Case: 1:11-cv-03275 Document #: 54 Filed: 03/22/12 Page 1 of 13 PageID #:617

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION ) ) ALLIANCE HEALTHCARE SERVICES, INC., ) ) ) Petitioner, ) vs. ) ) ARGONAUT PRIVATE EQUITY, LLC AND ) MEDICAL OUTSOURCING SERVICES, INC., ) ) ) Respondents. ) In the Matter of the Arbitration Between:

Case No. 11-cv-3275 Honorable Judge Matthew F. Kennelly Magistrate Judge Geraldine Soat Brown

RESPONDENT ARGONAUT PRIVATE EQUITYS REPLY IN FURTHER SUPPORT OF ITS MOTION TO VACATE OR MODIFY THE ARBITRATION AWARD AND IN FURTHER OPPOSITION TO PETITIONERS MOTION TO CONFIRM INTRODUCTION All the parties and all the members of the arbitration panel completely agree: the subject contract (that is, the Membership Interest Purchase Agreement or MIPA) authorized and empowered the arbitrators to enter an award for damages only if MOS-LLC had acted unlawfully in the manner it billed Medicare for fluorodeoxyglucose (FDG). Nevertheless, the arbitration panel majority (hereinafter the Majority) chose to stray from that contractual limitation. After expressly concluding that there is no statute, regulation or other law prohibiting the manner in which MOS-LLC billed Medicare, the Majority entered a damage award in favor of Petitioner Alliance Healthcare Services, Inc. (Alliance) the purchaser of MOS-LLC. The two arbitrators in the Majority ignored the contractually agreedupon standard; instead, they rendered an award based not on a finding of unlawful conduct but, instead, on their own personal views of what constitutes unfair and dishonest business

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practices. By their own admission, therefore, the Majority exceeded the powers granted to it under the MIPA. Here is an example of the Majoritys unauthorized conduct: 1. The Majority concedes that Alliance has not identified any statute, ordinance, rule, regulation, order, judgment, or decree that declares [MOS-LLCs billing] practice illegal. (Award at 7.) The Majority further concedes that there is no specific statute, rule, etc. that is even directed at MOS-LLCs billing practice let alone a law that declares it illegal. (Award at 7, emphasis added.) Nevertheless, the Majority concludes that the sellers breached a contractual warranty promising that MOS-LLC had complied with all statutes, ordinances, regulations, orders, judgments and decrees of any court or governmental entity or agency . . .. (Award at 6.)

2.

3.

This is a legal and logical impossibility: if there is no statute, ordinance, rule, regulation, order, judgment, or decree that declares [MOS-LLCs] practice illegal, then the sellers (including Respondent Argonaut Private Equity, LLC) could not have breached a contractual warranty promising that [MOS-LLC] has complied with all statutes, ordinances, regulations, orders, judgments and decrees of any court or governmental entity or agency . . .. The Majoritys error has nothing to do with quibbles about contract interpretation; indeed, as noted earlier, all the parties and arbitrators agree that a finding of unlawful conduct was a necessary prerequisite to liability. Nor does the Majoritys error turn on quarrels with any findings of fact (though the Majority certainly made many). Instead, this error is entirely the result of the arbitrators exceeding the authority granted them under the MIPA, dispensing their own brand of industrial justice in place of the contractually agreed-upon trigger for liability. See Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., ___ U.S. ___,

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130 S. Ct. 1758, 1767-68 (2010); see also United Food & Commercial Workers, Local 1546 v. Illinois-American Water Co., 569 F.3d 750, 755 (7th Cir. 2009). Alliance attempts to defend the Majoritys decision, but its discomfort in doing so is palpable. The arbitration award was animated by the Majoritys belief that, when a healthcare provider is reimbursed $380 from Medicare for a drug costing $160, there has been an unfair and dishonest siphoning of money from the public fisc. (Award at 7.) But Alliance is in no position to advance that argument. As noted by the dissenting arbitrator, Alliance itself charged $900 per FDG dose, [its] Medicare carrier allowed $450 and reimbursed Alliance $360 when Alliances actual cost was $170. (Dissent at 5.) Alliance therefore received slightly more than twice its actual cost for doses of FDG billed to Medicare just like MOSLLC. As a consequence, Alliance is not well-positioned to embrace the Majoritys reasoning. Alliances Medicare reimbursements are not offered here as part of some tit for tat argument, however. Rather, they serve to highlight the infirmity in the Majoritys position. The arbitrators in the Majority may believe that Medicare is administered in a sloppy fashion, or they may decry the rising cost of healthcare in America and think that providers such as MOS-LLC may be to blame, or they may have any number of other views about how the federal government administers its agencies and manages its budget. But none of those personal beliefs has anything whatsoever to do with this case. Here, the governing contract authorized and empowered the arbitrators to issue an award only if MOS-LLC had acted unlawfully. MOS-LLC did no such thing. And the Majority arbitrators cannot end-run that conceded fact by placing an unlawful label on conduct that is nothing more than distasteful to them personally.

