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By Steven G. Mehta
A new case has been decided by the California courts regarding arbitration. The case held that the inclusion of a clause in the arbitration rules that allowed for possibility of future amendments did not authorize arbitrators to determine their own jurisdiction where such determination was only authorized by amendment enacted after the parties signed the arbitration agreement.
Gilbert Street Developers, LLC v. La Quinta Homes, LLC – filed June 11, 2009, Fourth District, Div. Three
To read more about this case read Professor Martin’s California Appellate Report blog.
If you would like a copy of the case, please feel free to contact me and i will email it to you.
The California Court of Appeal has recently ruled that an arbitration clause that was agreed upon as part of a Union contract was not sufficient to render claims for violation of alleged statutory rights subject to arbitration pursuant to the agreement.
In Flores v. Axxis Network & Telecommunications, Inc., 2009 WL 931706 (CA2 April 8, 2009), plaintiffs were employees of Axxis, a contractor that had contracted with the Los Angeles Unified School District (LAUSD) to perform construction services. LAUSD entered into a “project stabilization agreement” in May 2003 with the Los Angeles/Orange Counties Building and Construction Trades Council and various craft unions. Axxis had agreed to be bound by the LAUSD union contract.
Plaintiffs filed a complaint asserting three causes of action for (1) failing to pay prevailing wages under Labor Code sections 1771, 1774 and 1194, (2) failing to pay waiting time penalties under Labor Code sections 203 and 204.5, and (3) recovery on the payment bonds under Civil Code section 3250 as against Merchants Bonding Company, another defendant. Axxis petitioned to compel arbitration of the employees’ claims under the grievance and arbitration provision of the agreement. The trial court denied the petition. The court of appeal affirmed the decision.
In arriving at its decision, the court discussed two decisions. In Wright v. Universal Maritime Service Corp. (1998) 525 U.S. 70, 119 S.Ct. 391, 142 L.Ed.2d 361, the United States Supreme Court addressed the issue of whether a general arbitration clause in a collective bargaining agreement required an employee to use the arbitration procedures for an alleged violation of the Americans with Disabilities Act of 1990(ADA) (42 U.S.C. § 1210 et seq.). The Wright court noted that in the context of collective bargaining agreements there is generally a presumption of arbitrability of issues that are arguably within the scope of the agreement. Because the case involved the interpretation and application of a statute, “the ultimate question for the arbitrator would be not what the parties have agreed to, but what federal law requires.” Accordingly, for an agreement to require arbitration of a statutory claim the Court held it must be “clear and unmistakable” that the parties intended to waive a judicial forum for statutory claims. The waiver must be “explicitly stated” because “the right to a federal judicial forum is of sufficient importance to be protected against less-than-explicit union waiver in a collective bargaining agreement.”
In Vasquez v. Superior Court, 80 Cal.App.4th 430, 95 Cal.Rptr.2d 294 (2000), the arbitration clause at issue in Vasquez stated that it applied to all grievances and disputes between the union and employer regarding the interpretation or application of any term of the agreement. The agreement also contained a provision prohibiting discrimination against any applicant or employee “on account of race, color, religion, sex, age or national origin under applicable federal and state law.
The Vasquez court concluded that in “determining whether there has been a sufficiently explicit waiver, the courts look to the generality of the arbitration clause, explicit incorporation of statutory antidiscrimination requirements, and the inclusion of specific antidiscrimination provisions. The test is whether a collective bargaining agreement makes compliance with the statute a contractual commitment subject to the arbitration clause. The Vasquez Court provided two ways to make the claims subject to arbitration:
(1) If the agreement clearly, explicitly, and unmistakably shows that the parties intended to make statutory claims subject to arbitration; or
(2) The coupling of a general arbitration clause with an explicit incorporation of statutory antidiscrimination requirements elsewhere in the agreement. This combination is acceptable if another part of the agreement “makes it unmistakably clear that the…statutes at issue are part of the agreement, [then] employees will be bound to arbitrate their [state and federal statutory] claims.”
The court in Flores distinguished Vasquez and indicated that the Vasquez court did not create exclusive criteria or factors regarding arbitration enforceability. The agreement in this case excluded complaints of statutory and regulatory violations from the arbitration procedure. It distinguished between complaints of violations of law on the one hand, and disputes or grievances arising from the interpretation or application of the agreement on the other, and provided different procedural mechanisms for resolving each. The arbitration provision applied to resolve generic, non-specific “disputes” or “grievances” concerning the application or interpretation of contractual terms of the agreement and general disputes arising from that agreement. In contrast, the agreement specified distinctly different procedures and remedies for resolving what it termed “complaints” concerning alleged violations of law, as distinguished from alleged violations of rights solely arising from the agreement.
The court also addressed Labor Code 229 and found that the matter was not arbitrable under that provision also.
