Prologue — Vertrue Inc. v. Medvalusa Health Programs, Inc.

1) Supreme Court, U.S.

- | FILED

No. 05-__05- 117 JUL 2 0 2005

OPFICE OF THE CLERK

Bn The

Supreme Court of the Anited States

2

vv

|

VERTRUE INCORPORATED

(f/k/a MemberWorks Incorporated),

Petitioner,

V.

MEDVALUSA HEALTH PROGRAMS, INC.,

Respondent.

,

v

On Petition for a Writ of Certiorari

to the Supreme Court of Connecticut

>

v

PETITION FOR A WRIT OF CERTIORARI

e

Vv

ai AARON S. BAYER

Counsel of Record

JEFFREY R. BABBIN

KENNETH D. HEATH

WIGGIN AND DANA LLP

One Century Tower

P.O. Box 1832

New Haven, CT 06508

(203) 498-4400

Counsel for Petitioner

te ret ae amen ena aman em

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL CCLLECT (402) 342-2831

QUESTION PRESENTED

In upholding a court judgment confirming an arbitral

award of $5,000,000 in punitive damages, where the

arbitrators found no compensable harm and awarded no

compensatory damages, did the Supreme Court of Con-

necticut err by holding, in conflict with a decision of the

Supreme Court of Alabama, that judicially confirmed

arbitral punitive damages awards are exempt from the

due process limits announced by this Court in BMW of

North America, Inc. v. Gore and State Farm Mutual

Automobile Insurance Co. v. Campbell?

LIST OF PARTIES

AND RULE 29(6) STATEMENT

The names of all parties to the proceedings in the

Connecticut Supreme Court are in the case caption.

Petitioner Vertrue Incorporated (formerly known as

MemberWorks Incorporated) is a publicly-held Delaware

corporation (NASDAQ: VTRU) with no parent company.

More than ten percent of its stock is owned by Neuberger

Berman LLC, which is a wholly-owned subsidiary of

Lehman Brothers Holdings Inc., a publicly-held company.

- TABLE OF CONTENTS

Page

QUESTION PRESENTED 0.0.......ceecsssssessscsseeseeeseeee “<4

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CONSTITUTIONAL AND STATUTORY PROVISIONS

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SE SEE 465 nikis eis rica balinkensb dageaiehiniveWisnsiuasiscnneveces) 2

A. The Parties and Their Contract...................4 3

B. Arbitration Proceedings ..................cccceseeseeeees 4

Be POOR FD iii oes ici vnccineascdcnenssnsaccnes 5

REASONS FOR GRANTING THE WRIT.................- 8

I. The Connecticut Decision Highlights the

Conflict and Confusion in the Courts Regard-

ing Due Process Limits on Judicial Confirma-

tion of Arbitral Punitive Damages Award......... 10

II. The Connecticut Decision Will Undermine

This Court’s Longstanding Support for Arbi-

| BRRRRILER iS AEUR EE TLE De RIMS NER RR DOE RR RARE AN 15

III. The Connecticut Decision Undermines This

Court’s Precedents on Punitive Damages by

Erroneously Holding That Entry of Judg-

iv

TABLE OF AUTHORITIES

Page

CASES :

AFSCME v. Department of Central Management

Services, 671 N.E.2d 668 (Ill. 1996) .......... eee ences 21

BMW of North America, Inc. v. Gore, 517 U.S. 559

BE eeticipaitedincracichciacttccblaucastaseenieceshadnuibanensoucmemhaibiensian passim

Birmingham News Co. v. Horn, 901 So. 2d 27 (Ala.

IE ks picsncinen ich satagd pian cosets aeons 8,11, 12

Booker v. Robert Half Int'l, Inc., No. 04-7089, ___

F.3d __, 2005 WL 1540796 (D.C. Cir. Jul. 1,

SED isessivasssicstichliesssi-cacoennsishusascceienacalonieiegeapnuaicaiieaaianasencatinia 16

CVN Group, Inc. v. Delgado, 95 S.W.3d 234 (Tex.

POD pisuicssisikin . ShecGvasiciokcsieietasiatodsecbtennhcaiipea tse tesdsatbioiacuhetaongies 21

Cohen v. Cowles Media Co., 501 U.S. 663 (1991).......5...... 20

Commonwealth Associates v. Letsos, 40 F. Supp. 2d

Se a, Oe simak iecceisesesatnieiepitintendaiaiemeiacet 8,14

Davis v. Prudential Securities, Inc., 59 F.3d 1186

Ce Et I i cccssicinesainasnnetesinsnnisitedk cnamniarentalelaiadidoesnees passim

EMC Mortgage Corp. v. Stark, 125 S.Ct. 1973

IIE isststen bctsniecrinticosssanoastosh inciclipeipnseapaanainiiomdueisa aaa 13

Edmonson v. Leesville Concrete Co., 500 U.S. 614

NE TUF cx cadsocecaecsnsecainanccitestinssa wakerbcesbuioiag Aeosienanlianabebenaianlt 7, 20

