Masimo (NSDQ:MASI) is off the hook for a $5 million arbitration award after a federal judge yesterday found the arbitrator was biased against the medical device company because of his brother’s work as a lawyer for patient monitoring rival Covidien (NYSE:COV).
The ex-reps, Michael Ruhe and Vicente Catala, accused Masimo of promoting off-label uses for its Pronto and Pronto-7 patient monitoring devices, improperly billing government insurance programs, withholding sales records and interfering with subpoenas.
The duo filed a qui tam whistleblower lawsuit against Irvine, Calif.-based Masimo that was later dismissed. But in January, an arbitrator appointed to mediate the wrongful termination lawsuit also filed by Ruhe and Catala found for the plaintiffs, leveling damages of $5.4 million, according to court documents and regulatory filings.
But just 36 hours before the final arbitration hearing, according to Judge Cormac Carney of the U.S. District Court for Central California, Masimo said it had just learned of a major conflict of interest on the part of arbitrator, a retired judge named Richard Neal – Stephen Neal, the lead counsel for onetime Masimo court opponents Tyco Healthcare and Nellcor Puritan Bennett, both now part of Covidien (NYSE:COV), which lost a pair of$500 million patent infringement cases against Masimo.
Masimo said Richard Neal was wrong to reject their challenge to his impartiality, accusing him of improperly using the challenge as a justification for punitive damages. The arbitrator also erred in concluding that the Masimo devices are "inaccurate, defective, and could endanger patients," Masimo alleged, claiming that Neal also ignored the dismissal of the qui tam lawsuit (in which Carney ruled that Masimo didn’t knowingly promote devices that failed to meet their FDA-mandated specifications).
Yesterday Carney agreed, vacating the $5 million award on the grounds that Richard Neal demonstrated his partiality to plaintiffs Ruhe and Vicente Catala.
"Arbitration is intended to be a quick and efficient mechanism of dispute resolution, and it is a rare occasion when an arbitral award warrants setting aside. Unfortunately, this case is one of those rare occasions. By deciding Masimo’s disqualification challenge himself, and then imposing punitive damages on Masimo for making the challenge and for other reasonable acts of advocacy by its attorneys, the arbitrator demonstrated evident partiality that undermined the integrity of the award and the entire proceeding," Carney wrote. "The Arbitrator demonstrated evident partiality by awarding excessive and improper punitive damages in retaliation for Masimo’s counsel challenging his impartiality and taking other reasonable measures to zealously represent their client."