Reply Brief — PacifiCare Health Systems, Inc. v. Book

No. 02-215

2005

OFFICE OF THE CLERX |

Supreme Court of the Anited States

PACIFICARE HEALTH SYSTEMS, INC., ef al.,

Petitioners,

Vv.

JEFFREY Book, D.O., et al.,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

PETITIONERS’ REPLY BRIEF

WILLIAM E. GRAUER* JAMES W. QUINN

CHRISTOPHER R. J. PACE JEFFREY S. KLEIN

COOLEY GODWARD LLP EDWARD SOTO

4401 Eastgate Mall GREGORY S. COLEMAN **

San Diego, CA 92121 WEIL, GOTSHAL & MANGES LLP

(858) 550-6000 767 Fifth Avenue

* Counsel of Record porte rd 10153

for PacifiCare Health (212) 310-5088

Systems, Inc., and PacifiCare ** Counsel of Record for

Operations, Inc. UnitedHealth Group Incorporated

and UnitedHealthcare, Inc.

Counsel for Petitioners

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHINGTON, D. C. 20001

TABLE OF CONTENTS

TABLE Ge ATTIRE e CIE cccrscccccsscsevvssesonssccsscsesneneneee

RERETIGG cviniemunnnmennnnnnmnnenansmmnienien

——

Il.

III.

{

IV.

THE MEANING AND EFFECT OF

REMEDIAL PROVISIONS IN AN ARBI-

TRATION AGREEMENT ARE OUTSIDE

THE SCOPE OF A COURT’S ARBITRA-

BILITY DETERMINATION ................cccceeeeees

RESPONDENTS SHOULD BE REQUIRED

TO ARBITRATE THEIR RICO CLAIMS

BECAUSE THEY HAVE FAILED TO

DEMONSTRATE THAT THE DAMAGE

LIMITATION PROVISIONS LIMIT THEIR

TREAD TREES 0 Ci cevceeecccesenscnsencovnsisenerenneqeenencenenes

A. A Limitation on Punitive Damages in an

Arbitration Agreement Does Not Preclude

an Award of RICO Treble Damages............

B. Dr. Porth Can Recover RICO Treble

Damages Under His Arbitration Agree-

ment That Limits “Extracontractual

Nee” cxcescccesscesssisetmonesnreseninsciisimaneresen

THE COURT HAS NOT BARRED PRO-

SPECTIVE WAIVERS OF STATUTORY

REMEDIES, AND CONGRESS DID NOT

PROHIBIT SUCH WAIVERS IN RICO ..........

ALTERNATIVELY, THE DAMAGE LIMI-

TATION PROVISIONS SHOULD BE

SEVERED TO PRESERVE ARBITRATION

OF THE RICO CLAIMS ...ccsccccsscssscscscscnscoscscees

IT IOS cxccccssccsssrsnsneacsnecsenevensesnccsstaeneentnnensacntett

PEF FR ccrcccnesevessessncsseenscsneesvensemmeneansenmsemnensemnannenn

13

13

14

15

TABLE OF AUTHORITIES

CASES : Page

Alexander v. Gardner-Denver Co., 415

iiss ctr saciisasiennptenpeumsdenounsenseneneene 17>

Buckley v. Valeo, 424 U.S. 1 (1976).....cccccccccceeeees 16

Cange v. Stotler & Co., 826 F.2d 581 (CA7

En 18

Carneiro Da Cunha vy. Standard Fire Ins.

Co./Aetna Flood Ins. Program, 129 F.3d 581

SEE SPI ecsscensnceseeccssconscsnsvessscnsssssnssnsesesseses 15

County of Middlesex v. Gevyn Constr. Corp., 450

Fete A GPR BTL) nnccccocccccccecensesevscesesecccescosocees 11

D.H. Overmyer Co. v. Frick Co., 405 U.S. 174

FIFE Val vscrececcscadesoscccrscsestencccnscsessssnnsssesasieocssoosesoss 17

EEOC v. Waffle House, Inc., 534 U.S. 279

EEE sceasicsccceosesescososencoscossssecsunnsoosesnnsosnsocnoocssess 6, 15

Evans v. Jeff D., 475 U.S. 717 (1986) ...cccccccceeeseees 18

First Options of Chicago, Inc. v. Kaplan, 514

BPs BIE 0 BE iccrcescccecccsccsccccsesccssnsessseoqsossosesones 10

Gannon v. Circuit City Stores, Inc., 262 F.3d 677 ;

SSPE Be D xcoceccccsnsccscscveceserccoveocsensenccooscossssesses 19

Gilmer v. Interstate/Johnson Lane Corp., 500

Bs Be COPE Poceccocccccsessoseccocevsnsssoscocosessoscosscoscees passim

Graham Oil Co. v. ARCO Prods. Co., 43 F.3d

Be EY CED cceesnccrsccvescescccssecnsesssscsescesocsece 19

Graver Tank & Mfg. Co. v. Linde Air Prods. Co.,

FED Wile BF 0 CERO Pecvcccecccscxcescscccccssssssevcvescsvecees 15

Green Tree Fin. Corp.—Ala. v. Randolph, 53\

BRS FO Ga Pacveconsescocscsceccsconsescessnssssosssnssssooccsed 4,8, 12

Halcon Int'l, Inc. vy. Monsanto Austl. Lid., 446

FBO ISS QCAT 1978) .ccicccccccccccccccccccccscscsecossceece 11

Howsam v. Dean Witter Reynolds, Inc., __ U.S.

__. 823 S.Ct. SBS (200Z).......cccccccccescccccsveesoeeseees passim

Jarecki v. G.D. Searle & Co., 367 U.S. 303

STII anesesisehctisondenenosesnoceneescsscsonssncsensesvesssnssecesocses 15

iil

TABLE OF AUTHORITIES—Continued

Page

John Wiley & Sons, Inc. v. Livingston, 376 U.S.

