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February 28, 2022

Illegality and Arbitration: A Health Lawyer’s Dilemma

Professor Bruce Frederick Howell


For many years, it has been common practice to have arbitration clauses in contracts in the healthcare field. It is the exception, rather than the rule, that parties to various agreements believe they wish to have an arbitration clause in order to have arbitrators decide a matter rather than the courts.

Normally, contract arbitrations are handled in due course and can be an effective tool for saving money and time. However, one of the issues that arises from time to time is the question of legality of the agreement being arbitrated. This is especially true in the healthcare industry where changing rules and regulations raise the question of whether the arrangement is compliant with the law.

There are four types of noncompliance that may occur. First, the arrangement may in and of itself, and on paper, be violative of the rules and regulations. Thus, the arrangement and the supporting documents may be void ab initio.  Then there is the situation of when the law changes not prospectively but encompasses an otherwise legal arrangement. Another situation arises when the documents and the arrangement are fine but become unenforceable and noncompliant through performance of one or more of the parties. And, finally, there exists the situation where the arbitration clause itself may be subject to a legality challenge.

The best practice to determine legality or illegality is at the beginning of the litigation or arbitration. Legality is a basic issue to the continuation of the process since, under well accepted law, an illegal or non-compliant contract is not enforceable.

The Issue

Thus, in the matter of arbitration, who decides the question of illegality – is it a judge or an arbitrator?

Case Law on the Determination of Legality

The issue of illegality of contracts is a familiar one and it is black letter law that courts will not enforce agreements or arrangements that violate the law or public policy.  Since the 1992 healthcare case of Polk County v. Peters the shield or the sword of the illegality of an arrangement has been raised and expanded in the health law field. In Polk County, a physician successfully challenged a medical director agreement (to which he was a party) on the grounds that it violated the Federal Anti-Kickback Statute and, thus, was unenforceable.  Polk County was not an arbitration case and, indeed at that time, there was some confusion about the status of illegality determinations in arbitration.

One case, Buckeye Check Cashing, Inc. v. Cardegna finally addressed several of these questions. The case was a contract arbitration case that challenged an arbitration clause in a payday lender matter. The challenge was brought on by an interest rate that allegedly violated Florida usury laws. Usury laws are state statutes that prohibit excessive amounts of interest being charged to consumers and, in this case, the payday loan was argued to be in violation of the Florida statute. The case was appealed to the United States Supreme Court.

The question before the Court was whether the entire contract was unenforceable because it violated state law. The contract itself was governed by Florida state law, but the arbitration clause specified the Federal Arbitration Rules as governing, thus allegedly superseding state law. The Court applied a Federal Arbitration Act analysis and, in an 8-1 decision, distinguished between void and voidable agreements, holding that an arbitrator must rule on all issues of legality unless the challenge is to the arbitration clause itself. Justice Thomas dissented, stating that it was his opinion that the Federal Arbitration Act does not supersede state law.

In 2016, the Supreme Court decided a case that has implications for the issue of illegality whether it be in litigation or arbitration.In Universal Health Services, Inc. v. United States ex rel Escobar, the Court held that if an arrangement behind the submission of a claim to the government is illegal in a material sense, then the claim is a false claim. This is an important point of law because there are many levels upon which a false claim may be predicated due to state and federal law. For example, many states have the doctrine of corporate practice of medicine prohibition. If an arrangement, ab initio or in practice, violates that as did the arrangement in Escobar, then allegedly the defense of illegality (and therefore unenforceability) may be raised.

This puts the practitioner in a difficult situation. Raising a defense or a claim of illegality regarding federal or state law may in some instances involve potential criminal liability. In addition, if the health law practitioner discovers that governmental claims had been filed under this arrangement which is illegal, then the practitioner must decide whether to advise the client to self-report under the self-reporting requirements. This is problematic, since there is very little case law on this reporting requirement but there remains the “aiding and abetting” or “misprison of a felony” if the client refuses to do so.

