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Government Employees Insurance Co., et al v. Grand Medical Supply

July 4, 2012


The opinion of the court was delivered by: Cogan, District Judge.


This case is one of several recently filed in the Eastern District of New York by insurance companies seeking to recover benefits paid to health care providers under New York's no-fault insurance laws, and to avoid the future payment of benefits to these providers. Plaintiffs have asserted claims for civil racketeering, fraud, and unjust enrichment. The parties' familiarity with the allegations underlying this action and the basics of New York Insurance Law is assumed, but to summarize, plaintiffs allege that defendants, suppliers of orthotic and other medical devices, have submitted to plaintiffs, under the New York no-fault insurance law, inflated or false insurance claims for their products. They do this by receiving an assignment of the patients' right to reimbursement, then paying kickbacks to referring doctors or clinics who deliberately prescribe devices not listed on the schedule that dictates reimbursement amounts under the state's Medicaid regulations. Sometimes these defendants submit to plaintiffs wholly fraudulent invoices; other times they do not disclose that they have received rebates from the devices' manufacturers, which, under law, would have to be taken into account in determining their rate of reimbursement. Plaintiffs allege that defendants have so far received $477,000 in improper claims, and have pending over one million dollars in additional claims.

Before me is defendants' motion to compel arbitration of these claims. For the reasons set forth below, defendants' motion is granted in part and denied in part.


Defendants have moved to compel arbitration on the grounds that they have both a contractual right to arbitrate plaintiffs' claims under the governing insurance policies, as well as a statutory right to arbitrate under New York's Comprehensive Motor Vehicle Insurance Reparations Act, N.Y. Ins. Law § 5101, et seq. (the "No-Fault Statute"). Plaintiffs offer several arguments in opposition, including that defendant Albert Khaimov lacks standing to compel arbitration; that defendants' purported rights to arbitrate do not apply to plaintiffs' claims to recover benefits already paid; and that defendants have waived their right to compel arbitration with regard to claims for reimbursement that are still pending. I address each of these arguments in turn below.

I.Governing Law

The applicable subsection of the No-Fault Statute, N.Y. Ins. Law § 5106(b), read in conjunction with other subsections of that statute, provides that automobile insurance companies that wish to do business in the state of New York must offer in their insurance contracts an option to arbitrate that meets the requirements of that statute. See N.Y. Ins. Law § 5106(b) ("[e]very insurer shall provide a claimant with the option of submitting any dispute . . . to arbitration"). If an insurance company fails to offer such an option, the statute supplies it by default. Id. at § 5103(h) (any no-fault policy "which does not contain provisions complying with the requirements of this article, shall be construed as if such provisions were embodied therein").

Here, both sides agree that the policies at issue contain an arbitration option that meets the requirements of the statute. There is, therefore, no occasion to rely on the default provision in §5103(h). Neither party has pointed to any substantive difference between the statutory requirements and the policy provision entered into because of it. The statute thus does not control their rights; the arbitration clause in the policies does. In other words, when an insurance company provides a statutorily compliant arbitration option, as the parties agree it did here, the statute effectively drops out of the analysis, and a court need look only to the arbitration clause in the policies to determine any issues concerning arbitration.

Because we look to the arbitration clause in the policies, not the statute, the framework for determining any disputed issues concerning arbitration must be determined in the context of the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (the "FAA"), rather than any conflicting state law. The FAA is clear that whenever a contract containing an arbitration clause affects interstate commerce, the FAA supplants state law to the extent they are inconsistent. See Chung v. President Enters. Corp., 943 F.2d 225, 229 (2d Cir. 1991) (FAA governs all questions before a federal court regarding the validity and enforceability of arbitration agreements if there is a written agreement, jurisdiction, and the underlying transaction affects interstate commerce). There can be no doubt that an automobile insurance policy is a contract that affects interstate commerce. See generally Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115 S. Ct. 834 (1995).

For this reason, I respectfully disagree with the recent decision of my colleague Judge Jack Weinstein, who concluded in Liberty Mut. Ins. Co. v. Excel Imaging, P.C.,-- F.Supp.2d --, No. 11-CV-5780, 2012 U.S. Dist. LEXIS 86303 (E.D.N.Y. June 21, 2012), that "[d]efendants' right to arbitrate is a creation of state no-fault law. Defendants have presented no evidence that the Liberty Mutual insurance contracts bargained for the right to arbitrate affirmative fraud claims through their private agreements. As a result, New York law, rather than the Federal Arbitration Act, applies to determine whether the defendants have waived their arbitration rights." Id. at *29. I do not see the arbitration clause in the policy here as a "creation" of state law; rather, it is a "requirement" of state law. Plaintiffs did indeed "bargain for" the right to arbitrate claims that fall within the policies' arbitration clause by choosing to do business in New York and offering the arbitration clause required by New York's Insurance Law. And, again, because there can be no question that a policy of automobile insurance affects interstate commerce, the starting point for any analysis is the FAA, not state law.

This is not to say that there is no place for state law in this case. The FAA does not purport to answer every question that might arise in the context of a motion to compel arbitration, and indeed expressly defers to state law on fundamental issues such as contract formation and interpretation. See Perry v. Thomas, 482 U.S. 483, 492 n.9, 107 S. Ct. 2520 (1987). But the starting point is the FAA, which will take us either to federal law, if there is any, or state law, if there is not.

II.Defendant Khaimov's Standing

Defendant Khaimov is the principal of the corporate defendants Grand Medical Supply, Inc., Royal Medical Supply, Inc., and Utopia Equipment, Inc. Plaintiffs do not deny that they entered into valid arbitration agreements in their no-fault insurance policies with the corporate defendants, but rather argue as a threshold matter that defendant Khaimov has no standing to compel arbitration under those agreements, and that plaintiffs should, therefore, be permitted to prosecute their claims against him in this case regardless of whether plaintiffs must arbitrate their claims against the defendant corporations. Specifically, plaintiffs contend that only the corporate defendants took assignments from policy holders and submitted reimbursement claims, and that therefore only they have the right to compel arbitration. In response, defendants concede that Khaimov may not technically qualify as a claimant under the policies, but argue that plaintiffs should be estopped from circumventing their agreement to arbitrate disputes over no-fault reimbursement claims by bringing suit against Khaimov directly.

When determining whether to compel arbitration under the FAA, a court must answer two questions: "(1) whether there exists a valid agreement to arbitrate at all under the contract in question . . . and if so, (2) whether the particular dispute sought to be arbitrated falls within the scope of the arbitration agreement." Hartford Accident and Indem. Co. v. Swiss Reinsurance Am. Corp., 246 F.3d 219, 226 (2d Cir. 2001) (internal quotation marks omitted) (alteration in original). The first question -- whether there is a valid arbitration agreement -- is determined solely by state contract law, without influence from the general presumption in favor of arbitration underlying the FAA. See Applied Energetics, Inc. v. Newoak Capital Mkts., LLC, 645 F.3d 522, 526 (2d Cir. 2011); see also Bell v. Cendant Corp., 293 F.3d 563, 566 (2d Cir. 2002) ("Because an agreement to arbitrate is a creature of contract . . . the ultimate question of whether the parties agreed to arbitrate is determined by state law."). The logical extension of this rule is that whether a particular person or entity is to be considered a party ...

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