In a Missouri Court of Appeals decision this week an arbitration provision was held to be unconscionable and unenforceable.  Manfredi v. Blue Cross and Blue Shield of Kansas City, No. WD71150 (Mo. App. W.D. 2011).  In this case Manfredi, a licensed chiropractor, entered into an Allied Provider Network Agreement (the “Agreement”) with Blue Cross and Blue Shield of Kansas City and its affiliates (“BCBS”).  The Agreement was on a form contract drafted by BCBS and presented to Manfredi on a take-it-or-leave-it basis.  The Agreement had a mandatory arbitration provision.

In 2004 BCBC notified Manfrerdi and other healthcare providers that if would no longer be providing coverage for electrical stimulation modalities because BCBS had decided to reclassify the treatments as “investigational” for pain treatment.

In 2005 Manfredi filed a Petition for Declaratory Judgment and Injunctive Relief against BCBS asserting that BCBS did not have the authority to eliminate coverage or services under the Agreement.  The petition also asked the court to declare the Agreement’s binding arbitration clause unconscionable and unenforceable. The trial court denied BCBS’s motion to compel arbitration, concluding that the arbitration clause was unconscionable.

Although there were questions as to the scope of the arbitration provision in the Agreement, because they were not raised, the parties effectively conceded that the issues were within the scope of the Agreement.  The real issue in the case as was whether the Agreement was unconscionable in general and thus would not be enforced.  BCBS contended that the trial court erred in finding the presence of procedural unconscionability and in finding various portions of the arbitration agreement substantively unconscionable.

The Court reviewed the aspects of procedural and substantive unconscionability presented in the case and held that when considered together the arbitration provision was generally unconscionable.  As noted by the Court “First, Paragraphs 9.6 and 9.6.1 of the arbitration clause provide:

In the event of a dispute between [BCBS] and Allied Provider, the parties agree that they shall abide by the procedures, processes and remedies set forth in this Agreement or otherwise established by BCBS for disputes of that type ….  [The dispute] shall be submitted to binding arbitration in accordance with the rules of the American Arbitration Association or other national ADR association acceptable to [BCBS].

(Emphasis added.)  Paragraph 8.1 further provides;  ‘Except as specified herein, this Agreement or an Addendum or Attachment may be amended by [BCBS] upon ninety (90) days prior written notice to Allied Provider.’  These provisions grant BCBS unfettered discretion to unilaterally create, control, and alter the arbitration process.  They would allow BCBS to disregard the standard rules of the American Arbitration Association, select the rules of any other ADR association and unilaterally establish new procedures and remedies contrary to those specified in the Agreement.  While BCBS argues that these provisions are not unconscionable because it has yet to take advantage of them, the issue is whether the provisions were unconscionable when the Agreement was executed.

            The arbitration provision in this case, in addition to allowing BCBS to unilaterally alter or avoid the arbitration procedures, clearly precludes review of a certain class of disputes and unfairly favors BCBS.  Paragraph 5.14 of the Agreement states that providers have the right to ‘appeal any [BCBS] decision made in conjunction with the agreement.’  Paragraph 9.6 states that if, after going through whatever procedural steps are established by BCBS, a ‘dispute remains unresolved, the parties agree that they shall engage in binding arbitration in lieu of pursuing a remedy in any court of law or equity.’  However, as noted supra, Paragraph 9.6.3, creates an exception that denies review by the arbitration panel ‘where pursuant to the terms of the Agreement or governing law the disputed decision or determination is one which is committed to the discretion or medical judgment or either party.’  Thus, the arbitration mandated by the Agreement is purely illusory with regard to disputes involving discretion or medical judgment….

            While an ordinary person could reasonably expect general arbitration provisions in an adhesion contract, an ordinary person would not reasonably expect provisions that allow the other party to unilaterally revise the arbitration rules, render the arbitrator powerless to resolve a large class of claims, or fail to provide an adequate remedy for the dispute.  The practical effect of these provisions is to grant BCBS immunity for improper conduct in declaring procedures medically unnecessary or, as in this case, re-categorizing a treatment as medically experimental and, therefore, not subject to reimbursement….

            When considered together, the aspects of procedural and substantive unconscionability present herein establish that the arbitration agreement was generally unconscionable.”