detail here). In that case, the court voided an arbitration agreement purporting to set up a $250,000 limit on the patient’s compensation in the event of malpractice. This limit was four times lower than Florida’s statutory cap on noneconomic damages recoverable by wronged patients. Hence, it was unlawful, unconscionable and, crucially, not severable from the rest of the agreement between the doctor and the patient.

This decision does not mention FAA. This statute, however, has been extensively discussed in a decision delivered a week ago by New Jersey’s appellate court: Moore v. Woman to Woman Obstetrics & Gynecology LLC, ___ A.3d, 2013 WL 4080947 (N.J.Super.A.D. 2013). This decision involved a high-risk-pregnancy patient who signed an agreement on behalf of herself, her spouse and unborn child to arbitrate “all past and future claims for medical diagnosis and treatment.” The patient’s pregnancy ended up in a delivery of a baby with Downs Syndrome. Following this tragic development, the patient, the baby and her spouse sued the obstetricians for malpractice. The obstetricians moved to compel the arbitration agreement on the plaintiffs, but the trial judge denied their motion.

The appellate court reversed this decision. The court began its inquiry by stating that FAA and the Supreme Court’s AT&T decision “did not alter the basic premise that an agreement to arbitrate must be the product of mutual assent, as determined under customary principles of contract law” and that “in the aftermath of AT&T, state courts remain free to decline to enforce an arbitration provision by invoking traditional legal doctrines governing the formation of a contract and its interpretation” including “the defense of unconscionability.”

After finding that the agreement in question was a contract of adhesion, the court carried out the requisite “sharpened inquiry” concerning unconscionability. As part of that inquiry, the court considered three factors: subject-matter, bargaining powers, and economic compulsion. As far as subject-matter is concerned, the court decided that there is “no inherent harm to the doctor/patient relationship that flows from the agreement to substitute one forum [arbitration] for another [court] in the event of future claims.” The court then determined that the patient’s bargaining power was way below her doctors’ power. The court nonetheless found no economic compulsion (“procedural unconscionability”) since there were no “significant inadequacies due to [the patient’s] age, literacy [or] lack of sophistication, the agreement’s hidden or unduly complex … terms, [and] the defendants’ bargaining tactics.” The court consequently ruled that the arbitration agreement was enforceable against the patient and her child. Because the patient’s spouse was not a party to that agreement, the court allowed him to proceed with his individual suit.

I believe that this decision takes the law in the right direction. Whether arbitration will take over globally is a separate question on which I will offer some thoughts in my next post.

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