Py eee avccninsinniniianbecnnteuitetnenetinenniseniatiucssiiininedinn 5,7

Johnson v. W. Suburban Bank, 225 F.3d 366

Een GUN cnsececctaneditcatuseneumancamieniniatileibanpsindiiniets 17

Kremer v. Chem. Constr. Corp., 456 U.S. 461

Spee eccisrncapistiisniiesnscetnaptilacesiadinneatsandtasinsipliiaden 5

In re Managed Care Litig., 132 F.Supp.2d 989

Ge PU Gee crccsndnasnresitdateanacintacatnnanindiininin 3, 10, 12

Matsushita Elec. Indus. Co. v. Epstein, 516 U.S.

er eee icenesscctenimrasennenstnertenssinntennnititneineneantie 3

Metro East Ctr. for Conditioning & Health v.

Qwest Communications Int'l, Inc., 294 F.3d

Fy SE cenesvetertictresenensinnensnnminantiens 16-18

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) .0.....ccccee passim

Molzof v. United States, 502 U.S. 301 (1992)....... 14

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

ee icratcsmtnienenseceiconnteninennn 3, 11

Shearson/American Express, Inc. v. McMahon,

TE passim

Town of Newton v. Rumery, 480 U.S. 386

EU enecncinnannnenndasesienanameieiatnensmnmiagmeneiemanedition 18

United States Civil Serv. Comm'n v. Nat'l Ass'n

of Letter Carriers, 413 U.S. 548 (1973) ............ 16

Venegas v. Mitchell, 495 U.S. 82 (1990)............... 18

Vimar Seguros y Reaseguros, S.A. v. M/V Sky

BE ee 6,8

Volt Info. Scis., Inc. v. Bd. of Trs. of the Leland

Stanford Junior Univ., 489 U.S. 468 (1989)...... 15

Wright v. Universal Maritime Serv. Corp., 525

eh Pe pe ictinicinnractnnsinnsnendntnncnttantnnnBecteats 17

iv

TABLE OF AUTHORITIES—C ontinued

OTHER AUTHORITIES

E. ALLAN FARNSWORTH, FARNWORTH ON CON-

wt | |.

RESTATEMENT (SECOND) OF CONTRACTS ........0000+

SAMUEL WILLISTON, WILLISTON ON CONTRACTS

(Richard A. Lord 4th ed. 1990).............ccccccceeeees

Tanya Albert, Patients in Liability Hot Spots

Asked to Arbitrate, Not Litigate, AMERICAN

MEDICAL News, February 10, 2003...............-..

ARGUMENT

When parties have entered into a written contractual agree-

ment to arbitrate, a district court can refuse to order arbitra-

tion only when: (1) the dispute is not within the scope of the

parties’ contractual arbitration agreement; (2) the agreement

to arbitrate is subject to revocation under §2; or (3) one of the

parties has asserted a federal statutory claim and Congress

has clearly expressed an intent that the statutory claim not be

arbitrated. Respondents have not argued, and cannot argue,

that any of those circumstances exist in this case.

Instead, respondents and their amici’ argue that a damage

limitation provision in the parties’ agreement will independ-

ently excuse parties from arbitration if they can assert a claim

under a federal statute whose remedies are (or merely may

be) limited by contract. Respondents’ theory prohibiting

contractual remedial limitations in arbitration would

dramatically reshape both the substantive law regarding the

validity of agreements to arbitrate under the FAA and the

process under which such determinations have traditionally

been made by the arbitrator.

Parties in most circumstances may agree prospectively to

limit or waive remedies in litigation or arbitration, and the

Court has never suggested, much less held, that the mere

existence of a contractual agreement to limit remedies will

excuse a party from arbitrating federal statutory claims that

the party has agreed to arbitiate. Respondents do not even

argue that the damage limitation provisions are independently

invalid. Even if they were, an invalid remedial limitation

' While physician groups are frequent amicus curiae advocates in this

Court, none of those groups has chosen to file an amicus brief supporting

respondents, presumably because many of those groups encourage arbitra-

tion themselves. See Tanya Albert, Patients in Liability Hot Spots Asked

to Arbitrate, Not Litigate, AMERICAN MEDICAL NEWS, February 10, 2003

(available at http://www.ama-assn.org/scipubs/amnews/pick 03/pri10210.htm).

2

should not void the parties’ contractual agreement to

arbitrate, and the Court has never held that a damage

limitation provision and agreement to arbitrate mutually

infect and invalidate one another when used together. Nor

has the Court held that only courts—and not arbitrators—are

competent to evaluate the validity or scope of a negotiated

damage limitation provision.

Respondents and their amici focus on hypothetical exam-

ples in which consumers or employees with inadequate

bargaining power are coerced into contracts under which they

are required to arbitrate and waive many of their substantive

rights. To the extent that such individuals would be en-

titled to relief from their arbitration agreements, that relief

would be based on §2 revocation grounds, not because a

remedial limitation excuses arbitration. Those kinds of §2

defenses would not, however, be applicable to the contracts

negotiated by respondents, all sophisticated actors with

advanced degrees.

Respondents contractually agreed to arbitrate their disputes

with United and PacifiCare. Respondents’ agreements to

arbitrate are not revocable under §2, their RICO claims are

within the scope of their agreements to arbitrate, and the

Court has expressly held that RICO claims may be arbitrated.

The district court should have required respondents to

arbitrate all of their RICO claims.

I. THE MEANING AND EFFECT OF REMEDIAL

PROVISIONS IN AN ARBITRATION AGREE-

MENT ARE OUTSIDE THE SCOPE OF A

COURT’S ARBITRABILITY DETERMINATION.

As the Court recently reiterated in Howsam v. Dean Witter

Reynolds, Inc., _ U.S. __, 123 S.Ct. 588, 592 (2002), a court

may decide whether an arbitration agreement is enforceable

under §2 and whether a dispute is within the scope of the

parties’ agreement to arbitrate. See Mitsubishi Motors Corp.