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Accordingly, Respondent Argonauts motion to vacate should be granted. See Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 660 F.3d 281, 285 (7th Cir. 2011) (arbitration award subject to vacatur when the arbitrators had defied the contract by making a decision on a ground other than the (contractual) principle chosen by the parties). ARGUMENT I. THE ARBITRATION PANEL MAJORITY EXCEEDED ITS POWERS UNDER THE CONTROLLING CONTRACT AND, AS A RESULT, ITS AWARD SHOULD BE VACATED. A. THE ARBITRATION AWARD MUST BE EVALUATED BASED ON WHAT THE PANEL MAJORITY ACTUALLY STATED.

Alliance argues that, in deciding whether to confirm or vacate an arbitration award, this Court should divine some hypothetical interpretive path that might make sense of the arbitrators ultimate decision. It asks this Court to minimize (or ignore altogether) what the arbitrators actually set forth as the rationale for their decision and, instead, confirm the award if there is something that the panel majority could have said (but did not) to properly justify the award that was entered. But that is not the law. In Edstrom Industries, Inc. v. Companion Life Insurance Co., 516 F.3d 546 (7th Cir. 2008), the Seventh Circuit expressly rejected Alliances argument. The Court noted that, in circumstances where an arbitrator does not offer a written opinion expressing his view, a federal court would attribute to him whatever interpretive path might lead to the conclusion he reached. Id. at 553. But, when an arbitrator offers a written explanation for his decision, the award must rise or fall based on the chosen rationale: [W]e can no more ignore what an arbitrator says than what a jury says when it returns a special verdict rather than a general verdict or what a judge says who explains the basis for a ruling excluding evidence rather than just saying objection sustained. Had the 4

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arbitrator in this case said to hell with Wisconsin law, we could not enforce his award on the ground that[,] had he said nothing[,] we would imagine what he might have said to make it seem that he was applying that law. Id. at 553 (collecting like cases). Here, both Alliance (Response1 at 2) and the panel Majority (Award at 7) recognized that unlawful conduct on the part of MOS-LLC was required in order to trigger liability. Notwithstanding that undisputed interpretation of the parties contract, the panel issued a damages award even though it could not identif[y] any statute, ordinance, rule, regulation, order, judgment, or decree that was even directed at MOS-LLCs billing practice let alone a provision that declares its practice unlawful. (Award at 7.) Alliance cannot escape this core truth, drawn from the express statements of the Majority, which alone requires vacatur. Moreover, Alliances efforts to hypothesize some other rationale have no support either in the award or in law. For example, Alliance contends that: (1) the arbitration panel understood the relevant legal principle to be invoice pricing, and (2) the panels awareness of that one phrase was sufficient to support its conclusion that MOS-LLCs billing practices were unlawful. (Response at 6-7.) But that generalization of the issue in the case is simply meaningless. It is essentially the same as arguing that, once the arbitration panel understood that a Medicare claim is initiated by somehow contacting Medicare, the panel then had license to create its own requirements for what type of contact with Medicare would be sufficient and lawful. But that is not how our legal system works. Ours is a nation of laws, not judges. United States v. Higdon, 638 F.3d 233, 247 (3d Cir. 2011) (criticizing district judge for

Response refers to Petitioners Combined Memorandum In Opposition To Motion To Vacate Arbitration Award And Reply In Support Of Motion To Confirm Arbitration Award (Document #52). 5

