Considering Arbitration

by Reed Smith
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We first mused over arbitration and drug/medical device claims exactly six years ago, when the United States Supreme Court issued its opinion in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).  In that widely studied opinion, the Supreme Court held that the Federal Arbitration Act preempted state laws limiting the enforceability of class action waivers.  Bexis wondered aloud whether drug and device companies could arbitrate their drug and device-related disputes, perhaps when involved in contractual relationships with third party payers?

And then we largely stopped talking about arbitration. For six years.  Until now.  Because it’s Supreme Court opinion season again, and the Supreme Court has again ruled that the FAA preempts state laws limiting arbitration.  And this time, the Court has done so in a wrongful death case and in a remarkably strong opinion, which got us to thinking again:  Is there a role for arbitration in drug and medical device product liability claims?  (And because Bexis originally posed this question in 2011, we have shamelessly stolen his thoughts and prose for parts of this post, with his permission).

In Kindred Nursing Centers Limited Partnership v. Clark, No. 16-32, 2017 WL 2039160 (U.S.S.C. May 15, 2017), the U.S. Supreme Court upheld application of a nursing home’s arbitration agreement to tort claims for alleged personal injuries suffered by patients under the home’s care.  Those holding the patients’ medical powers of attorney (an unfortunately common situation) “signed an arbitration agreement with [defendant] on behalf of [the] relative.” Id. at *3.  Later, they brought state-court tort actions for wrongful death. Id.  The defendant moved to enforce the arbitration agreement, but lost.  The state supreme court held both agreements invalid, invoking specificity rules involving powers of attorney and singling out arbitration agreements for special scrutiny.  As described by the Court:

The Kentucky Constitution, the court explained, protects the rights of access to the courts and trial by jury; indeed, the jury guarantee is the sole right the Constitution declares “sacred” and “inviolate”. . . . And that clear-statement rule − so said the court − complied with the FAA’s demands.  True enough that the [Federal Arbitration] Act precludes singling out arbitration agreements.  But that was no problem, the court asserted, because its rule would apply not just to those agreements, but also to some other contracts implicating “fundamental constitutional rights” . . . [such as] a contract “bind[ing] the principal to personal servitude.”

Kindred, at *4 (citations and quotation marks to opinion being reviewed omitted).

The Federal Arbitration Act “preempts any state rule discriminating on its face against arbitration,” including “any rule that covertly accomplished the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” Id.  The Court then found the examples of non-arbitration “constitutional rights”− other than jury trial − pretextual.  “[T]he court hypothesized a slim set of both patently objectionable and utterly fanciful contracts that would be subject to its rule,” but only the jury trial was realistically implicated:

In ringing terms, the court affirmed the jury right’s unsurpassed standing in the State Constitution: The framers, the court explained, recognized “that right and that right alone as a divine God-given right” when they made it “the only thing” that must be “ ‘held sacred’ ” and “ ‘inviolate’”. . . .  And so it was that the court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement − namely, a waiver of the right to go to court and receive a jury trial.  Such a rule is too tailor-made to arbitration agreements − subjecting them, by virtue of their defining trait, to uncommon barriers.

Id. at *5 (citations omitted).

Thus, even in personal injury cases, the FAA “requires a State to enforce all arbitration agreements (save on generally applicable grounds) once they have come into being.” Id. at *6.  “The Act’s key provision, once again, states that an arbitration agreement must ordinarily be treated as “valid, irrevocable, and enforceable.” Id. (citing 9 U.S.C. § 2).  “Adopting the [plaintiffs’] view would make it trivially easy for States to undermine the Act − indeed, to wholly defeat it.” Id.  Thus, the Court in Kindred “reach[ed] a conclusion that falls well within the confines of (and goes no further than) present well-established law.” Id. at *7 (quoting DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 471 (2015)).  States cannot “flout[ ] the FAA’s command to place those agreements on an equal footing with all other contracts.” Id.

It was already clear that the FAA enforces arbitration clauses in “standard form” contracts. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 682 (1996).  The Act validates arbitration provisions in consumer contracts as well, including where the contract allows a company “to make unilateral amendments,” including to the arbitration provision. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 336 (2011).  DIRECTV pointed out that “parties to an arbitration contract [have] considerable latitude to choose what law governs,” so long as that law is “valid” under the FAA.  136 S. Ct. at 468, 470.

From our perspective, what Kindred adds to the analysis is the elimination of any argument that the FAA somehow exempts state-law personal injury actions – since that is precisely what was preempted by the FAA in that case.  We would even say more broadly that the opinion pumps the brakes on efforts to invalidate arbitration clauses on the basis of public policy.

