Epstein v. Vision Serv. Plan

Decision Date22 October 2020
Docket NumberA155219
Citation56 Cal.App.5th 223,270 Cal.Rptr.3d 239
CourtCalifornia Court of Appeals Court of Appeals
Parties Gordon EPSTEIN, Plaintiff and Appellant, v. VISION SERVICE PLAN, Defendant and Respondent.

Law Offices of Craig S. Steinberg, Craig S. Steinberg, Agoura Hills, for Plaintiff and Appellant.

Hooper, Lundy & Bookman, P.C., Andrew Hardenbrook Struve, for Defendant and Respondent.

Banke, J. Plaintiff Gordon Epstein, an optometrist, entered into a "Network Doctor Agreement" with Vision Service Plan (VSP) to be part of its provider network. After VSP conducted an audit of Epstein's claims for reimbursement, it concluded he was knowingly purchasing lenses from an unapproved supplier and terminated the provider agreement.

As pertinent here, the agreement set forth a two-step dispute resolution procedure. The first step, entitled "Fair Hearing," (underscoring omitted) provided for an internal appeal process in accordance with the "VSP Peer Review Plan and Fair Hearing Policy." If the dispute remained unresolved, the second step, entitled "Binding Arbitration," (underscoring omitted) required arbitration pursuant to the Federal Arbitration Act (FAA) and in accordance with procedures also set forth in the referenced plan and policy.

Epstein invoked the first step of the dispute resolution process and appealed the audit and termination decision. A three-member panel, after conducting a hearing during which testimony and documentary evidence was presented, upheld the audit findings and termination of the agreement.

Instead of invoking the second step of the dispute resolution process and requesting arbitration, Epstein filed the instant administrative mandamus proceeding ( Code Civ. Pro., § 1094.5 ). He alleged this was proper for two reasons. First, he maintained the second step of the dispute resolution process was contrary to state regulatory law requiring certain network provider contracts to include a procedure for prompt resolution of disputes and expressly stating arbitration "shall not be deemed" such "a provider dispute resolution mechanism." ( Cal. Code Regs., tit. 28, § 1300.71.38.) He further claimed this state law was not preempted by the FAA by virtue of the McCarran-Ferguson Act, which generally exempts from federal law, state laws enacted to regulate the business of insurance. Epstein secondly maintained that, regardless of any regulatory prohibition of arbitration, the second step of the dispute resolution process was procedurally and substantively unconscionable and therefore unenforceable.

The trial court rejected both Epstein's regulatory law and unconscionability challenges to arbitration and denied his writ petition on the ground he had failed to exhaust administrative remedies because he had failed to request arbitration.

We affirm. As did the trial court, we conclude state regulatory law requiring certain network provider agreements to include a dispute resolution process that is not arbitration, pertains only to the first step of the dispute resolution process and does not foreclose the parties from agreeing to arbitration in lieu of subsequent judicial review through administrative mandamus. We also conclude that while the arbitration provision is procedurally unconscionable in minor respects, Epstein failed to establish that it is substantively unconscionable.

I. BACKGROUND

The Network Doctor Agreement

VSP is the largest vision care insurer in California, indeed, in the United States. It provides coverage to approximately 80 million individuals.

To deliver the vision coverage promised, VSP contracts with approximately 38,000 medical providers. Thus, when Epstein desired to become one of these providers, he and VSP entered into a "Network Doctor Agreement" (which we refer to as the "provider agreement"). (Capitalization omitted.)

As relevant here, this 14-page agreement provided for a two-step dispute resolution process, as follows:

"9. Fair Hearing Policy/Binding Arbitration
"a. Fair Hearing. In the event of a dispute as to VSP's imposition of any applicable disciplinary action against Network Doctor, Network Doctor, for himself/herself and on behalf of any derivative associate doctor(s), may appeal such action in accordance with provisions and requirements, including the payment of fees and costs, set forth in the VSP Peer Review Plan and Fair Hearing Policy, as may be amended or replaced from time to time, and incorporated herein by reference (the ‘Fair Hearing Procedure’).
"b. Binding Arbitration. If the above process does not resolve the dispute, then, unless expressly disallowed by state law, the dissatisfied party may request final determination and resolution of the matter by mandatory binding arbitration, pursuant to the Federal Arbitration Act, 9 U.S.C. Chp. 1-3, in accordance with the Fair Hearing Procedure. This mechanism, the initial costs of which shall be shared equally by the parties, shall be the sole method, in lieu of a jury or court trial, of resolving any permissible dispute that may arise between Network Doctor and VSP. Any such arbitration shall (i) take place in Sacramento, California and (ii) be administered by a mutually agreeable arbitrator, selected from a closed list of neutral-qualified and readily available arbitrators maintained by VSP, who may, in the arbitration award, allocate among or between the parties, all or part of the costs of arbitration, including the fees and costs of the arbitrator, including any legal counsel to the arbitrator, and the reasonable attorney's fees and costs of the prevailing party. To the extent allowable so as not to invalidate application of the Federal Arbitration Act, this Agreement shall be governed by the laws of the state of California."