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following his own concepts of justice rather than the precedent of the applicable appellate court or the United States Supreme Court). The issue in the present dispute is whether MOS-LLC acted lawfully when it presented its claims to Medicare. As discussed more fully in Argonauts previous papers, MOS-LLC received a monthly invoice from its supplier and, separately, received a credit memo to reflect any volume discounts received during that month. Even assuming that invoice pricing is a relevant concept, the phrase at most suggests that an invoice is somehow involved in the claims-submission processes. But how? How is the credit memo to be accounted for? How are volume discounts to be addressed? The bare-bones phrase invoice pricing sheds no light whatsoever on what MOS-LLC was required to report in its situation. Moreover, neither Medicare nor any of the pertinent Medicare Administrative Contractors published any regulatory guidance explaining how claims were to be submitted in such a situation. (See Argonauts Opening Memorandum at 13.) And even Alliance concedes that there were no Medicare manuals issued by CMS [the Centers for Medicare & Medicaid Services] at the national level which offered any further definition of the term invoice pricing (Response at 8); and Alliance fails to identify any other official rule or regulation speaking to the issue.2

Alliance attempts to make much of 42 U.S.C. 1395u. But that statute merely mentions invoice pricing as one acceptable methodology. And, although an early CMS manual (Medicare Claims Processing Manual, Pub. 100-04, Transmittal No. 528, April 22, 2005) suggests that the invoice pricing method should be used, a later superseding manual made clear that Medicare contractors were not required to use invoice pricing but, instead, could use other methodologies. (See Medicare Claims Processing Manual, Pub. 100-04, Transmittal No. 738, Nov. 1, 2005.) In all events, though, neither the statute nor the CMS manuals either define invoice pricing or condemn as illegal the billing practices used by MOS-LLC. 6

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In short, when Alliance claims that the Majority understood the law to require MOSLLC to submit claims supported by its FDG invoices disclosing its true price (Response at 12), Alliance is manufacturing a fanciful interpretive path that the panel did not use and could not reasonably have contemplated. In the real world, the Majority expressly stated that it uncovered no statute, ordinance, rule, regulation, order, judgment, or decree that declared MOS-LLCs billing practices unlawful. And it reached that conclusion because, as discussed above, no such statute or regulation exists.3 B. INASMUCH AS THE PANEL MAJORITY EXCEEDED ITS POWERS, THE AWARD SHOULD BE VACATED.

In Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., ___ U.S. ___, 130 S. Ct. 1758 (2010), the Supreme Court recently and plainly held that the task of an arbitrator is to interpret and enforce a contract, not to make public policy. Id. at 1767. Accordingly, an arbitration award should be vacated when [an] arbitrator strays from interpretation and application of the agreement and effectively dispense[s] his own brand of industrial justice.

Alliance places great stock in the fact that the panel did not award damages for any activity occurring in Ohio, but the Ohio-related decision only reinforces the conclusion that the Majority was acting in an arbitrary fashion, indulging its own notions of justice in a manner completely unbounded by the directives of the underlying contract. To perhaps state the obvious, the arbitrators in the Majority were personally unhappy with the manner in which MOS-LLC provided invoices to Medicare; so, even though MOS-LLC did not act unlawfully, the arbitrators entered an award in favor of Alliance for the two States which (in the arbitrators view) required an invoice to be involved in some fashion in the billing process. The arbitrators granted no award for Ohio, where they felt uncomfortable concluding that an invoice was even somehow involved in submissions to Medicare. But none of those conclusions either redeems the arbitrators judgment or gives any reason to believe that contrary to their expressly-stated findings the arbitrators in fact found some applicable law condemning MOS-LLCs billing practices (which they chose not to publicly identify in their opinion). Rather, it means only that the arbitrators were following some personal logic and personal sense of justice, issuing orders and awards that made sense to them personally but acting in a fashion completely detached from the directives contained in the parties agreement. 7

