Health Plan of Nevada, Inc. v. Rainbow Med.

• Decision Date: 10 November 2004
• Docket Number: No. 39712.,39712.
• Parties: HEALTH PLAN OF NEVADA, INC., Appellant/Cross-Respondent, v. RAINBOW MEDICAL, LLC, and Resource Healthcare, LLC, a/k/a Resource Pharmaceutical Services, Respondents/Cross-Appellants.
• Court: Nevada Supreme Court

100 P.3d 172

120 Nev. 689

HEALTH PLAN OF NEVADA, INC., Appellant/Cross-Respondent, v. RAINBOW MEDICAL, LLC, and Resource Healthcare, LLC, a/k/a Resource Pharmaceutical Services, Respondents/Cross-Appellants.

No. 39712.

Supreme Court of Nevada.

November 10, 2004.

Beckley Singleton, Chtd., and Daniel F. Polsenberg and Beau Sterling, Las Vegas; Jimmerson Hansen and Lynn M. Hansen, Las Vegas, for Appellant/Cross-Respondent.

Lemons Grundy & Eisenberg and Robert L. Eisenberg, Reno, for Respondents/Cross-Appellants.

Marquis & Aurbach and Phillip S. Aurbach, Las Vegas, for Respondent/Cross-Appellant Rainbow Medical, LLC.

McDonald Carano Wilson McCune Bergin Frankovich & Hicks LLP and George F. Ogilvie III, Las Vegas; Radford J. Smith, Henderson, for Respondent/Cross-Appellant Resource Healthcare, LLC.

BEFORE THE COURT EN BANC.

OPINION

PER CURIAM:

In this appeal, we are presented with questions involving Nevada's Uniform Arbitration Act and the scope of judicial review of an arbitration award.

Appellant Health Plan of Nevada, Inc. (HPN) and respondents Rainbow Medical, LLC (Rainbow) and Resource Healthcare, LLC (Resource) (the assignee of Rainbow's assets) entered into a contract under which Rainbow would provide pharmacological services to HPN members. A dispute arose regarding the quality of services provided by Rainbow and whether HPN owed Rainbow additional monies under the contract. The matter proceeded to binding arbitration. The arbitrator found that HPN had breached its duty of good faith and fair dealing under the contract and that Rainbow had substantially performed under the contract. The arbitrator awarded Rainbow monetary damages.

HPN moved the district court to vacate the arbitration award, while Rainbow requested that the court confirm the award. The district court concluded that the arbitrator had exceeded his authority by imposing burdens upon HPN outside of the contractual terms. Rather than vacate the award and remand the matter for a new arbitration hearing, the district court asked the arbitrator to review and clarify his ruling. The district court requested that the arbitrator indicate the extent to which he had relied on the allegedly improper burden findings in determining that HPN had breached its covenant of good faith and fair dealing. When the arbitrator responded that the burden findings played no part in his decision, the district court confirmed the arbitration award.

On appeal, HPN argues that once the district court determined that the arbitrator exceeded his authority, the district court should have vacated the award and ordered a new hearing before a new arbitrator. HPN also argues manifest disregard of the law as an additional ground for vacating the arbitration award and ordering a new arbitration hearing. Rainbow asserts that the arbitrator did not exceed his powers or manifestly disregard the law and that the district court's denial of the motion to vacate and confirmation of the arbitration award should be affirmed.

Although we conclude that the district court erred in remanding for clarification, the arbitrator did not exceed his powers or manifestly disregard the law. Therefore, the district court correctly confirmed the arbitration award.¹

FACTS

HPN is a federally qualified health maintenance organization that provides health care benefits to its members. Rainbow is a pharmaceutical products and services provider. Evidence submitted during the arbitration proceeding indicates that HPN's officers and Rainbow's founder had long-standing social and/or professional relationships. The record reflects that HPN's president encouraged Rainbow's founder to create Rainbow so that Rainbow could contract with HPN as a service provider. The record also indicates that this arrangement would expand HPN's territory and/or member services while allowing Rainbow's founder to enter a new business market. According to the record, HPN was aware that Rainbow's founder's previous experience was primarily confined to real estate development and management.

On August 1, 1995, HPN and Rainbow entered into an agreement under which Rainbow would provide pharmacological services to HPN members. Rainbow received a "capitated" or flat rate per HPN member as opposed to a fee for each service provided. In calculating the capitation rate, the parties relied on HPN data reflecting the amount of pharmaceutical services provided to HPN members in the past. This information is referred to as utilization data. A contract provision permitted a capitated rate adjustment if utilization varied more than ten percent from the originally anticipated utilization rate.