The incorporated "Fair Hearing Procedure" spelled out in detail the procedures for a step-one fair hearing and for a step-two arbitration. With respect to arbitration, these procedures included the deadline to request arbitration after an adverse decision by a hearing panel, the initial fee for arbitration subject to reallocation by the arbitrator, the content of the notice scheduling the arbitration hearing and stating the issues to be arbitrated, the right to counsel, the arbitrator selection process, the extent of discovery, witness disclosure, attendance at the arbitration hearing, and the confidentiality attendant to the "peer review privileged and protected process."

The Underlying Dispute1

VSP requires its contracted providers to use either a VSP lab or a VSP-contracted lab to fabricate eyeglass lenses for VSP insureds. VSP "reimburses VSP-contracted labs an agreed upon amount for eyeglass lenses fabricated ... for a VSP member. The contract between VSP and a lab is considered by the parties to be confidential."

Lenstek was a VSP-contracted lab until its contract was terminated in 2009. After Lenstek's contract with VSP was terminated, Lenstek entered into an agreement with Nouveau Labs, a VSP-contracted lab, under which Lenstek would fabricate eyeglass lenses for VSP insureds whose eyeglass prescriptions were sent to Nouveau.

In short, Lenstek continued to fabricate lenses for VSP insureds, but did so indirectly through Nouveau. VSP's "policies and procedures do not permit such an arrangement, and VSP would not have paid for the Lenstek lenses that were inaccurately billed to VSP as Nouveau product."

Epstein ordered eyeglasses on behalf of his VSP patients from Nouveau Labs. When VSP learned of Nouveau's subcontract with Lenstek, it filed suit against Nouveau and terminated Epstein's provider contract. VSP also demanded that Epstein pay restitution of $104,333, the amount it had paid Epstein the prior three years for claims for lenses ostensibly fabricated by Nouveau, but actually fabricated by Lenstek.

Epstein appealed in accordance with the first step of the dispute resolution process set forth in the provider agreement, and the matter was heard by a three-person panel. Both Epstein and VSP were represented by counsel. At the outset of the hearing, the panel chairman explained the procedures and rules. Epstein was given an opportunity to raise procedural objections but did not voice any. Both documentary and testimonial evidence were presented to the panel.

The hearing panel found Epstein knew Nouveau was subcontracting out the fabrication work and that the work "was actually being performed at a non-contracted VSP lab, contrary to VSP policy." The panel therefore "upheld VSP's initial decision imposing restitution, terminating the [Agreement], and charging the audit fees."

Rather than proceed to the second step of the dispute resolution process—by submitting a request for arbitration—Epstein filed the instant administrative mandamus action, challenging the hearing panel's decision on several grounds.

Epstein's writ petition came on for hearing following a scheduling order issued by the trial court in its order overruling a demurrer to the petition. In addition to the administrative record, the parties filed supporting and opposing points and authorities, supporting and opposing documentation, and stipulated facts. At the close of the hearing, the trial court asked for additional briefing on whether the state regulatory law Epstein claimed invalidated the arbitration provision was preempted by the FAA or saved from preemption by virtue of the McCarran-Ferguson Act.

Following the additional briefing, the court denied Epstein's writ petition on the ground he had "failed to exhaust" his administrative remedies by failing to request arbitration. It rejected Epstein's regulatory challenge to arbitration, concluding "the VSP hearing panel proceeding and binding arbitration proceeding are separate proceedings, rather than a single process of binding arbitration." It also rejected his claim that the requirement to arbitrate an adverse decision by a hearing panel, in lieu of a judicial challenge thereto, was unconscionable.

II. DISCUSSION
A. State Regulatory Law Prohibiting Arbitration...

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