Must a Trial Court Consider the Legality of a Contract Before Enforcing an Arbitration Award Issued Under that Contract?

By Ashtin Henninger
In Visiting Nurse Association of Florida, INC. vs. Jupiter Medical Center (SC11-2468), argued in October, the Florida Supreme Court was presented the issue of whether a trial court must consider the illegality of an underlying contract before enforcement of an arbitrator’s decision on the merits of the contract.
Jupiter Medical Center, Inc. (“JMC”), a hospital, and Visiting Nurse Association of Florida, Inc. (“VNA”), a home health service provider, entered into a contract in February 2005 whereby VNA would purchase certain assets relating to JMC’s then existing home health agency business, including referrals from JMC for discharged patients, for $639,000. In addition, VNA was to have access to facilities and work space in the hospital. Within the purchase documents was a provision requiring arbitration of any disputes.
Following the agreement, there was a reduction of access between VNA’s admission coordinators and JMC’s discharge planners. VNA attempted to amicably settle the dispute, but in September 2007, JMC sent VNA a letter evicting VNA from the leased space in the hospital. Thereafter VNA stopped payment of the off-campus lease. VNA filed an arbitration claim against JMC asserting breach of contract for insufficient future referrals, terminating VNA’s in-hospital office lease, and for failing to abide by the contact’s discharge protocols.
A three-person arbitration panel awarded VNA $1,251,213 in monetary damages for loss of Medicare patient referrals. The panel found that JMC breached the agreement after failing to adhere to procedures set forth in the agreement and for evicting VNA from the leased space. Subsequently, JMC filed a Motion for Rehearing with the panel and raised the issue of illegality for the first time. However, JMC focused on the award and the arbitrator’s interpretation of the contract rather than the underlying contract. The motion was denied.
JMC filed a petition to vacate the award in the District Court for the Southern District of Florida, which was dismissed for lack of subject matter jurisdiction. JMC also filed an action for damages in the Circuit Court of Palm Beach County for VNA’s alleged breach of the off-campus lease.
The Circuit Court ruled in favor of VNA, dismissing the motion and confirming the award. JMC appealed to the 4th DCA, arguing the contract was illegally interpreted by the panel, and that it conflicted with governing state and federal laws and regulations that prohibit the sale/purchase of patient referrals. The 4th DCA ruled in favor of JMC, holding that Florida courts should not enforce an arbitrator’s award until claims of legality of the underlying contract are resolved.
VNA requested discretionary review of the 4th DCA opinion as inconsistent with decisions of the U.S. Supreme Court, the Florida Supreme Court, and the Fifth District Court of Appeal that held the question of illegality of the underlying contract is for the arbitrator to decide. (In. Br. At 18).
VNA relied upon the public policy behind allowing parties to choose arbitration, which limits the expense of litigation and reaches a speedy decision. VNA argued that whether a contract is illegal in nature is a matter for the arbitrator to decide. An arbitrator’s interpretation of facts and law are not subject to later judicial challenge and should be given great deference. It contended that the contract is legal, as evidenced by the arbitrator’s holding that JMC breached an enforceable contract. Further, VNA pointed out that an arbitrator’s award can only be vacated under limited circumstances as set forth in §682.13, Florida Statutes, such as fraud, evident partiality, or if the arbitrator exceeded his or her powers. Finally, if arbitration awards were reviewable, they would be rendered merely a step towards settlement rather than being a final determination of a case.
JMC countered that a Florida court cannot enforce an illegal contract, and that the face of this contract violated state and federal health care fraud and anti-kickback laws and regulations. Further, JMC cited that governing healthcare laws and regulations prohibit medical care providers from accepting payment in return for referrals. Accordingly, JMC argued that the arbitrator’s interpretation of the underlying contract was illegal since it would require JMC to steer future referrals to VNA in exchange for monetary remuneration—the purchase price of the contract, and further, the $1,251,213 award. JMC stated that it did not raise the issue of illegality until after the arbitration panel construed the language into creating illegal contractual obligations on the parties. JMC claimed that it was understood between the parties that it did not intend to steer patient referrals to VNA and subsequently raised the issue to avoid being penalized for not conforming to healthcare laws. Under section 682.13(1)(c), Fla. Stat., JMC argues the award could be vacated due to the arbitration panel exceeding its powers set by terms in the contract limiting the construction of the agreement where it stated that all provisions must conform to state and federal laws and regulations. Further, JMC argued that finality and efficiency of arbitration should not overcome the ability of courts to consider the legality of a contract.
A link to a video of the arguments is available here. If the Court reaches the merits, contracting parties in Florida should receive some clarification about this important aspect of arbitration law.