3

v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985);

Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,

226 (1987); Gilmer v. Interstate/Johnson Lane Corp., 500

U.S. 20, 26 (1991). When a federal statutory claim is raised,

a court may decide whether Congress has expressed an intent

in the federal statute creating the claim to exempt the claim

from arbitration. Mitsubishi, 473 U.S., at 628; cf: Matsushita

Elec. Indus. Co. v. Epstein, 516 U.S. 367, 380-86 (1996).

Once those questions are answered in favor of arbitration,

however, the court’s inquiry is at an end and arbitration must

be ordered. See §4; Howsam, 123 S.Ct., at 592; Mitsubishi,

473 U.S., at 627-28; Prima Paint Corp. v. Flood & Conklin

Mfg. Co., 388 U.S. 395, 403-04 (1967). All other issues may

be raised in, and resolved by, the arbitral forum. See

Howsam, 123 §.Ct., at 592.

In this case, the district court found, and it has not been

disputed, that: (1) the arbitration agreements were enforceable

under §2, see In re Managed Care Litig., 132 F.Supp.2d 989,

1000-01, 1005, 1007 (S.D. Fla. 2000); (2) respondents’ RICO

claims fell within the scope of the arbitration agreements, see

id., at 1000 n.3, 1001 n.4, 1005 n.9; and, (3) RICO claims are

subject to arbitration, see id., at 993 (citing McMahon, 482

U.S., at 220). The district court’s inquiry should have ended

at that point, and the court should have ordered respondents

to arbitrate their RICO claims.

Attempting to dramatically expand the district court’s pre-

arbitration inquiry, respondents radically misapply out-of-

context phrases from a handful of the Court’s decisions to

erroneously suggest that the Court has authorized an inten-

sive, searching review of remedial limitations in cases

involving federa! statutory claims. Respondents make the

same arguments to restrict arbitration of federal statutory

claims that the Court has rejected in holding that statutory

4

claims are arbitrable.? Respondents cling to a theory under

which federal statutory claims are presumptively not

arbitrable unless the court first makes certain findings, Resp.

Br. 8-9, but the Court has consistently emphasized that

statutory claims are arbitrable unless Congress has clearly

indicated otherwise. See Mitsubishi, 473 U.S., at 627-28;

McMahon, 482 U.S., at 226-27; Gilmer, 500 U.S., at 26;

Green Tree Fin. Corp.—Ala. v. Randolph, 53\ U.S. 79, 89-90

(2000). Thus, there is no “uneasy union between arbitration

and statutory rights,” Resp. Br. 7, and respondents’ claim

merely manifests their general hostility to arbitration and their

specific refusal to fulfill their contractual duty to arbitrate

their RICO claims.

The “legal constraints external to the parties’ agreement”

envisioned by the Court in Mitsubishi, 473 U.S., at 628, were

solely those potentially imposed by congressional intent to

preclude arbitration of certain statutory claims. That review

was authorized by the Court to be a limited evaluation of

whether Congress had foreclosed the possibility of arbitration

of certain statutory claims, not an open-ended review of any

asserted error relating to the arbitration. The Court in

Mitsubishi acknowledged that Congress can make statutory

claims nonarbitrable, but certainly did not intend to permit a

plaintiff, simply by alleging a violation of a federal statute,

to dramatically alter the prearbitration review performed by

a court.

Respondents are equally misguided in assuming that they

need not arbitrate federal statutory claims if they can allege

procedural or remedial limitations that might restrict their

? Compare Resp. Br. 12 (complaining that “[a}rbitrators are not gen-

erally required to write or publish opinions”) with Gilmer, 500 U.S., at 31-

32 (rejecting that complaint as a rationale for not compelling arbitra-

tion of ADEA claims). The AAA rules, which govern arbitration under

the contracts at issue in this case, require a written ruling and permit any

party to request a written rationale for the award. See App., Rule R-44.

en ne NE EEE

5

ability to “effectively vindicate” their claims in arbitration.

Resp. Br. 8-9. The Court has restricted the prearbitration

“effective vindication” determination to whether there is a

categorical conflict between arbitration under the FAA and

the statute authorizing the plaintiffs claim. In so doing, the

Court has acknowledged that, while Congress expressly

ordered in the FAA that arbitration agreements be enforced,

Congress also has the authority through separate legislation to

exempt statutory claims from the reach of the FAA (although

it has rarely done so).’ See Mitsubishi, 473 U.S., at 627 (“[I}t

is the congressional intention expressed in some other statute

on which the courts must rely to identify any category of

claims as to which agreements to arbitrate will be held

unenforceable.”) (emphasis added). Because that determina-

tion addresses the statutory reach of the FAA, it makes sense

to permit a court to determine whether Congress has

exempted a statutory scheme from the reach of the FAA.

But, again, permitting courts to delay or interfere with

arbitration to address premature and speculative questions

about remedial limitations decides nothing about arbitrability

and merely denies the parties the benefit of their contractual

agreement to arbitrate. See John Wiley & Sons, Inc. v.

Livingston, 376 U.S. 543, 558 (1964).

* In searching for an inherent conflict between the FAA and the statute

that forms the basis for the claims, the focus is on whether there is an

“irreconcilable conflict” like that required in the Court’s implied repeal

jurisprudence. See, e.g., Kremer v. Chem. Constr. Corp., 456 U.S. 461,

468 (1982).

* Respondents in effect seek a wholesale overruling of the restrictions

the Court has placed on prearbitration review, advocating a system in

which a party to an arbitration agreement would be able to obtain prear-

bitration judicial review of a wide-ranging list of complaints about

arbitration, Resp. Br. 17-19, thus ensuring that the courthouse will be a

substantial obstacle in enforcing any contractual agreement to arbitrate.