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Id. (quoting Major League Baseball Assn. v. Garvey, 532 U.S. 504, 509 (2001)). That is precisely the situation here. In the present matter, the arbitration panel concedes: (1) that it was authorized to issue a damages award only upon a finding of unlawful conduct, and (2) there was no unlawful conduct that is, there was no statute, ordinance, rule, regulation, order, judgment, or decree that declared MOS-LLCs billing practices unlawful. Therefore, when the panel nevertheless issued an award, it was advancing not United States public policy (as evidenced by our Nations laws) but instead its own view of public policy. Indeed, in the words of the Majority arbitrators, an award was issued because we cannot accept MOS-LLCs billing practices. (Award at 7.) But the MIPA simply did not grant the arbitrators authority to issue damage awards based on what they, on a personal level, could or could not accept.4 Alliances reference to United Food & Commercial Workers, Local 1546 v. IllinoisAmerican Water Co., 569 F.3d 750, 755 (7th Cir. 2009), is unavailing. Indeed, that opinion actually supports Argonauts position. In United Food, the arbitrator was faced with competing contract provisions that, in his view, created an ambiguity in the contract. Id. at 755-56. Under those circumstances, the Seventh Circuit declined to intervene to overturn the arbitrators resolution of that ambiguity. But, as the Seventh Circuit warned, the result might have been different had the arbitrator concluded that the contract was unambiguous. Id. at 756. In such a Alliance cites Environmental Barrier Co., LLC v. Slurry Systems, Inc., 540 F.3d 598 (7th Cir. 2008), claiming that, having submitted the issue of lawfulness to the arbitration panel, Argonaut cannot now claim that the arbitrators had no authority to resolve the question. (Response at 9-10.) But Alliance misstates the relevant inquiry. The arbitrators had authority to conclude that warranty liability under the MIPA was triggered only by unlawful conduct, and they had authority to conclude (as they must) that no laws were broken by MOS-LLC. Those were the issues put to the panel. The arbitrators were not authorized, however, to then disregard the MIPA and issue an award based upon their own brand of industrial justice. Indeed, that is the very point of Stolt-Nielsen and the other cases cited in this section. 8
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situation, vacatur might be appropriate if the arbitrator proceeded to act contrary to [the contracts] directions. Id. at 756. As the Court explained: [i]t is only when the arbitrator must have based his award on some body of thought, or feeling, or policy, or law that is outside the contract . . . that the award can be said not to draw its essence from the [parties agreement]. Id. at 755 (brackets and emphasis in original). Here, the Majority acted contrary to the MIPAs directions, and the two arbitrators in the Majority must have based their award on thoughts, feelings and polices outside the contract. No other conclusion is possible when arbitrators issue an unlawful-conduct-based award in the face of an admission that no law prohibits the subject conduct. The Seventh Circuits recent decision in Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 660 F.3d 281 (7th Cir. 2011), provides further support for Argonauts position. There, the Court noted that [d]isregard of the law comes within 10(a)(4) if it also amounts to disregard of the contract that conveys the arbitrators authority. Id. at 285. In such a case, vacatur would be appropriate because the arbitrators had defied the contract by making a decision on a ground other than the [governing] (contractual) principle. Id. Here, the arbitrators in the Majority defied the contract. As construed by the arbitrators and agreed-to by the parties, the contract authorized a damage award only upon a finding of illegality. Yet the arbitrators ultimately entered an award on a ground other than that governing principle.5

Vacatur would also be appropriate under a manifest disregard of the law standard. Contrary to the impression created by Alliance (Response at n.2), the Supreme Court has expressly reserved the question concerning the viability of manifest disregard as a basis for vacatur under the Federal Arbitration Act. Stolt-Nielsen, 130 S. Ct. at 1768 n.3. Here, the Majority plainly recognized there was no provision of law condemning MOS-LLCs billing practices as illegal, yet they deliberately disregarded that information in order to issue an award in favor of Alliance. 9

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II.

ALLIANCE IS NOT ENTITLED TO ADDITIONAL RELIEF EXCLUDING PREJUDGMENT INTEREST FROM THE MIPA INDEMNIFICATION CAP. In the event that the arbitration award should not be vacated, Alliance seeks from this

