Masimo (NSDQ:MASI) accused the arbitrator who handed it a $5.4 million loss in a wrongful termination lawsuit brought by 2 former sales reps of hiding a major conflict of interest and of misapplying the law in his ruling.

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.

Now Masimo claims that the arbitrator, a retired judge named Richard Neal, is the brother of Stephen Neal, the lead counsel for onetime Masimo court opponents Tyco Healthcare and Nellcor Puritan Bennett, both now part of Covidien (NYSE:COV). Masimo wants the federal judge overseeing the case to toss the arbitrator’s decision.

"When Masimo first became aware that the arbitrator is Neal’s brother, it immediately challenged the arbitrator’s continued service. The arbitrator rejected that challenge, unilaterally declaring himself impartial even though [Judicial Arbitration and Mediation Services] rules require JAMS to decide such challenges. The arbitrator blamed Masimo for not discovering his relationship to Neal sooner, and subsequently deemed Masimo’s challenge to be an ‘abusive tactic’ warranting punitive damages," Masimo alleged in a motion to vacate Neal’s ruling. "Because full disclosure is vital to the integrity of the arbitration process, courts routinely vacate arbitration awards where arbitrators fail to disclose such information."

The arbitrator also erred in concluding that the Masimo devices are "inaccurate, defective, and could endanger patients," according to Masimo.

"Masimo and the FDA discussed and agreed that Masimo should follow scientific methods established by the International Organization for Standardization to determine an accuracy specification for its devices. Yet, without support from any scientific or regulatory expert or doctor, the Arbitrator pronounced his own ‘critical test.’ Based on this proposed test, he concluded that Masimo’s devices are inaccurate, defective, and could endanger patients," according to court records. "The arbitrator even justified punitive damages because Masimo tested the devices in a controlled setting per ISO. But Masimo did not, and could not, have agreed to arbitrate what testing methodology it should have followed. Masimo followed the testing discussed with the FDA, and the FDA did not require anything further. This question, not within the arbitrator’s authority, was also preempted by federal law. Therefore, the arbitrator exceeded his power."

Neal also ignored the dismissal of the qui tam lawsuit, in which Judge Cormac Carney of the U.S. District Court for Central California ruled that Masimo didn’t knowingly promote devices that failed to meet their FDA-mandated specifications, Masimo alleged.

"But the arbitrator cast aside this court’s ruling and made findings directly to the contrary. He found that Masimo ‘knowingly created’ intolerable working conditions by pressuring plaintiffs to sell devices that Masimo ‘knew’ did not meet their FDA-cleared accuracy specification. The arbitrator even awarded punitive damages, in part, because Masimo tried to rely on this court’s ruling," according to the documents.

And the $5 million in punitive damages Neal awarded runs contrary to the U.S. Constitution, the company alleged.

"The arbitrator also disregarded the Constitutional limits on punitive damages. Plaintiffs brazenly urged him to do so, arguing his ruling would not be subject to normal appellate review. The arbitrator obliged by awarding $5,000,000 in punitive damages, more than 16 times compensatory damages, disregarding the very law he cited. Moreover, the arbitrator manifestly disregarded Supreme Court precedent when he justified the punitive damages award by relying on potential harm to patients that he thought could result from Masimo’s devices. But this alleged potential patient harm is dissimilar to the harm allegedly suffered by plaintiffs, and thus under that Supreme Court precedent, cannot support the award," according to the motion to vacate. "The arbitrator also denied Masimo a fundamentally fair hearing. He refused to consider evidence proffered by Masimo, applied disparate evidentiary standards to the parties, and failed to rule on Masimo’s cross-claim. He even justified punitive damages, in part, because Masimo offered to conduct another study under his and the FDA’s supervision to confirm the accuracy of its devices."