6

Consistent with that limited approach, the Court has ex-

pressly prohibited judicial consideration of contract-based

arbitral procedures or remedies until the award-enforcement

stage. For instance, in Mitsubishi, the Court rejected the type

of prearbitration “effective vindication” analysis employed by

the district court. See 473 U.S., at 637 n.19 (“We therefore

have no occasion to speculate on [the law to be applied by the

arbitral panel] at [the motion-to-compel arbitration] stage in

the proceedings, when Mitsubishi seeks to enforce the

agreement to arbitrate, not to enforce an award.”); see also

Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515

U.S. 528, 540 (1995); Pet. Br. 19-20.°

Respondents have additionally misconstrued the Court’s

descriptive statements that a party daes not forgo statutory

substantive rights by agreeing to arbitrate a statutory claim as

a categorical prohibition on waivers or remedial limitations in

connection with the arbitration of federal statutory claims.

There is no basis in the Court’s precedent for this proposition.

Those statements from the Court describe the result of a bare

agreement to arbitrate, ie, a change in forum for the

resolution of the parties’ disputes. See Mitsubishi, 473 U.S.,

at 628; EEOC v. Waffle House, Inc., 534 U.S. 279, 296 n.10

(2002).° If the Court had intended those statements as a pro-

* As in Mitsubishi and Vimar Seguros, the damage limitation provi-

sions at issue here do not expressly prohibit the award of treble damages

and certainly make no reference whatsoever to RICO treble damages.

J.A.84, 106-07, 146-147, 168, 212. Rather, as in those cases, the district

court was faced with only the speculative possibility that application of

the damage limitation provisions could result in a conflict with the RICO

statute (if one erroneously assumes that RICO remedies are not waivable).

See Resp. Br. 13-14.

° The Court’s statement in Waffle House that an employee’s agreement

to arbitrate did not waive the EEOC’s own prerogative to sue, 534 U.S., at

296 n.10, merely reflects that a bare agreement to arbitrate does not waive

the employee’s own substantive rights and neither purports to nor could

waive the EEOC’s own right to enforce the statutory scheme. Nothing in

7

hibition on remedial limitations, they would logically apply

equally to all claims, not just federal statutory claims. Noth-

ing in either the FAA or the Court’s decisions gives any indi-

cation that the parties’ agreement to arbitrate remains valid

only as long as the parties retain all of their remedial rights

and the opposing party does not subsequently decide to assert

a federal statutory claim. There is no justification for using

the potential invalidity of a remedial limitation to excuse a

party from its separate contractual obligation to arbitrate.

Once it has been determined that the statute at issue—in

this case, RICO—has not been exempted from arbitration by

Congress, there is no justification for differentiating these

circumstances from the general review of challenges to

remedial limitations, which respondents do not and cannot

dispute should be performed by the arbitrator. See John

Wiley, 376 U.S., at 546-47. If respondents had brought only

negligence claims and had alleged that the damage limitation

provisions improperly limited punitive damages, for example,

nothing in respondents’ arguments would shift that challenge

to the damage limitation provisions from the arbitrator to the

court. See Resp. Br. 21-22 n.17 (conceding that their argu-

ments “d[o] not mean that the arbitration agreement is

unenforceable as to other claims”).

At the core of that implicit concession is the acknowl-

edgment that, in the absence of respondents’ allegations of

statutory RICO claims, the arbitrator would resolve a chal-

lenge to the damage limitation provisions and, consequently,

that it is not the kind of “narrow circumstance” discussed in

Howsam that the parties expect a court to resolve before

arbitration. 123 S.Ct., at 592. Once it is understood that

Congress intended RICO claims to be arbitrable and that

arbitrators would normally resolve challenges to remedial

Waffle House holds or even suggests that a private party cannot agree to

limit the remedies available to her.

sedi

limitations, only unsupportable lingering distrust of the

arbitral process could justify specially authorizing courts to

perform a prearbitration review on remedial limitations that

are potentially applicable to statutory claims.

Respondents have no basis to suggest that parties enter-

ing a contractual agreement to arbitrate would “reasonably

expect” a court to determine the merits of a challenge to a

remedial limitation. See Resp. Br. 11-12. The meaning and

effect of specific arbitral procedures and remedies are issues

that parties expect an arbitrator to decide in the first instance.

See Howsam, 123 S.Ct., at 592. Indeed, in Howsam the Court

held that whether a dispute has been brought to arbitration in

a timely manner—a question that must be answered before

reaching the merits of the dispute—is one that the parties

expect arbitrators to decide. See id. In this case, the issue

involves the remedies an arbitrator can award only after

resolving the merits of the parties’ dispute. The parties

clearly intended an arbitrator to resolve that issue, in part

because only the arbitrator can determine on a complete

record what remedies, if any, would be appropriate.’ Inquir-

ing into the potential availability of a particular remedy, such

as RICO treble damages, before the arbitrator has made any

determination that the claimant might be entitled to that

remedy is purely conjectural and requires the court to engage

in what the Court has already deemed to be inappropriate

“speculation” at the prearbitration stage. See Mitsubishi, 473

U.S., at 637 n.19; see also Green Tree, 531 U.S., at 91; Vimar

Seguros, 515 U.S., at 541.

” The parties also clarified their intent that the arbitrator make these

determinations by adopting, in all four arbitration agreements, the AAA

rules, including Rule R-8(a), which provides: “The arbitrator shall have

the power to rule on his or her own jurisdiction, including any objections

with respect to the existence, scope or validity of the arbitration

agreement.” See App., Rule R-8(a). The parties thus adopted a set of

arbitral rules that expressly provide that the arbitrator will make this

decision.

