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An Arbitration Agreement That Attempts to Skew a Statutory Arbitration Scheme Is Void as Against Public Policy

Federal public policy favors arbitration and the broad interpretation and enforcement of arbitration agreements. So how can an arbitration agreement be held by a court to be void as against public policy?  One answer from a state court (in circumstances where the Federal Arbitration Act did not apply) is that toying with a statutory arbitration scheme could do the trick.

In Hernandez v. Crespo, No. SC15-67, 2016 Fla. LEXIS 2718 (Fla. Dec. 22, 2016), the Supreme Court of Florida held that a physician-patient arbitration agreement that seemed to adopt the arbitration provisions of the state’s Medical Malpractice Act (“MMA”), Fla. Stat. Ann. § 766.207-212, was void as against public policy because it actually created a heavily imbalanced arbitration scheme by contracting around most of the patient-friendly statutory terms.

The arbitration agreement in question purported to adopt the MMA’s arbitration provisions, but with carve-outs that produced significant advantages for the physicians. Hence, while the patients gave up their right to jury trial by agreeing to arbitrate, they did not receive the benefits that the statutory scheme provided in exchange.  For example, (1) the MMA required that the physician concede liability in exchange for a cap of $250,000 on non-economic damages, but the agreement imposed the damages cap without any concession of liability; and (2) the MMA required a panel of three independent arbitrators, one of whom must be an administrative law judge, but the agreement did not require independent arbitrators, and instead allowed each party to appoint an arbitrator (with the party-appointed arbitrators appointing the panel chairman), and if the patient failed to appoint an arbitrator within 20 days, the physician was effectively empowered to appoint a majority of the arbitrators.  Also, contrary to the MMA, the agreement (3) provided for equal sharing of costs by the parties rather than requiring the physician to assume most costs; (4) did not provide for payment of interest on damages; (5) did not require joint and several liability of defendants; and (6) in effect excluded the right of appeal.  See 2016 Fla. LEXIS 2718, at *15-17.

First, the court implicitly determined that it, rather than an arbitrator, would decide whether the arbitration agreement was void. That determination was consistent with the general principle that a court determines the validity of an arbitration agreement. Cf. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967) (determinations regarding alleged fraudulent inducement of arbitration clause, and its effect, are decided by court rather than arbitrator).

Second, the dispute was among Florida domiciliaries concerning conduct and consequences in Florida, and no “place” of arbitration was specified. So Florida procedural and substantive laws presumptively governed.

In considering the arbitration agreement in question, the Florida Supreme Court applied the following decisive rule:

“Parties may contract freely around a statute, but ‘a contractual provision that contravenes legislative intent in a way that is clearly injurious to the public violates public policy and is thus unenforceable.’” 2016 Fla. LEXIS 2718 at *11-*12.

The Court found that the agreement in question diverged from the MMA’s arbitration provisions through terms more favorable to the doctors in six major respects (described above). Id. at *16-*17.  It also determined that the legislature had enacted those arbitration provisions “with the explicit goal of ‘reducing attorneys’ fees, litigation costs, and delay’ caused by terms favorable to one party like those in the agreement in this case.” Id. at *14-*15.  The Court opined that the freedom to contract around a statute like the MMA does not imply “the freedom to ignore its balance of statutory incentives, which were designed to entice claimants and defendants to enter into arbitration.” Id. at *18.

Ultimately, the Court found that “arbitration agreements which purport to incorporate the statutory scheme [of the MMA] but have terms clearly favorable to one party . . . contravene the ‘substantial incentives for both claimants and defendants to submit their cases to binding arbitration’ which ‘[t]he arbitration provisions were enacted to provide.” Id. at *14.  The arbitration agreements in question disrupted the balance of incentives the legislature carefully crafted to encourage arbitration.  The agreements therefore were deemed void as against public policy. Id. at *18.

One wonders how the assertion of common law contract defenses, such as lack of mutual assent, contract of adhesion, unconscionability, and duress, might have fared in the circumstances to defeat the arbitration agreements in question.

Hernandez contains a useful lesson for practitioners. If an arbitration agreement is grossly one-sided, it should be unsurprising if the courts pay close attention to any statutory or common-law arguments against enforcement.  And if that arbitration agreement conflicts with a relevant statutory arbitration scheme, it may well be held void as against public policy.

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David Barres