Elmore v. Chicago & Illinois Midland Railway Co.,

Fe Eee Oe CHE RE BI esp ccnncsshaentcenctheenniiionantns 18

FDIC v. Air Florida System, Inc., 822 F.2d 833 (9th

A, PINNED i iickdeesihicnccieviciintanasesctaethaaindiabbhuciemdisabeaiaazentinglce 18

Fabri v. United Technologies International, Inc.,

Ee Se OC CA Fi i sscscinveesbipnecssnrsciticsieerminaininn 17

TABLE OF AUTHORITIES — Continued

Page

Freeman v. Alamo Management Co., 607 A.2d 370

Ns I ehawincicickscloOoagaicsa cv gisestlrcotgnecich vakbcckbacocncs tatkeaehuvcuitltces 22

Fuentes v. Shevin, 407 U.S. 67 (1972)............ccsssssseseseesees 21

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

EF ite ics saedva baiaeabacianasapedio ya isascancaecuavconsawedieaseieas 15, 17

Hoeft v. MVL Group, Inc., 343 F.3d 57 (2d Cir. 2008)....... 22

Honda Motor Co. v. Oberg, 512 U.S. 415 (1994)... 10, 18, 23

Knepp v. Credit Acceptance Corp., 229 B.R. 821

Cri PUA: Bie: TOO) os. sscccssccevecesajvosaceccatesnatescecs 8, 13

Lenz v. CNA Assurance Co., 630 A.2d 1082 (Conn. __

NE Ss REN nee pasacdennpecicasavicsanicecanambsaneasiustanenies becdican 22

Lugar v. Edmondson.Oil Co., 457 U.S. 922 (1982)........... 21

Mantle v. Upper Deck Co., 956 F. Supp. 719 (N.D.

I MN aio Len vicssdnsuicedadcxd pldeaitulacih cetrasiocsd thes caeanniacassouccie 11

Mastrobuono v. Shearson Lehman Hutton, Inc., 514

eS SOIIEE ccs ovnpacictsucitsncdsernanicaacsasee lbh scksastecttciuos 8, 22

McDonald v. City of West Branch, 466 U.S. 284

REE iccrek i soctdeunsnhdicrdadacdbindeetibchigesaaislelgdedussseutee ib eatcidencas 20

Mitchell v. W.T: Grant Co., 416 U.S. 600 (1974) ......00000.... 21

Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 460 U.S. 1 (1983)...........cc ce ecceeeeees 15

New York Times Co. v. Sullivan, 376 U.S. 254

MID i Seihisswiicd Gigtcobucitcsanabasemciaenteaceeaaaa aha sas Damuileossainte 20

Porush v. Lemire, 6 F. Supp. 2d 178 (E.D.N.Y. 1998)....... 11

Rifkind & Sterling, Inc. v. Rifkind, 33 Cal. Rptr. 2d

He re es P, TOG) onic coc rsiseesevcckssossnensics 11, 15, 17

TABLE OF AUTHORITIES — Continued -

Page

Sanders v. Gardner, 7 F. Supp. 2d 151 (E.D.N.Y.

RE iiss cadences OR aoe cao s awe oan 11

Sawtelle v. Waddell & Reed, Inc., 754 N.Y.S.2d 264

CPUs 2 IN Le Pca csivnandisnccansesasansdcscoppadiateacnass tanh 14, 21

Schoonmaker v. Cummings & Lockwood of Con-

3 necticut, P.C., 747 A.2d 1017 (Conn. 2000)................ 6, 21

Shearson/American Express, Inc. v. McMahon, 482

LSE oe Dy. 2 PRM agen marmite Mi tryin ora Sas IPO Mee ERE Ee 18

Shelley v. Kraemer, 334 U.S. 1 (1948)... ccscesseeteeeteeeees 8

Sniadach v. Family Finance Corp. of Bay View, 395

RF a icine bdsi anaes cheieineansoaias 21

Southland Corp. v. Keating, 465 U.S. 1 (1984)............. 8, 16

Stark v. Sandberg, Phoenix & Von Gontard, PC.,

S81 F.3d TO3 Cth Cir: DOOD). cisiiicccl occccesGaccacss 12, 13, 16

State Farm Mutual Automobile Insurance Co. v.

Campbell, 538 U.S. 408 (2008)...............sscsccseeceesees passim

State v. New England Health Care Employees

Union, District 1199, 855 A.2d 964 (Conn. 2004)...... 6, 21

TXO Production Corp. v. Alliance Resources Corp.,

OE ris eo is cei aia ceed aa avinssonces 19

Volt Information Sciences, Inc. v. Board of Trustees

of Leland Stanford Junior University, 489 U.S.

