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State Farm Mutual Automobile Ins. Co v. John Mcgee

June 25, 2012


The opinion of the court was delivered by: Glasser, United States District Judge:

Memorandum and Order

Plaintiff, State Farm Mutual Automobile Insurance Company ('State Farm" or "plaintiff") filed this action on August 20, 2010 against nineteen defendants, alleging claims pursuant to the Racketeer-Influenced and Corrupt Organizations Act ("RICO"),

18 U.S.C. § 1961, et seq., New York State Law, and common law fraud. On March 5, 2012 defendants Dr. John McGee ("Dr. McGee"), Advanced Medical Rehabilitation, P.C., Integrated Medical Rehabilitation and Diagnostics, P.C., Yellowstone Medical Rehabilitation, P.C., Queens-Brooklyn Medical Rehabilitation, P.C., and Queens Brooklyn Jewish Medical Rehabilitation, P.C. (the "PC Defendants") (collectively, "defendants") moved to stay proceedings and compel arbitration of plaintiff State Farm's RICO claims pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 3-4. For the reasons set forth below, defendants' motion is denied.


Plaintiff's factual allegations are set out in the Court's previous decision, familiarity with which is assumed. See Memorandum & Order dated February 21, 2012 (Dkt. No. 90) ("Feb. 21 Order"). Briefly, plaintiff alleges that defendants and a number of other individuals engaged in a scheme to defraud State Farm. Compl. ¶¶ 1-4. As part of that scheme, Dr. McGee, a doctor of osteopathy, treated patients insured by State Farm's automobile insurance who had been injured in automobile accidents (the "insured individuals"). Id. ¶ 1. Under New York's Comprehensive Motor Vehicle Insurance Reparations Act, N.Y. Ins. Law § 5101, et seq.; 11 N.Y.C.R.R. § 65, et seq. ("New York No-Fault Laws"), State Farm is required to provide Personal Injury Protection Benefits of up to $50,000 per insured individual for necessary expenses incurred for medical services. An insured individual may assign his or her Personal Injury Protection Benefits to the healthcare provider in exchange for those services, permitting the healthcare provider to submit claims directly to the insurer for payment. State Farm alleges that insured individuals assigned their benefits to the defendants. Compl. ¶¶ 9 , 15. State Farm alleges that Dr. McGee then ordered medically unnecessary tests and treatments, administered by the PC Defendants, in order to fraudulently obtain payment from State Farm. Id. ¶¶ 24-26.


Defendants seek to stay proceedings and compel arbitration on the grounds that the insurance contracts between State Farm and the insured individuals contained the following provision:

In the event any person making a claim for first-party benefits and the Company do not agree regarding any matter relating to the clam, such person shall have the option of submitting such disagreement to arbitration pursuant to the procedures promulgated or approved by the Superintendent of Insurance.

Defendants' Memorandum of Law ("Defs.' Mem.") at 3 (citing 11 N.Y.C.R.R. § 65-1.1(d)). Defendants argue that because the insured individuals validly assigned their rights as first-party beneficiaries under the contracts to the PC Defendants, defendants are now entitled to compel arbitration. In opposition, plaintiff argues that defendants have waived their right to arbitration, lack standing to elect to arbitrate RICO claims, and the RICO claims are not subject to the arbitration provision in the insurance contracts. Because the Court determines that defendants have waived their right to arbitration, it is unnecessary to address plaintiff's other arguments.

I.Defendants' Have Waived Their Right to Arbitration

The Federal Arbitration Act ("FAA") requires a federal court to enforce an arbitration agreement and stay litigation that contravenes it. See 9 U.S.C. § 2 ("A written provision in . . . a 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 . . . ."). It is well-established that federal public policy strongly favors arbitration. However, where a party has a right to submit a dispute to arbitration as an alternative to litigation, the opportunity to exercise that right is not indefinite. By engaging in litigation that prejudices the opposing party, a party may be deemed to have waived the right to arbitration. PPG Indus., Inc. v. Webster Auto Parts, Inc., 128 F.3d 103, 107 (2d Cir. 1997) ("[A] party waives its right to arbitration when it engages in protracted litigation that prejudices the opposing party.").

There is "no rigid formula or bright-line rule for identifying when a party has waived its right to arbitration" and the determination depends on the particular facts of each case. Louisiana Stadium & Expo. Dist. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 626 F.3d 156, 159 (2d Cir. 2010). Waiver is not to be lightly inferred and "any doubts concerning whether there has been a waiver are resolved in favor of arbitration." PPG Indus., 128 F.3d at 107-08. In determining whether a party has waived its right to arbitration, courts in this Circuit consider the following three factors: (1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice. Louisiana Stadium, 626 F.3d at 159 (citations omitted). "Generally, waiver is more likely to be found the longer the litigation goes on, the more a party avails itself of the opportunity to litigate, and the more that party's litigation results in prejudice to the opposing party." Thyssen, Inc. v. Calypso Shipping Corp., S.A., 310 F.3d 102,105 (2d Cir. 2002).

Of the three factors, the third-prejudice-is most significant. "Waiver of the right to compel arbitration due to participation in litigation may be found only when prejudice to the other party is demonstrated." Rush v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Cir. 1985) (emphasis added); accord Thyssen, Inc., 310 F.3d at 105 ("The key to a waiver analysis is prejudice."). Prejudice "'refers to the inherent unfairness-in terms of delay, expense, or damage to a party's legal position-that occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue.'" PPG Indus., 128 F.3d at 107-08. Prejudice has been found "when a party seeking to compel arbitration engages in discovery procedures not available in arbitration, makes motions going to the merits of an adversary's claims, or delays invoking arbitration rights while the adversary incurs unnecessary delay or expense." Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993) (internal citations omitted). "No bright line defines [prejudice]-neither a particular time frame nor dollar amount automatically results in such a finding-but it is instead determined contextually, by examining the extent of the delay, the degree of litigation that has preceded the invocation of arbitration, the resulting burdens and expenses, and the surrounding circumstances." Kramer v. Hammond, 943 F.2d 176, 179 (2d Cir. 1991).

In the instant case, defendants have participated in litigation proceedings for almost two years without ever raising the defense of arbitration. To justify this delay, defendants argue they were unable to file the motion to compel arbitration until March 5, 2012 after, "the CompuCredit decision in January 2012 which both reinforced the Supreme Court's earlier holding in Shearson[/American Exp., Inc. v. McMahon, 482 U.S. 220, 107 S. Ct. 2332 (1987),] and altered the landscape with respect to the arbitration of claims." Defs.' Mem. at 9-10. The Court is unable to discern any reason why defendants were prevented from filing their motion prior to CompuCredit Corp. v. Greenwood, 565 U.S. __, 132 S. Ct. 665 (2012), a decision that defendants implicitly acknowledge merely reinforced the Court's well-established holding that RICO claims may be arbitrated. The motion to compel could have been filed immediately upon service of the Complaint; defendants needed no discovery and were well-aware of the language of the insurance contracts. Consequently, defendants have provided no legitimate explanation for their eighteen-month delay, a factor that weighs in favor of finding waiver. See, e.g., S & R Co. of Kingston v. Latona Trucking, Inc., 159 F.3d 80, 83 ...

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