9

Ultimately, respondents are forced to rely on the unsus-

tainable position that an arbitrator cannot determine a chal-

lenge to a remedial limitation because the arbitrator is bound

to the parties’ contractual agreement no matter what the

applicable law holds. Resp. Br. 15. That miserly interpre-

tation of an arbitrator’s authority does not accurately reflect

the arbitrator’s authority and duty to resolve a dispute in

accordance with controlling law. See Mitsubishi, 473 U.S., at

636-37 (“Where the parties have agreed that the arbitral body

is to decide a defined set of claims which includes, as in these

cases, those arising from the application of American antitrust

law, the tribunal therefore should be bound to decide that

dispute in accord with the national law giving rise to the

claim.”); see Pet. Br. 40-41 (explaining that the arbitrator is

bound to apply controlling law). Ironically, the oft-quoted

sentence from Mitsubishi on which respondents erroneously

rely to suggest that a party cannot limit remedies in arbitra-

tion, Resp. Br. 8 (asserting a “requirement that the agreement

‘result only in a change of forum rather than a forfeiture of the

‘substantive rights afforded by the statute’”), is really a reaf-

firmation that parties generally enjoy the same substantive

rights in arbitration as in litigation and, consequently, that the

arbitrator has the sarne duty as a court to apply the same

substantive law in interpreting the relevant statutes and deter-

mining the validity of any contractual remedial limitations to

which the parties may have agreed.

If a remedial limitation is invalid under the governing law,

an arbitrator has both the duty and authority to enforce the

law correctly, and ensuring that the arbitrator has done so is

one of the protections afforded by postarbitration review

under §§10 and I1 of the FAA. See McMahon, 482 U.S.., at

232 (“{Ajlthough judicial scrutiny of arbitration awards

necessarily is limited, such review is sufficient to ensure that

arbitrators comply with the requirements of the statute.”). If

the arbitrator in this case concludes that respondents are

entitled to RICO damages but that RICO treble damages are

10

not awardable under the terms of the arbitration agreements,

the district court could subsequently address whether that

result violates a cognizable public policy or amounts to a

manifest disregard of the law, which the Court and courts of

appeals have recognized as bases for vacating an arbitration

award. See First Options of Chicago, Inc. v. Kaplan, 514

U.S. 938, 942 (1995); Mitsubishi, 473 U.S., at 637 n.19; Pet.

Br. 24 n.14. Contrary to respondents’ assertion, therefore, the

arbitrator can evaluate their claim that the damage limitation

provisions are not enforceable under controlling law. There

is no reason to doubt the authority or willingness of the

arbitrator to follow that law, and the arbitrator’s deter-

mination, when made, can be adequately scrutinized in

postarbitration review.

Outside the general determination of what claims come

within the scope of a particular agreement to arbitrate and the

evaluation of whether Congress has exempted particular

statutory claims from arbitration, a court may not perform a

claim-by-claim arbitrability analysis. By definition, those

claims are arbitrable claims within the scope of the parties’

agreement to arbitrate, and a court can only justifiably block |

arbitration of those claims if the agreement to arbitrate is

itself revocable under §2. See McMahon, 482 U.S., at 226

(stating that there would be no §2 relief without a well-

founded claim of fraud or excessive economic power that

would provide grounds for the revocation of any contract).

Notably, respondents do not, and cannot, contend that the

district court’s decision that the RICO claims are not arbi-

trable was the result of a §2 analysis. To the contrary, the

district court expressly determined that the arbitration agree-

ments are valid, irrevocable, and enforceable. See Jn re Man-

aged Care Litig., 132 F.Supp.2d, at 1007 (compelling

respondents to arbitrate certain claims against petitioners,

including breach of contract and quantum meruit).

In any event, §2 does not permit the kind of claim-by-claim

review respondents seek. By its text and structure, §2 empha-

sizes the congressionally mandated validity of agreements to

arbitrate but preserves a party’s common-law ability to seek

revocation of the core agreement to arbitrate. See Prima

Paint, 388 U.S., at 403-04 & n.12. The claimed improper

application of the damage limitation provisions to a federal

statutory claim is not an arguable ground for revocation of the

parties’ core agreement to arbitrate. “[T]he only grounds for

revocation that meet the requirements of the Federal Arbi-

tration Act are mutual agreement or a condition that vitiates

the agreement ab initio, including fraud, mistake, and

duress.” SAMUEL WILLISTON, WILLISTON ON CONTRACTS

§57:52, at 347 (Richard A. Lord 4th ed. 1990) (citing Halcon

Int'l, Inc. v. Monsanto Austl. Lid., 446 F.2d 156, 159 (CA7

1971) (discussing §2 and explaining that “‘Revocation’ and

‘cancellation’ are closely synonymous; to revoke means ‘to

annul, repeal, rescind, cancel’”) (citations omitted)). A

court’s evaluation of whether a party’s agreement to arbitrate

may be revoked as a result of fraud, mistake, or duress

focuses on the formation of the contractual agreement to

arbitrate and whether the party should be permitted to revoke

it. See County of Middlesex v. Gevyn Constr. Corp., 450 F.2d

53, 56 (CAI 1971). The §2 analysis does not encompass the

application of the parties’ agreement to arbitrate specific

asserted claims. The claims a party chooses to assert will

ordinarily be irrelevant to the revocation analysis because a

party’s ability to revoke an agreement to arbitrate will not

depend on the subsequent events giving rise to the need for

arbitration. A court may either revoke an agreement to

arbitrate under §2 or not, but a court may not rely on §2 to

pick and choose between asserted claims. There is no claim-

by-claim revocation under §2.

Respondents’ reliance on Green Tree is misplaced because

the Court in Green Tree was addressing a §2 claim attempting

to completely invalidate the agreement to arbitrate. The cost

12

issue before the Court in Green Tree did not relate to the

evaluation of whether Congress had precluded arbitration of

TILA claims, see 531 U.S., at 90 (“Nor does Randolph

contend that the TILA evinces an intention to preclude a

waiver of judicial remedies.”), but rather to whether “respon-

dent’s agreement to arbitrate [was] unenforceable” under §2.