So let’s circle back to our initial question: Is there a role for arbitration in drug and medical device product liability claims?  Forty years ago, when arbitration was seen as a commercial animal and a process where “businessmen” felt comfortable resolving their business disputes, we would have asked, why?

Today, we ask, why not? Things have changed, both in how we view arbitration on the one hand and product liability litigation on the other.  Of course, the elephant in the room is that in most personal injury lawsuits, the plaintiff and the alleged tortfeasor do not have a preexisting contractual relationship, which is how most parties in arbitration have agreed to arbitrate.  But assuming that could somehow be overcome, there are no clear legal barriers to adopting arbitration in drug and medical device product liability cases.

The FAA certainly does not exempt product liability claims. The relevant provision – the aforementioned 9 U.S.C. §2 – states:

A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

The sale of prescription medical products is certainly a “transaction” or “contract” – the other side routinely alleges warranty, consumer protection, and other contractually-based claims when suing our clients. Likewise such sales “involve commerce,” or else the FDA couldn’t exist.  There is no explicit exemption in the statute for product liability, torts, personal injury, or anything else of that nature.  So, we’d say the FAA by its terms covers sales of prescription medical products. Kindred establishes that tort claims for damages from goods and services “arise out of” the sales transaction for FAA purposes.

The FDA does not prohibit arbitration either. We checked FDA regulations and guidance documents to see if the FDA put any a priori (that means “right at the outset” in legal Latin) limits on arbitration clauses.  We found zilch in the FDA’s regulations, and to the extent arbitration is discussed at all in FDA Guidance Documents, those discussions did not pertain to prescription medical products – at least those used in humans.  Moreover, in 1998, President Clinton issued an executive order that “each Federal agency must take steps to:  1. Promote greater use of . . . arbitration. . . .”  Granted, that this order, by its terms applies only to disputes “involving the United States,” but it would be difficult for the FDA affirmatively to obstruct arbitration elsewhere while itself being under such a presidential directive.

And, because of Kindred, we know that state law cannot discriminate against arbitration clauses.  That was what Kindred was all about.

So it appears to us that the primary obstacles are practical, and assuming those could be worked out, we see many reasons why arbitration is worthy of consideration for product liability cases. To start with, there is no longer any stigma attached to arbitrating tort claims.  It has been well-established since the 1970s that medical malpractice claims can be arbitrated, and it has been clear since at least the 1990s that there is no public policy that would per se exclude personal injury and wrongful death claims from the scope of arbitration.  If there were any doubt on this point, the U.S. Supreme Court laid it to rest in Kindred, where seven justices of an eight-member court ruled that wrongful death claims can and should be arbitrated.

To those who say that arbitration is inadequate or is biased against claimants, we would say there are two sides to every story. Sure, the arbitration process can be (but is not always) less robust than litigation, especially in terms of discovery.  But before decrying that compromise, consider how productive discovery actually is when weighed against the cost—the majority of which is born by the defense.  Does discovery in its current form actually lead to results that are more fair than what parties would receive in arbitration?  We are not so sure.  And considering our view that discovery abuse is all too common, we would argue that a process that brings discovery under control and fully embraces proportionality would be eminently more fair.

As for bias, anyone who has been hit with a substantial arbitration award would disagree that arbitration presents substantial disadvantages to claimants. The structure of the arbitration process can address perceptions of bias as well.  We saw that in Concepcion, where the Supreme Court noted several procedural features that benefited consumers, including adoption of a one-page complaint, shifting of “nonfrivolous” costs to the defendants, designating a location convenient to the claimant, a flexible hearing process (in person, by telephone, or in writing) at the claimant’s option, among other features. Concepcion, 563 U.S. at 336-37.  Anyone who has been on the losing end of an arbitration award person would also disagree that arbitration removes the deterrent value of jury verdicts.  After all, the same statute that makes arbitration clauses enforceable also makes arbitration awards enforceable.

Finally, some defend product liability litigation for its “narrative value,” i.e., the value gained by presenting and resolving controversies in open court.  We see their point, but again consider how things have changed.  In our years of practice, we have come to understand that the American tort system is good at transferring wealth from one party to another, but is limited in delivering much more than that.  As a result, plaintiffs who sue to vindicate interests other than monetary interests tend to be disappointed.  Moreover, in today’s mass tort system, relatively few plaintiffs have any interest in litigation other than monetary gain.  Other than a few hand-picked “bellwether” plaintiffs, none will actually see the inside of a courtroom, and many will not meet their lawyers until the day before their depositions, if ever.  How does preserving this inventory-based system advance any helpful “narrative”?

In the end, we don’t know if arbitration on any appreciable scale could work, but it is worth considering. We do know that the current Supreme Court would be open to approving it.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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