MIE TO cna scieca inchs daccecicuncecnneeis chadactiaiteanenes 15, 17, 18

Yonir Technologies, Inc. v. Duration Systems (1992)

‘Ltd., 244 F. Supp. 2d 195 (S.D.N-Y. 2002)..........sceseee 11

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CONSTITUTIONAL PROVISIONS

Due Process Clause, U.S. CONST. amend. XIV,

Be SERIE ee ace eee aa ey REM TO NCOP IN eS ESS Tor 1, 2, 8, 19, 20

TABLE OF AUTHORITIES — Continued

Page

STATUTES AND RULES

, BIR TO Dy SOG, NON ROON ETON e SERA Gay ESTs 1

Cad: Cov. FROG. COREE © TRIG. iis scosoncssenessucensctdeevicescquievecs 21

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Coenrns. CHmee, STD. FO BAe ns coc cess innecicsivnssinestenkicecpantiiven 2, 5

CONN. Gane, SRAP. § SB TIO ois cicvecsiscsieciccscenecscivestate 2, 5, 20

CONN. GEN. STAT. ARF siicinsenzes iis incisecacaniabpasecnmiaein 2, 5, 20

Come. Gen. Brat, SOAS... inci cccccondinailn 2, 6, 21

Cons. Git, Gan. S$ Bai icicksss iis ienc 2, 6, 20

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WY: OC. RR: TORO icc ccineewinsainc ees 21

MISCELLANEOUS

Petition for Certiorari, EMC Mortgage Corp. uv.

Stark (No. 04-1056, Feb. 2, 2005), cert. denied,

SG B.C. BFE Ce inet censcedntdnnccacesedenieaariiamaiens 13

Richard C. Reuben, Public Justice: Toward a State

Action Theory of Alternative Dispute Resolution,

By CORE, Tas BORG. BEF TIED evercipiastenciisiacnssthavensnacenssnaitons 13

Jean R. Sternlight, Rethinking the Constitutionality

of the Supreme Court’s Preference for Binding

Arbitration: A Fresh Assessment of Jury Trial,

Separation of Powers, and Due Process Concerns,

vi we: Py ARE 6 > 5 SON uUe it wok Memon rn string ora” 13

Malcolm E. Wheeler, The Constitutional Case for

Reforming Punitive Damages Procedures, 69

WA, Te, BURY. OD AED sis ccs csv ccnsvussas nacdensensiesicavaesaeabonns 22

1

PETITION FOR A WRIT OF CERTIORARI

Petitioner Vertrue Incorporated (formerly known as

MemberWorks Incorporated) (“MemberWorks”)' respectfully

requests that a writ of certiorari issue to review the judg-

ment of the Supreme Court of Connecticut in this case.

OPINIONS BELOW

The Connecticut Supreme Court’s opinion is reported

at 273 Conn. 634, 872 A.2d 423 (2005), and reprinted in

the Appendix (“App.”) at la-55a. The Connecticut Supreme

Court’s order transferring the appeal to itself before

decision by the Connecticut Appellate Court is reprinted at

56a. The order of the Connecticut Superior Court confirm-

ing the arbitral award, App. at 57a-78a, is unofficially

reported at 35 Conn. L. Rptr. 153 (Conn. Super. Ct. May

22, 2003). The December 12, 2002 arbitral award, App. at

79a-83a, is unreported.

=<

JURISDICTION

The Connecticut Supreme Court’s final judgment

entered on May 17, 2005.’ This Court has jurisdiction to

_ review the judgment under 28 U.S.C. § 1257.

CONSTITUTIONAL AND

STATUTORY PROVISIONS INVOLVED

This case involves the interpretation of the Due

Process Clause of the Fourteenth Amendment to the

United States Constitution, which provides, in relevant

* This petition refers to “MemberWorks,” the name of the predecessor

corporation involved in the events in question and in the Connecticut _

Supreme Court’s opinion. Because of a recent name change and corporate

reorganization, petitioner Vertrue Incorporated is the successor in interest

to MemberWorks for all purposes relevant to this matter.

* Pursuant to section 77-1 of the Connecticut Rules of Appellate

Procedure, judgment automatically entered on May 17, 2005, the date the

decision was officially released and printed in the Connecticut Law Journal.

2

part, that “[nJo state shall ... deprive any person of life,

liberty, or property, without due process of law... .” U.S.

Const. amend. XIV, § 1.

The case also involves provisions of the Connecticut

Unfair Trade Practices Act, CONN. GEN. STAT. §§ 42-110b,

-110g, & -110c, which are reprinted at 84a-88a. The case

also involves Connecticut's arbitration act, CONN. GEN.