Id., at 89. The fact that the respondent in Green Tree chose to

characterize her argument as one relating to “effective

vindication” of her statutory claim does not change the fact

that the Court relied on §2 as the basis for its willingness and

ability to examine the meaning and effect of terms in the

parties’ arbitration agreement at the prearbitration stage. See

id., at 89-90. Thus, the Court noted that “prohibitive costs”

could result in revocation of an arbitration agreement since

such costs would deny access to the arbitral forum, making

the arbitration illusory. See id., at 90-91. Likewise, the only

non-categorical attack evaluated by the Court in Gilmer was

the petitioner's §2 challenge regarding unequal bargaining

power, which the Court quickly rejected. 500 U.S., at 32-33.

Although §2 has no direct application in this case, it is in

fact the key to the primary concerns raised by respondents

and their amici. For instance, respondents’ complaint about

unequal bargaining power, Resp. Br. 7 & n.5, 17, is clearly an

issue that can be resolved in the §2 context,” as are the

* Although Gilmer examined whether ADEA claims could be effec-

tively vindicated in arbitration in light of “a host of challenges to the ade-

quacy of arbitration procedures.” such as limited discovery, see Gilmer,

500 U.S., at 30-32, those challenges were not derived from specific limita-

tions set forth in the parties’ arbitration agreement. Instead. they were

simply “generalized attacks on arbitration” that the Court had previously

rejected. /d, at 30.

* These kinds of issues do not apply to respondents, all of whom have

advanced medical degrees, and whom the district court expressly found to

be saphisticated actors in the negotiation of the agreements at issue in this

case. In re Managed Care Litig., 132 F_Supp.2d, at 998.

13

concerns expressed by respondents and their amici regarding

potential unfairness to consumers and employees.

The district court erred in undertaking to determine the

meaning and scope of the damage limitation provisions at the

prearbitration stage. Once it determined that respondents’

RICO claims were within the scope of their agreement to

arbitrate and that the arbitration agreement itself was

enforceable under §2, the district court should have

compelled arbitration of respondents’ RICO claims.

il. RESPONDENTS SHOULD BE REQUIRED TO

ARBITRATE THEIR RICO CLAIMS BECAUSE

THEY HAVE FAILED TO DEMONSTRATE

THAT THE DAMAGE LIMITATION PROVI-

SIONS LIMIT THEIR RICO RIGHTS.

Even if a court were the appropriate tribunal to decide the

validity of the damage limitation provisions, respondents

should still be required to arbitrate their RICO claims because

they have failed to demonstrate that the damage limitation

provisions limit their RICO rights at all.'°

A. A Limitation on Punitive Damages in an Arbi-

tration Agreement Does Not Preclude an

Award of RICO Treble Damages.

The lower courts incorrectly construed the language in the

arbitration agreements limiting the arbitrator's ability to

award “punitive damages” as a limitation on RICO treble

Respondents argue that Dr. Porth’s and Dr. Kelly's arbitration agree-

ments may be unenforceable due to “the one-year limitation period in Dr.

Porth’s and Dr. Kelly's agreement with United.” Resp. Br. 17. United

has demonstrated that the diligent-prosecution requirement is not an

impermissible “one-year statute of limitations.” Pet. Br. 270.17. In any

event, the Court's recent opinion in Howsam clarifies that such issues

should be decided by the arbitrator and not the court. See 123 S.Ct,

at 592.

14

damages. Respondents’ argument that RICO treble damages

have a punitive component does not remotely suggest that

RICO treble damages are within the meaning of the term

“punitive damages” as that term-of-art is generally

understood. See Molzof v. United States, 502 U.S. 301, 306

(1992); Pet. Br. 29-32.

The Court has never directly characterized RICO treble

damages as “punitive damages.” Indeed, the Court has

repeatedly emphasized the remedial purpose served by RICO

treble damages, McMahon, 482 U.S., at 240-41, and Clayton

Act treble damages on which RICO damages were modeled,

Mitsubishi, 473 U.S., at 635-36, although it is also true that

the Court has referred to antitrust treble damages as being

punitive in nature. Resp. Br. 24. Even if there were some

ambiguity about the nature of RICO treble damages, the

district court was required to construe the arbitration

agreements generously in favor of arbitration so as to

preserve the parties’ contractual agreement to arbitrate. Pet.

Br. 32. Accordingly, unless the Court finds that the limitation

on “punitive damages” unambiguously precludes RICO treble

damages, the damage limitation provisions should be

interpreted to permit the possibility of RICO treble damages,

and respondents should be required to arbitrate their RICO

claims.

B. Dr. Porth Can Recover RICO Treble Damages

Under His Arbitration Agreement That Limits

“Extracontractual Damages.”

Dr. Porth’s contract bilaterally restricts the recovery of

“extracontractual damages, including punitive or exemplary

damages.” Pet. Br. 32. RICO treble damages are not

“extracontractual damages” because that term usually refers

to non-economic damages, such as punitive damages or men-

tal anguish damages, which are sometimes sought, but

typically denied in pure breach of contract cases. Pet. Br. 33.

RICO treble damages, on the other hand, are a statutorily cre-

15

ated category of damages that are never available in pure

breach of contract cases.'' Because the contract specifically

lists punitive and exemplary damages as examples of extra-

contractual damages, the term should not be interpreted under

noscitur a sociis to include significantly different categories

of damages, like RICO treble damages. See Jarecki v. G.D.

Searle & Co., 367 U.S. 303, 307 (1961). At worst, the

provision is ambiguous and should be interpreted in favor of

arbitration. See Waffle House, 534 U.S., at 294 (citing Volt

Info. Scis., Inc. v. Bd. of Trs. of the Leland Stanford Junior

Univ., 489 U.S. 468, 478 (1989)).

iil. THE COURT HAS NOT BARRED PRO-

SPECTIVE WAIVERS OF STATUTORY REME-

DIES, AND CONGRESS DID NOT PROHIBIT

SUCH WAIVERS IN RICO.

