February 28, 2008

The Health Net Punitive Damages Award: Are Arbitration Awards of Punitive Damages Subject to Federal Due Process Review?

The Los Angeles Times reports on a recent arbitration award of $9 million in damages, of which $8.4 million was punitive damages, against Health Net for canceling plaintiff's coverage while she was undergoing chemotherapy. Generally, an arbitration award is extremely difficult to set aside merely because of legal error. However, this case may raise an interesting issue that is percolating through courts around the country regarding whether the due process review of punitive damage awards applies to punitive damages awarded in an arbitration.

A California Court of Appeal opinion, Rifkind & Sterling, Inc. v. Rifkind (1994) 28 Cal.App.4th 1282, 1291-1292 held that the process of “confirming an arbitration award and converting it into a judicial judgment constitutes state action” which requires a "traditional measure of due process." However, the court concluded under the then-existing punitive damages due process cases, due process did not require any heightened review of a punitive damages award in arbitration. At the time Rifkind was decided the federal due process clause merely required some review of punitive damages awards and had not yet become a significant substantive check on punitive damages awards. (See, e.g., Honda Motor Co. Ltd. v. Oberg (1994) 512 U.S. 415, 432 [114 S.Ct. 2331, 129 L.Ed.2d 336]; Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. 1, 18, 20, 21-22 [111 S.Ct. 1032, 113 L.Ed.2d 1].)

Since Rifkind was decided in 1994, there has been a sea change in the law with respect to the significant limits the due process clause places on punitive damages awards. (See, e.g., BMW of North America, Inc. v. Gore (1996) 517 U.S. 559, 574-575 [116 S.Ct. 1589, 134 L.Ed.2d 809]; Cooper Industries v. Leatherman Tool (2001) 532 U.S. 424, 436 [121 S.Ct. 1678, 149 L.Ed.2d 674]; State Farm Mut. Auto. Ins. Co. v. Campbell (2003) 538 U.S. 408, 418 [123 S.Ct. 1513, 155 L.Ed.2d 585] Williams v. Philip Morris (2007) ___ US ___ [127 S.Ct. at p. 1062].)

Thus, there is a strong argument that since enforcing an arbitration award involves state action, subjecting it to due process review, arbitration awards of punitive damages should be evaluated the same way any other punitive damage award awarded during a trial would be. So far, three courts have considered this question in the post-BMW environment, and there is a nationwide split of authority. (See Birmingham News Co. v. Horn (Ala. 2004) 901 So.2d 27, 66 [holding that judgments confirming arbitration awards constitute state action, thus warranting “review of the awards under governing federal due-process considerations”]; but see MedValUSA Health Programs, Inc. v. MemberWorks, Inc. (2005) 273 Conn. 634, 641 [872 A.2d 423]; Davis v. Prudential Securities, Inc. (11th Cir. 1995) 59 F.3d 1186, 1192.)

At some point, the United States Supreme Court may need to resolve this split.

Full disclosure: I am currently handling an appeal, Raymond v. Flynt, in the California Court of Appeal raising this issue.