Hunter v. Kaiser Foundation Health Plan, Inc.

Background

Theresa Hunter brought a proposed class action against Kaiser Foundation Health Plan, Inc. and USCB, Inc., which the opinion describes as Kaiser’s third-party debt collector. Hunter alleged that the defendants sought to collect alleged balances from Medi-Cal beneficiaries for services covered by Medi-Cal and reported those alleged debts to consumer credit reporting agencies. Her claims arose under the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, California credit-reporting and debt-collection laws, California’s Unfair Competition Law, and California common law.

Hunter received medical services from Kaiser in 2012 while enrolled in Medi-Cal. She later found USCB collection entries reporting an unpaid Kaiser balance exceeding $9,000. She disputed the entries with three credit reporting agencies and contacted the Consumer Financial Protection Bureau and the California Attorney General’s office. According to the allegations, Kaiser later acknowledged to the Attorney General that Hunter had active Medi-Cal coverage when she received the services, that Kaiser had assigned the charges to collection, and that Kaiser—not Hunter—was responsible for the bill.

Hunter enrolled with Kaiser through Medi-Cal from 2012 through 2017 and through Covered California in 2018. The Medi-Cal Choice Form stated that Kaiser required binding arbitration for certain disputes and that the enrollee gave up the right to a jury or court trial for those disputes. The 2018 Covered California enrollment process required an electronic acknowledgment of the binding-arbitration agreement, and Kaiser’s membership materials contained additional arbitration terms.

Arbitration Agreement and California Disclosure Law

The Federal Arbitration Act requires courts to determine whether a valid arbitration agreement exists and whether it covers the dispute. Kaiser and USCB moved to require Hunter to arbitrate her claims individually. Hunter opposed Kaiser’s motion based on the argument that no enforceable agreement had been formed because Kaiser did not comply with California Health and Safety Code section 1363.1. USCB did not raise an independent objection to arbitration; it argued that its claims were arbitrable if Hunter’s claims against Kaiser were arbitrable.

For the 2018 Covered California enrollment, the court held that federal law preempted section 1363.1. The court reasoned that the Affordable Care Act and its implementing regulations extensively governed enrollment methods and arbitration disclosures through the state exchange, including online enrollment and enrollment assisted by call-center agents. The court therefore held that section 1363.1 did not apply to Hunter’s 2018 enrollment.

For the 2012–2017 Medi-Cal period, the court did not decide whether the federal Medicaid Act and its regulations preempted section 1363.1. Instead, assuming the state law applied, the court held that the Medi-Cal Choice Form satisfied it. The arbitration notice was prominently displayed, appeared effectively immediately above the signature line, and substantially informed the enrollee that certain medical-malpractice and other disputes were subject to arbitration. The court also stated that the specific wording required for professional-negligence disputes was not relevant because Hunter’s case was not a medical-malpractice claim against a provider.

Unconscionability

Hunter argued that the arbitration agreement was procedurally and substantively unconscionable. Procedural unconscionability concerns unfairness in how an agreement was formed, such as oppression, lack of meaningful choice, or surprise. Substantive unconscionability concerns overly harsh or one-sided contract terms.

The court found a low degree of procedural unconscionability because the membership agreement was a contract of adhesion, meaning a standardized agreement that Hunter had little or no opportunity to negotiate. But the court also found that Hunter had alternatives to Kaiser during the Affordable Care Act period, had repeatedly received or had access to the membership agreement, and had received arbitration disclosures during both enrollment processes. Because the procedural unconscionability was limited, the court required a high degree of substantive unconscionability to invalidate the arbitration agreement.

The court found that two types of provisions were substantively unconscionable: provisions that appeared to prevent Hunter from recovering attorney fees even if she prevailed on claims for which the law permits fee recovery, and provisions requiring her to share arbitration costs. The court concluded that these terms could undermine the incentives provided by consumer-protection laws and could impose arbitration costs that a consumer would not bear in ordinary litigation. The court severed those provisions rather than invalidating the entire arbitration agreement.

The court rejected Hunter’s separate challenge to Kaiser’s use of rules administered by the Office of the Independent Administrator. Although the limited record raised a slight concern about possible arbitrator bias, Hunter did not identify a specific rule, undisclosed selection criterion, or training requirement that favored Kaiser. The court therefore did not find that the use of those rules made the agreement substantively unconscionable.

Class Arbitration and Injunctive Relief

The court held that Hunter must arbitrate individually. Under United States Supreme Court precedent, an arbitration agreement must provide a contractual basis showing that the parties agreed to class arbitration; silence or ambiguity is insufficient. The agreement’s references to plural parties and claimants did not clearly authorize class-wide or group arbitration.

Hunter also argued that claims seeking public injunctive relief should remain in court under California law. The court rejected that argument because nothing in the arbitration agreement prevented the arbitrator from awarding public injunctive relief. The court therefore sent all of Hunter’s claims to arbitration.

Disposition

Judge William H. Orrick granted Kaiser’s and USCB’s motions to compel arbitration in full, except that the substantively unconscionable provisions concerning fee shifting and arbitration costs were severed and declared unenforceable. The court required Hunter to arbitrate her claims individually, administratively closed the case pending completion of arbitration, and required counsel to file a joint status update every 180 days.