If the Court decides that the district court rather than the

arbitrator should analyze the effect of the damage limitation

provisions in the parties’ contracts and that the words of the

damage limitation provisions can be construed only to

preclude recovery of RICO treble damages, the Court should

nevertheless compel arbitration in this case. The Court’s

precedents and the congressional intent underlying RICO

make clear that the parties’ agreement to waive a subset of

their available remedies under RICO is valid and enforceable.

The lower courts did not find, and respondents have not

argued, that the damage limitation provisions are invalid

independent of the arbitration agreements. Nevertheless,

'' “Contract interpretation is generally a question of law.” Carneiro

Da Cunha v. Standard Fire Ins. Co./Aetna Flood Ins. Program, 129 F.3d

581, 584 (CAI! 1997). Accordingly, the “two-court” rule, see Pub. Cit.

Br. 4 n.2, has absolutely no application here because that rule merely

precludes the Court from disturbing “concurrent findings of fact”—not

questions of law. Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 336

U.S. 271, 275 (1949).

16

amicus Public Citizen incorrectly suggests that private parties

may never prospectively exempt themselves from a federal

Statutory scheme that provides mechanisms to enforce a

standard of conduct. See Pub. Cit. Br. 6. The authority cited

_ by Public Citizen deals almost exclusively with attempts by

parties to completely shield themselves from the substantive

protections of certain federal statutes intended to protect

consumers and employees, such as Title VII, the FLSA, and

the Truth in Lending Act. Pub. Cit. Br. 5-8. The damage

limitation provisions in this case, however, do not attempt to

exempt United or PacifiCare from the standards of conduct

proscribed by Congress in the RICO statute. See McMahon,

482 U.S., at 228 (distinguishing waivers of “compliance”

from other waivers). To the contrary, the arbitrator will be

fully able to determine whether United and PacifiCare

violated the standards of conduct mandated by RICO and, if

respondents prevail, to award appropriate remedies for any

violations found by the arbitrator.

Parties may mutually agree to partially waive remedies

provided by federal statutes.'’ Pet. Br. 34. As the Seventh

Circuit recently recognized, the Court “has never held that

any entitlement is outside the domain of contract, unless the

Statute forbids waiver.” Metro East Ctr. for Conditioning &

Health v. Qwest Communications Int'l, Inc., 294 F.3d 924,

928 (CA7 2002). The Court has repeatedly upheld waivers of

constitutional or statutory rights. See Pet. Br. 35-40; see also

Buckley v. Valeo, 424 U.S. 1, 57 0.65 (1976) (holding that

political candidates may waive some speech rights in

exchange for a federal subsidy); United States Civil Serv.

Comm'n v. Nat'l Ass'n of Letter Carriers, 413 U.S. 548, 556

(1973) (providing that public employees may waive their

? It is difficult to imagine. if petitioners were suing respondents for

fraudulently submitted claims, that respondents would be decrying the

unfairness of the damage limitation provisions or urging that they invalli-

dated the parties’ agreements to arbitrate. See note |. supra.

17

right of political speech in exchange for employment); D.H.

Overmyer Co. v. Frick Co., 405 U.S. 174, 186-88 (1972)

(holding a pre-dispute waiver of the constitutional right to

notice and a hearing contained in a cognovit note valid where

the parties enjoyed equal bargaining positions and the con-

tract was not one of adhesion). In addition, lower courts have

upheld prospective waivers of statutory rights when Congress

has not evidenced an intent to prohibit such waivers. See Pet.

Br. 34, 38; see also Metro East, 294 F.3d, at 928-29

(upholding an arbitration clause providing for the allocation

of attorney’s fees under the American Rule, rather than the

Communications Act's fee shifting provision); Johnson v. W.

Suburban Bank, 225 F.3d 366, 369 (CA3 2000) (validating an

arbitration clause that waived the class action remedy

available under the Truth In Lending Act).

The cases cited by Public Citizen do not support a broad

prohibition of prospective waivers of a subset of available

statutory remedies. Instead, those cases merely acknowledge

that individuals cannot waive statutory rights and remedies

when Congress has so mandated to protect vulnerable classes,

such as employees or consumers.'’ But neither respondents

nor their amici ever presented any evidence that Congress in

enacting RICO intended to prohibit either prospective or

" Public Citizen also relies heavily on the Court’s pronouncement in

Alexander v. Gardner-Denver Co., 415 US. 36 (1974), that “an

employee's rights under Title VII are not susceptible of prospective

waiver.” /d., at 51-52; see Pub. Cit. Br. 5-6. That statement is dictum,

and the Court recognized in Gilmer that an employee may execute an

arbitration agreement relinquishing the right to litigate employment dis-

crimination claims. Gilmer, 500 U.S., at 33-35. Indeed, the Court has

questioned whether the statement survived Gilmer. See Wright v. Uni-

versal Maritime Serv. Corp., 525 U.S. 70, 80 (1998). In any event, the

private attorney general model on which Alexander relied, see 415 U.S., at

45, “is simply less plausible” for the typical RICO plaintiff than it is for

the typical antitrust plaintiff. McMahon, 482 U.S., at 242.

18

retrospective waivers in order to protect a vulnerable class of

citizens with unequal bargaining power. Pet. Br. 37-38.

Public Citizen also mischaracterizes the Court’s holdings

in Evans v. Jeff D., 475 U.S. 717, 730-32 (1986) (providing

that plaintiffs may waive attorneys’ fees under 42 U.S.C.

§1988), and Town of Newton v. Rumery, 480 U.S. 386, 394

(1987) (allowing waiver of right to file suit under 42 U.S.C.

§1983), claiming they allow waivers of substantive s.atutory

rights only if such waivers are either contained in a settlement

or are the subject of an existing dispute. Pub. Cit. Br. 4-5.