By Steven G. Mehta
A recent case came down that addressed the issue of arbitration agreements and whether they can be enforceable in light of arguments regarding unconscionability. In Olvera v. El Pollo Loco, Inc., — Cal.Rptr.3d —-, 2009 WL 1110828 (2nd. Dist. Cal. App. April 27, 2009), the plaintiff, Carlos Olvera, was a general manager of an El Pollo Loco restaurant. The employees were provided with documents that identified the company’s dispute resolution policies. One page of the document identified in Spanish and English that the parties could use mediation as a form of alternative dispute resolution. There was no mention of arbitration. On a separate page, there were other procedures and policies that that included a procedure on dispute resolution that was in English only. The dispute resolution policy stated that all employment-related disputes must be resolved through binding arbitration. It stated procedures for demanding arbitration and that the parties “may agree” to mediation, but that the sole means to resolve any dispute not resolved through other means was through arbitration. It also stated that class arbitration was prohibited.
El Pollo Loco filed a motion to compel arbitration. Plaintiff argued that the agreement was procedurally and substantively unconscionable because it was non-negotiable, and that it was misleading because of the multiple policies and the language issues. Plaintiff further argued that the waiver of the class action arbitration was also unenforceable.
The court explained that a contract is unenforceable, in whole or in part, if it is unconscionable. Both procedural and substantive unconscionability must be present to justify the refusal to enforce a contract or clause based on unconscionability. Procedural unconscionability focuses on oppression or unfair surprise, while substantive unconscionability focuses on overly harsh or one-sided terms. The more procedural unconscionability is present, the less substantive unconscionability is required to justify a determination that a contract or clause is unenforceable. Conversely, the less procedural unconscionability is present, the more substantive unconscionability is required to justify such a determination.
The Court held that the agreement was procedurally unconscionable in two respects. First, the inequality in bargaining power between the low-wage employees and their employer made it likely that the employees felt at least some pressure to sign the acknowledgment and agree to the new dispute resolution policy.
Second, the court explained that the employees’ agreement to be bound by the new dispute resolution policy was not an informed decision. The court explained that:
“The explanatory materials provided… if the problem was not resolved in that manner, mediation was required. This was stated in large type, in both English and Spanish, and presented in an inviting, easy-to-read format. The description of the new policy, however, was totally inaccurate. The dispute resolution policy itself, on another page, required binding arbitration of all employment-related disputes and stated that the parties “may agree to mediate,” not that mediation was required. The description provided in the explanatory materials was misleading in that it described the new policy as one of required mediation rather than required arbitration. Moreover, the policy itself appeared in much smaller type than the explanatory materials, and in English only. This exacerbated the effect of the misrepresentation and made it more likely that the employees would be misled.”
As such, the court concluded that “the degree of procedural unconscionability is high.”
The court also found substantive unconscionability with the class arbitration waiver because it insulated El Pollo Loco from employee class actions and class arbitrations. The court explained that class actions may be especially important if many of those employees are low-wage earners with limited English language skills who are likely ill-informed of their statutory rights. Moreover, the waiver was unfairly one-sided because it benefited only El Pollo Loco, which was unlikely to sue its employees in a class action lawsuit.
As such, given the procedural and substantive unconscionability, the court found the arbitration agreement along with the waiver of class action rights as unenforceable.
These decisions reaffirm law regarding arbitration that there must be an element of both substantive and procedural unconscionability before the courts will agree to render an arbitration agreement unenforceable. It also appears clear that the greater the procedural unconscionability, the less that is necessary to prove for substantive unconscionability. Moreover, as in Roman, where there was some, but not a lot of evidence, of procedural unconscionability, the courts appear to be less willing to render the arbitration agreements unenforceable.
Arbitration is a favored concept in California. However, there are many occasions when those agreements are not enforced. Parties need to be aware that when they are drafting arbitration agreements that they need to make sure that there is a certain element of fairness to the agreement so that it can be deemed to be procedurally fair and uniform. This will help to make the arbitration agreement enforceable.
Most attorneys that practice in the injury arena are familiar with the concept of liens. There are medical liens, worker’s compensation liens, insurance liens, and then there is the issue of a Medicare lien. In reality, Medicare doesn’t actually have a lien. Instead, Medicare’s right to reimbursement is far superior than a mere lien; it really is a “Super lien,” because its right of reimbursement is paramount to any other claim.
Many attorneys know that Medicare has a statutory right to reimbursement against any recovery from a lawsuit where Medicare paid for health benefits for a beneficiary. However, some have ignored those rights when settling cases because Medicare has not been vocal in its efforts to assert a lien. Most attorneys, however, when polled about Medicare reimbursement rights don’t know the following Pitfalls involved with Medicare.
1. The Lien Must be Paid Within 60 Days After Resolution
Medicare is not primary medical insurance like health insurance plans. Instead, Medicare is a secondary insurance plan. By statute, Medicare conditionally pays for medical treatment subject to reimbursement by the “primary plan” such as private health insurance plans, third-party tortfeasors (including uninsured or self insured parties) or liability insurance. As a result, Medicare is entitled to reimbursement any time it pays and a case is resolved (by settlement or judgment) that involves Medicare payments. According to the Code, a Medicare beneficiary who receives a payment from a “primary plan” or “primary payor” must reimburse Medicare within 60 days of receipt of payment from that primary plan. 42 U.S.C 1395y; 42 CFR 411.24(h).