_ Stav. §§ 52-417, -418, & -421, which provides, among other

things, that —

[t]he judgment or decree confirming, modifying

or correcting an [arbitral] award... shall have

the same force and effect in all respects as, and

be subject to all the provisions of law relating to,

a judgment or decree in a civil action; and it may

be enforced as if it had been rendered in a civil

action in the court in which it was entered.

Id. § 52-421(b). These statutes are reprinted at 88a-9la.

STATEMENT

This case stands at the crossroads of two significant

lines of this Court’s jurisprudence: its repeated affirmation

that the Due Process Clause bars grossly excessive punitive

damages awards, and its strong support for arbitration. The

Connecticut Supreme Court’s decision threatens both lines

of precedent and the critical public policies they reinforce.

Here, a Connecticut trial court entered judgment

confirming an arbitral award of $5,000,000 in punitive

damages under the Connecticut Unfair Trade Practices Act

(“CUTPA”), where the arbitrators awarded zero compensa-

tory damages because the claimant did not prove any

compensable harm. The court acted under its statutory

authority to review arbitral awards and render them

enforceable as state court judgments, thus putting the

imprimatur of the State on a result that could not have

withstood constitutional scrutiny if it arose from a trial.

The Connecticut Supreme Court affirmed, holding that

due process limits on punitive damages do not apply at all

to judicial confirmation of an arbitral award, “regardless of

how excessive the award may be.” App. at 7a (emphasis

3 F

added). Although punitive damages under CUTPA serve a

public purpose, and the State’s judiciary plays an integral

role in enforcing arbitral awards (including a review for

violations of state public policy), the court found no state

action in the judicial review and confirmation of an arbitral

award or in the entry of judgment enabling the coercive

power of the State.

This decision, and a similar ruling by the Eleventh

Circuit, will leave courts powerless to address even the

most outrageous arbitral awards of punitive damages,

giving parties little incentive to pursue arbitration rather

than litigation in the courts. Moreover, the decision

- squarely conflicts with a recent Alabama Supreme Court

decision holding that judicial confirmation of an arbitral

punitive damages award warrants review under this

Court’s due process precedents. Litigants contemplating

arbitration thus face the reality that their due process

protections against grossly excessive punitive damages

awards hinge on the jurisdiction in which an award will

receive judicial review. This conflict and the lower-court

confusion it reveals demonstrate the need for this Court’s

guidance regarding the constitutional limits on punitive

damages awarded in arbitration and confirmed by courts.

A. The Parties and Their Contract

This case involves a commercial dispute between two

businesses: petitioner MemberWorks and respondent Med-

ValUSA Health Programs, Inc. (“MedVal”). MemberWorks

offers membership programs providing discounts on many

products and services, including health-care. MemberWorks

also sells these programs wholesale to resellers who market

under their own labels. MedVal was a startup company

formed to sell discount health care programs through

community-based independent sales representatives.

In 1998, MemberWorks and MedVal entered into a

contract under which MedVal would purchase Member-

Works’ health care program and resell it under a MedVal

name. App. at 92a-104a. Under the contract, MedVal

agreed to a sales quota of 10,000 memberships to be sold

4

within eighteen menths of an agreed-upon start date. In

return, MemberWorks would ensure that members re-

ceived discounts from one of its physician networks.

MemberWorks also agreed to provide marketing materials -

and customer support. The parties agreed to arbitrate

disputes arising under the contract:

[A]ny dispute arising [out] of or relating to this

Agreement ... will be finally settled by arbitra-

tion in accordance with the rules of the American

Arbitration Association and the United States

Arbitration Act[,] and judgment upon the award

rendered by the arbitrator(s) may be entered by

any court with jurisdiction.

App. at 103a.

During the first year of the contract, the parties’ relation-

ship deteriorated, and MedVal sold no memberships. In hopes

of salvaging the enterprise, the parties amended their contract

in 1999. App. at 105a-121a. Under the amended contract,

MemberWorks agreed to increase the number and density of

physicians in the program, reduce MedVal’s initial sales quota, -

and accept a new start date. The amendment did not alter the

terms of the original arbitration clause. Despite this amend-

ment, the parties’ relationship did not improve, and by the

amended start date MedVal had sold only a single member-

ship. In May 2000, MedVal notified MemberWorks that it was

ceasing business operations. App. at 3a.

B. Arbitration Proceedings

On September 13, 2000, MedVal filed an arbitration

demand with the American Arbitration Association,

alleging that MemberWorks was responsible for its busi-

ness failure. Among other things, MedVal alleged that

MemberWorks had breached the contract by failing to

notify MedVal regarding its communications with the

physician network, its contracts with other physician

networks, and changes to MedVal’s program. MedVal also

claimed that MemberWorks had breached the duty of good

faith and fair dealing.