Neither case made any distinction based on when the waiver

was effectuated.'* On the contrary, the Court has already

refuted that reading by explaining that under Evans, “as far as

§1988 is concerned, it is the party’s right to waive, settle, or

negotiate (his or her] eligibility” for a statutory award of

attorneys’ fees. Venegas v. Mitchell, 495 U.S. 82, 88 (1990)

(emphasis added). ~

Furthermore, there are no similar public policy concerns

when each party is a sophisticated, commercial actor, bar-

gaining for what he or she considers more important.

Because Congress did not intend to protect respondents from

their own voluntary decisions, the damage limitation provi-

sions contained in the arbitration agreements are therefore

valid and enforceable.

4 See, e.g. Metro East, 294 F.3d, at 929 (discussing Evans and

Rumery, and stating that “(a] pre- versus post-dispute line has been drawn

by a few statutes, such as the Fair Labor Standards Act, but §206 of the

Communications Act is not among them”). A case cited by Public

Citizen, see Pub. Cit. Br. 7, recognized this principle. See Cange v.

Stotler & Co., 826 F.2d 581, 596 (CA7 1987) (“[Neither Evans nor

Rumery] embody a distinction between anticipatory waivers and

subsequent ones . . . [but] start from the premise that people may strike

bargains as they please .. . . There is a difference between statutes that

forbid waivers and those that do not.”) (Easterbrook, J., concurring).

19

IV. ALTERNATIVELY, THE DAMAGE LIMITA-

TION PROVISIONS SHOULD BE SEVERED TO

PRESERVE ARBITRATION OF THE RICO

CLAIMS.

Even if the Court holds that the damage limitation provi-

sions are not valid, respondents should still be required to

arbitrate their RICO claims. There is no independent basis

for revoking the parties’ agreement to arbitrate, and there is

no reason why a court’s invalidation of a damage limitation

provision should additionally release a party from its

contractual obligation to arbitrate. Respondents argue against

severance, yet their entire theory depends on severing the

damage limitation provision and the agreement to arbitrate,

rather than merely the damage limitation provision.

In contrast to respondents’ reliance on Graham Oil Co. v.

ARCO Prods. Co., 43 F.3d 1244 (CA9 1995), there has been

no evidence presented or even alleged that the arbitration

agreements in this case constitute an improper scheme to

deprive respondents of any statutory rights. In any event, it is

a well-known principle of contract law that an illegal contract

provision may be severed from the remainder of the contract

if it is possible to do so without rendering the remainder of

the contract meaningless.'* See Gannon v. Circuit City

Stores, Inc., 262 F.3d 677, 680-81 (CA8 2001); Pet. Br. 41.

“An illegal portion of an agreement that relates to the remedy

is more readily separable.” WILLISTON, supra, §19.69, at 543

(citing RESTATEMENT (SECOND) OF CONTRACTS §183 and

comment a; §184) (“If less than all of an agreement is

unenforceable under . . . §178, a court may nevertheless

enforce the rest of the agreement . . . if the performance as to

which the agreement is unenforceable is not an essential part

of the agreed exchange.”); see also E. ALLAN FARNSWORTH,

FARNSWORTH ON CONTRACTS §5.8 (2d ed. 1998).

'S PacifiCare’s agreements contain specific severabililty clauses.

20

Severance of the damage limitation provisions would not

encourage parties to include illegal limitations in arbitration

agreements. To the contrary, severance will greatly favor

respondents, Gannon, 262 F.3d, at 682-83, and, as a result of

the delays caused by these seemingly interminable prearbi-

tration proceedings, the parties have now “lost many of the

advantages of arbitration.” /d., at 682 n.7. Respondents’

suggestion that severance of the damage limitation provisions

would encourage drafters to include illegal limitations in

arbitration agreements is undermined by the forfeiture of the

very purpose for which the parties agreed to arbitrate all

disputes arising out of their business relationship.

CONCLUSION

For these r xons and those stated in petitioners’ opening

brief, the judgm. _— of the court of appeals should be reversed.

Respectfully submitted,

WILLIAM E. GRAUER* JAMES W. QUINN

CHRISTOPHER R. J. PACE JEFFREY S. KLEIN

COOLEY GODWARD LLP EDWARD SOTO

4401 Eastgate Mall GREGORY S. COLEMAN **

San Diego, CA 92121 WEIL, GOTSHAL & MANGES LLP

(858) 550-6000 767 Fifth Avenue

eC +1 of Record prot vey wd 10153

for PacifiCare Health (212) 310-8000

Systems, Inc., and PacifiCare ** Counsel of Record for

Operations, Inc. UnitedHealth Group Incorporated

and UnitedHealthcare, Inc.

Counsel for Petitioners

February 12, 2003

APPENDIX

la

APPENDIX

Commercial Arbitration Rules of the AAA (excerpted):

R-8. Jurisdiction

a. The arbitrator shall have the power to rule on his or

her own jurisdiction, including any objections with

respect to the existence, scope or validity of the

arbitration agreement.

. The arbitrator shall have the power to determine the

existence or validity of a contract of which an

arbitration clause forms a part. Such an arbitration

clause shall be treated as an agreement independent of

the other terms of the contract. A decision by the

arbitrator that the contract is null and void shall not for

that reason alone render invalid the arbitration clause.

. A party must object to the jurisdiction of the arbitrator

or to the arbitrability of a claim or counterclaim no

later than the filing of the answering statement to the

claim or counterclaim that gives rise to the objection.

The arbitrator may rule on such objections as a

preliminary matter or as part of the final award.

R-44. Form of Award

a. Any award shall be in writing and signed by a majority

of the arbitrators. It shall be executed in the manner

required by law.

. The arbitrator need not render a reasoned award unless

the parties request such an award in writing prior to

appointment of the arbitrator or unless the arbitrator

determines that a reasoned award is appropriate.