2. If The lien is not paid by the plaintiff (beneficiary) The Defendant Must Pay It
Most people are shocked to hear this one. The reality is that if the Medicare beneficiary does not repay Medicare within 60 days from receipt of the settlement or judgment, the insurance company for the defendant (or the self-insured) “must” reimburse Medicare “even though it has already reimbursed the beneficiary or other party.” 42 CFR section 411.24 (i). Most defendants find this provision very difficult to understand because they feel that they have already paid for the settlement and that they should not have to pay twice. Because of this feeling, I am quoting the rules exactly as follows:
(i) Special rules.
(1) in the case of liability insurance settlements and disputed claims under employer group health plans, workers’ compensation insurance for plan, and no-fault insurance, the following rule applies: if Medicare is not reimbursed as required by paragraph (h) of this section, the primary payer must reimburse Medicare even though it has already reimbursed the beneficiary or other party.
(2) the provisions of paragraph (i.)(1) of this section also apply if the primary payer makes its payments to anti-other than Medicare when it is, or should be, aware that Medicare has made a conditional primary payment. 42 CFR section 411.24 (i).
3. The Plaintiff’s attorney can be held liable for Failure to Pay Medicare
The “Super lien” allows Medicare to seek reimbursement directly from the Medicare beneficiary. In addition, Medicare is also authorized to seek recovery from anybody, including the plaintiff’s attorneys, who receive payment from the primary plan. 42 USC 1395y(b)(2)(B); 42 CFR section 411.24. Until recently, this was never tested in the courts.
However, late last year, the US District Court in the Northern District of West Virginia addressed this issue in the case of U.S. v. Harris (if you would like Steve Mehta to send you a copy of this case, please click here and request it to be sent by email).
In that case, the defendant was Paul J. Harris, a plaintiff’s attorney who had settled a personal injury case involving a Medicare beneficiary. After settling the case for $25,000, Harris sent Medicare (A.K.A. CMS) the details of the settlement payment, as well as his attorney’s fees and costs. However, before he was notified by Medicare of the final demand for payment, he distributed the settlement funds. CMS then sued Harris for $10,253.59.
Harris argued that he distributed the sums with knowledge of the government and therefore he wasn’t liable. The District Court disagreed. It held that he was personally liable for the full amount of the lien. The following rules of law were cited by the court:
· A primary plan, and an entity that receives payment from a primary plan, shall reimburse the appropriate Trust Fund for any payment made…” 42 U.S.C. § 1395y (b) (2) (B) (ii)
· CMS may “bring an action against any or all entities that are or were required or responsible…to make payment with respect to the same item or service…under a primary plan.” 42 U.S.C. § 1395y (b) (2) (B) (iii)
· holding that the government “may recover…from any entity that has received payment from a primary plan or from the proceeds of a primary plan’s payment to any entity.” Cox v. Shalala, 112 F.3d 151, 154 (4th Cir. 1997)
· “CMS has a right of action to recover its payments from any entity, including beneficiary provider, supplier, physician, attorney, State agency or private insurer that has received a primary payment.” 42 C.F.R. §411.24(g)
4. The Defendants Are REQUIRED To Report A Potential Recovery To Medicare
Effective July 1, 2009, section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007” (MMSEA) will require defendants to determine whether or not plaintiffs are entitled to Medicare benefits. The MMSEA will require defendants to first determine whether or not the plaintiff is entitled to Medicare benefits, regardless of whether or not the claim against the defendant is resolved. Second, if the plaintiff is determined to be entitled to Medicare benefits, the defendant will be required to notify Medicare of its right to a possible recovery against the plaintiff. The defendant will be required to provide information to Medicare such as the identity of the Medicare beneficiary whose illness, injury, incident, or accident was at issue as well as such other information specified by Medicare to assist it in recovering the amount that Medicare has previously paid. Currently, however, there are no specific guidelines as to exactly what information must be communicated and when.
5. The penalties are Stiff!
The exposure in penalties can be enormous. For example, the MMSEA will impose $1000 a day penalty upon defendants for failure to comply with notification requirements. And, Medicare can charge interest if payment is not timely made. Finally, any party, including the plaintiff, the defendant, the defendant’s insurance company, and both sides’ attorneys can all be liable for up to double the amount of the Medicare “super lien” as damages to Medicare!
6. Six years Exposure!!!!
Finally, if all this news is not bad enough, think of this: Medicare has up to six (6), yes, six (6) years to sue you for its right to reimbursement. 28 USC 2415(a).
Now that we have identified a potential crisis, we have to arrive at a solution to avert the crisis. Unfortunately, however, there are no guidelines available for plaintiffs or defendants.
In the next chapter in this series of articles, we will address the possible solutions from both sides.