Practical Tips

The question of raising the illegality defense for consideration must be done at the very beginning of any litigation or arbitration. Thus, a trained health lawyer must evaluate the situation so as to properly advise his or her client.

In the case where the arbitration clause itself is to be challenged, then the Buckeye rule applies and the court must determine legality of the clause. In such a case, the issue must be raised at the beginning of litigation or, if the arbitration has begun, the case needs to be referred to a court for a determination of legality. The grounds for challenging the validity of an arbitration clause are usually fraud or misrepresentation in the entering of the contract.

Assuming the arbitration clause is not being challenged, and the contract provides for the Federal Arbitration Act to govern, the arbitrator must analyze whether the contract or arrangement is void or voidable. If the performance of the arrangement is the issue, the arbitrator must take evidence to make his or her determination.

If a change in law causes the arrangement to be not legal, then the parties must decide whether they wish to proceed in arbitration or reform the contract.

More difficult questions arise when the arbitrator is not willing or is unable to make a decision concerning legality issues. If the arbitration started in litigation and was removed from the court to the arbitration venue, then the referring court could be the body that makes the decision of illegality. The appropriate tool would be to have a motion to compel the arbitrator to make a determination and, if the case is governed by arbitration rules other than the Federal Arbitration Act (such as state or local arbitration statutes) then a declaratory judgment action to declare the arrangement illegal may be considered. It should be noted that the Federal Arbitration Act and local and state statutes do not address how to handle this situation except to state that impropriety of an arbitrator in the arbitration may provide grounds for an action in court.  The procedure for bringing such an action is subject to local rules.


The issue of legality is always present in any healthcare system. This is because of the inherent conflicts in the system and governmental attempts to regulate those conflicts. An analysis of the legality of the agreement and the arrangement should be conducted at the very beginning of any litigation or arbitration and the resolution of this issue must first be decided by the appropriate authority.

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    Bruce Howell, JD, MS

    Howell Health Law, LLC, Portland, OR

    Bruce Howell is one of the pioneers in the practice of health law. In 2019, he formed his own private practice at Howell Health Law LLC and has continued a 16-year streak of being awarded Best Lawyer in America for Health Law. From being one of the founders of the Dallas, Texas, Bar Association's Health Law Section to one of the first attorneys to become a Board-Certified Health Lawyer by the Texas Board of Legal Specialization in 2002, Mr. Howell has worked on a vast array of issues across the health industry spectrum.


    He focuses his practice on various aspects of health law, including reimbursement, fraud and abuse, managed care issues, physician practice management issues, and the Affordable Care Act. He also handles cases involving genetics, organ transplant technology, laboratory matters, clinical research and healthcare insurance coverage.


    Mr. Howell represents companies and individuals in healthcare governmental investigations and counsels clients in structuring transactions to comply with health law regulatory requirements. He has also created compliance programs and consulted on corporate governance matters and tax matters in the nonprofit healthcare industry. Mr. Howell is experienced in litigating cases related to health insurance, ERISA issues, health law regulatory matters, and the Affordable Care Act as well as serving as an expert witness in these areas.


    Mr. Howell has been recognized by Oregon Super Lawyers (2013-2021), Texas Super Lawyers (2007-2012) and as an Outstanding Physician Practice Lawyer (Nightingale's Health Care News, 2004). He has also been listed on the Best Lawyers in America (Health Law, 2006-2022), Best Lawyers in Texas (Health Law, 2010-2012), Top 100 Litigators in Oregon, and Best Lawyers in Oregon (2013-2022). Mr. Howell is a member of the Council (Board of Directors) of the American Bar Association Health Law Section, a member of the Oregon State Bar Health Law Section Executive Committee and is admitted to The Gus Solomon Inn of Court (Oregon).


    Mr. Howell is also a Distinguished Professor from Practice at Willamette University College of Law in Salem, Oregon, where he has taught for seven years and heads the law school’s Health Law Certificate Program.  He is a Vice Chair of the ABA Health eSource and Past Chair of the ABA’s Journal The Health Lawyer. He may be reached at  [email protected].