Court not only a judgment confirming the award as issued by the panel but also an additional declaration, ordering that prejudgment interest accruing after December 29, 2011 (the date of the award) not count against the indemnification cap established by the MIPA. Alliance cites no provision of the Federal Arbitration Act that allows a court to grant substantive relief in addition to that award by the arbitrators, nor does Alliance cite to any precedent from this or any other court which would allow such relief. Alliances request should therefore be denied. In its Response, Alliance disingenuously claims that it is not seeking any substantive relief beyond confirmation of the Award. (Response at 18.) Alliance apparently views its request as merely implementing what the arbitrators would likely have decided had they been asked. But Alliances self-serving characterization changes nothing. The arbitrators were not asked to grant the relief Alliance seeks, and the arbitrators did not issue an award granting that relief. There is no doubt, therefore, that Alliance is seeking relief in addition to that granted by the award. Its Memorandum In Support Of Motion To Confirm Arbitration Award candidly admits that under the award [a]s issued, prejudgment interest as of the date of the Award counts against the $5,000,000 indemnification cap. (Memorandum at 15.) It then seeks to remedy that perceived deficiency in order to not incentivize Argonaut to assert its rights (id.), and Alliances Motion To Confirm Arbitration Award asks this Court to affirmatively declare that any prejudgment interest accruing after December 29, 2011 not apply against the

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remaining indemnification cap under the MIPA. (Motion at 10.) Yet Alliance offers not one scrap of authority that allows a District Court to enter such relief When the arbitration panel wanted to excluded components of its relief from coverage under the indemnification cap, it knew how to do so. For example, after awarding attorneys fees and expenses, it ordered that those fees and expenses were not to be included in determining at some future time whether the Cap has been reached. (Award at 19.) The panel did not, however, enter a similar order concerning prejudgment interest and, as noted in many of the cases cited by Alliance itself, this Court is not empowered under the FAA to upset the panels decision in that regard. Conclusion For all of the foregoing reasons, as well as those set forth in Argonauts earlier Memorandum, Argonaut respectfully requests that this Honorable Court: (i) Deny Alliances Motion To Confirm Arbitration Award with respect to the

Majoritys (a) award of relief on Alliances First Claim for breach of representations and warranties and related award of attorney fees and expenses, and (b) dismissal of Argonauts Counterclaim; (ii) Grant Argonauts Motion To Vacate and (a) vacate the finding by the Majority

of the Panel that Alliance is entitled to relief on Alliances First Claim for breach of representations and warranties, (b) vacate the Majoritys award of attorney fees and litigation expenses, (c) vacate the Majoritys dismissal of Argonauts Counterclaim for release of its share of the escrow account, (d) vacate the Majoritys finding that Alliance has preserved an indemnity claim for future governmental action concerning alleged illegal Medicare

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overcharges, and (e) enter judgment in favor of Argonaut on its Counterclaim, net of Argonauts 75% share of the stipulated liability for Alliances Fifth Claim; (iii) Grant Argonaut leave to file an application for its attorney fees and expenses

incurred in the arbitration proceeding and before this Court based on Argonauts successful prosecution of its Counterclaim; and, (iv) Grant any further relief the Court deems just under the circumstances.

DATED: March 22, 2012

Respectfully submitted,

/s/ Patrick S. Coffey Patrick S. Coffey (IARDC # 6188134) Ashlee M. Knuckey (IARDC # 6300237) LOCKE LORD LLP 111 South Wacker Drive, Suite 4500 Chicago, Illinois 60606 (312) 443-1802 telephone (312) 896-6702 facsimile and Paul DeMuro (OBA # 17605) (admitted pro hac vice) FREDERIC DORWART, LAWYERS 124 East Fourth Street Tulsa, Oklahoma 74103 (918) 583-9922 telephone (918) 583-8251 facsimile Counsel for Argonaut Private Equity, LLC

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CERTIFICATE OF SERVICE I hereby certify that on March 22, 2012, a copy of the foregoing RESPONDENT ARGONAUT PRIVATE EQUITYS REPLY IN FURTHER SUPPORT OF ITS MOTION TO VACATE OR MODIFY THE ARBITRATION AWARD AND IN FURTHER OPPOSITION TO PETITIONERS MOTION TO CONFIRM was filed electronically. Notice of this filing will be sent to all parties by operation of the Courts electronic filing system. Parties may access this filing through the Courts system.

/s/ Patrick S. Coffey

Patrick S. Coffey (# 6188134) LOCKE LORD LLP 111 South Wacker Drive Chicago, Illinois 60606 Direct: (312) 443-1802 Fax: (312) 896-6702 Counsel for Argonaut Private Equity, LLC