In April or May 1996, alleged problems with the quality of Rainbow's services began to surface. HPN claimed it had received numerous complaints regarding Rainbow's performance. Rainbow addressed the complaints, substantially curing any alleged breach, but HPN still had serious concerns as to whether Rainbow would be able to perform its obligations under the contract.

The parties also disputed Rainbow's service coverage area under the agreement. HPN conceded that the agreement did not specifically define the service area, but alleged that Rainbow's capitation rate included HPN's southern Nevada members, and thus, Rainbow's coverage extended to all of southern Nevada. Rainbow maintained that its delivery area included only Clark County, Pahrump, and Laughlin. Rainbow also asserted that HPN shifted costs to Rainbow by constantly increasing the amount of services that Rainbow was supposed to provide under the capitation agreement. HPN allegedly told Rainbow that Rainbow would receive a capitation increase for the additional services it provided.

Despite various meetings, the parties were unable to reach a compromise. On May 16, 1997, Rainbow obtained HPN's consent to assign its rights and duties under the provider agreement to First Class Pharmacy and Regency Health Services. First Class Pharmacy and Regency Health Services later assigned the contract to Resource Healthcare, LLC. The asset purchase agreement stipulated that Rainbow retained rights to any retroactive capitation rate adjustments that might accrue for services performed before the "effective time" of the purchase.

On June 20, 1997, Rainbow wrote to HPN requesting a retroactive capitation adjustment for services provided prior to the assignment. HPN denied Rainbow's request because, according to HPN, Rainbow had failed to provide the quality of service required under the contract and had not submitted utilization data supporting the rate request.

After the denial, Rainbow initiated binding arbitration proceedings before the American Arbitration Association pursuant to its provider agreement with HPN. HPN refused to arbitrate the dispute and filed a complaint for declaratory relief, alleging that Rainbow no longer had standing to compel arbitration under the contract. The district court disagreed and entered an order compelling HPN to arbitrate. HPN appealed the order compelling arbitration, and this court affirmed the district court's decision compelling arbitration.²

The parties then agreed to an arbitrator. After twenty-two days of reviewing evidence and evaluating witness testimony, the arbitrator concluded that HPN had breached its duty of good faith and fair dealing and awarded $5,028,034.20 to Rainbow. The arbitrator found that Rainbow's service delivery problems had been timely cured and that Rainbow had substantially complied with the contract. The arbitrator found that HPN was not relieved of its obligation to pay additional fees to Rainbow under the capitation provisions. In reaching this conclusion, the arbitrator considered testimony regarding Rainbow's establishment and the relationship between HPN's president and Rainbow's founder in determining that HPN was willing to contract with a novice company, with no experience, in order to expand its markets. The arbitrator found that HPN could not use the service complaints to avoid paying amounts due under the contract's capitation recalculation provisions and that HPN was disingenuous in asserting this position. As to the other disputes between the parties, the arbitrator found that the contract was ambiguous and should be construed against HPN, as it had drafted the contract.

Among other findings supporting his 24-page decision, the arbitrator included a statement that "HPN's decision to contract with a totally green startup was a policy decision that imposed a higher mentoring burden. As a newborn Rainbow was entitled to be incubated by HPN, an affirmative duty to in good faith help Rainbow crawl, walk, and run."

HPN filed a motion to set aside and vacate the arbitration award, claiming that the arbitrator either exceeded his powers or manifestly disregarded the law. HPN contended that the "newborn" statement evidenced that the arbitrator improperly found that a partnership existed and imposed partnership fiduciary duties upon HPN in contravention of express language in the agreement that no partnership was created by the contract.

The district court concluded that the arbitrator had exceeded his authority by imposing a mentoring burden upon HPN "as this [was] not a duty recognized by the law." Instead of vacating the award, however, the district court remanded the case to the arbitrator and asked him to reexamine his findings in light of the determination that HPN had no legal duty to mentor and incubate Rainbow. Upon the arbitrator's declaration that the statement was gratuitous and had no bearing on the award, the district court confirmed the arbitration award. This appeal followed.

DISCUSSION

Standard of review

Nevada recognizes both common-law grounds and statutory grounds for examining an arbitration award. However, the scope of judicial review of an arbitration award is limited and is nothing like the scope of an appellate court's review of a trial court's decision.³ The party seeking to attack the...