United States: The Deeper Dive In Texas: Recent Appellate Court Decisions Affecting Providers

For this edition of the Deeper Dive, we travel to Texas for a look at some interesting cases involving healthcare providers decided on appeal in 2015. Some of these decisions may be surprising – and perhaps even troubling – as the plaintiffs have been relatively successful. So put on your hat and boots and join us for the latest roundup of recent decisions affecting Texas providers in 2015 thus far!

Purpose Clause Triggers Physician-Owned Hospital Liability

Generally, a certificate of formation or articles of incorporation will contain a clause setting out the business purposes of the legal entity being formed. In many cases, little attention is given to the specifics of the language being used, which is often quite broad. However, a recent decision by a Texas Court of Appeals suggests that a harder look should be taken when it comes to purpose clauses, particularly when forming a physician-owned medical facility enterprise. In an opinion delivered and filed on June 18, 2015, the Corpus Christi Court of Appeals ruled that a physician-owned hospital could be held liable for the alleged professional negligence of a limited partner physician who practiced medicine at the hospital.

Dr. Rodolfo Lozano, a physician and limited partner of Women's Hospital at Renaissance (WHR), was accused of negligently attending a childbirth at the hospital. The parents sued WHR, alleging that Dr. Lozano's negligence occurred within the ordinary course of the partnership's business and/or with the authority of the partnership. Despite Texas law that precludes WHR from engaging in the corporate practice of medicine, the court looked to the purpose clause of the partnership agreement to ascertain whether Dr. Lozano was acting on behalf of the partnership.

The WHR partnership agreement provides that the "objects and purposes of the [p]artnership" in relevant part are:

(i) to develop, construct and operate such Health Care Facilities as the General Partner may deem appropriate from time to time; ... (iii) to own, develop, operate and engage in such other business activities as the General Partner may deem appropriate from time to time; and (iv) to enter into, make and perform all such agreements and undertakings, and to engage in all such activities and transactions, as the General Partner may deem necessary or appropriate for or incidental to the carrying out of the foregoing objects and purposes.

In addition, the recitals section of the partnership agreement provided that WHR is intended to "be an efficient, quality provider of medical services." Limited partners, however, were prohibited from performing "any act on behalf of the [p]artnership [or] incur[ring] any expense or obligation ... on behalf of the [p]artnership ..."

Based upon the foregoing, the court found that there was "at least an issue of fact as to whether Lozano, at the time of the alleged negligence, was either acting in the ordinary course of [W]HR's business or with [W]HR's authority" as there was "at least some evidence that [W]HR's 'ordinary course of business' includes the practice of medicine by its physician-partners" based upon the court's interpretation of the purpose clause and testimony by Lozano that "one of the purposes of [W]HR was to provide obstetrical services" and [W]HR's sworn interrogatory response [that] stated that [W]HR "was offering labor and delivery services to the public."

Consequently, the certificate of formation or articles of incorporation of a physician-owned medical facility enterprise should carefully and expressly exclude the provision of professional medical services from the purpose of the enterprise.

Doctors Hosp. at Renaissance Ltd. v. Andrade, No. 13-15-00046-CV, 2015 WL 3799425 (Tex. App.—Corpus Christi June 18, 2015, no pet. h.).

Competitive Gunslinging Dooms Peer Review Privilege Claim

Memorial Hermann Memorial City Medical Center (MHMC) was faced with the opening of a competing hospital in 2009, and there was a "growing fear at [MHMC] that staff would leave to go to" the new hospital. When MHMC and the other defendants learned that cardiothoracic surgeon Dr. Miguel Gomez was affiliating with the new hospital, the defendants initiated a "whisper campaign" that, according to Dr. Gomez, not only "cast doubt on his robotic heart surgery procedures" but inferred he was "having problems" with his patient mortality rate. Dr. Gomez further alleged that MHMC displayed and disseminated "false data and statements" to the medical community, which "ruined" both his referral patterns and his status as a sought-after surgeon.

Dr. Gomez brought suit and sought discovery. In response, MHMC asserted that some of the documents were protected by medical committee privilege and/or medical peer review committee privilege. On May 22, 2015, the Texas Supreme Court ruled that there is a limited exception to confidentiality for proceedings, records, or communications "relevant" to an anticompetitive action. According to the court, this exception applies when a plaintiff asserts a cause of action that requires proof that the conduct at issue has a tendency to reduce or eliminate competition that is not offset by countervailing procompetitive justifications.

The term anticompetitive "denote[s] an overall substantially adverse effect on competition, rather than the existence of some negative effects," but is not synonymous with an antitrust action. Anticompetitive action is broader, because antitrust actions do not include "all conduct that could substantially lessen competition in a particular market." Under the court's holding, a plaintiff would need to plead only a valid anticompetitive action as opposed to a valid antitrust claim.

However, before a record is discoverable, the court must make a finding that the proceeding, record, or communication is relevant to a judicial proceeding in which the plaintiff asserts a cause of action that requires proof of anticompetitive conduct or effects. Consequently, providers must carefully consider their actions in light of this exception to the peer review privilege.

In re Mem'l Hermann Hosp. Sys., No. 14-0171, 2015 WL 2438752 (Tex. May 22, 2015).

Botched Consent Leaves Hospital Liable for Tortious Interference and Retaliation

Dr. Frederick Harlass, an obstetrician at Las Palmas Medical Center, reportedly used the rebuke "if you want a brain-damaged or dead baby, don't blame me" to gain a patient's consent to a cesarean section. A certified registered nurse anesthetist (CRNA) working for an independent group reported to the Las Palmas ethics and compliance coordinator that Dr. Harlass had failed to obtain an informed consent from the patient. Two to three hours later, Las Palmas advised the CRNA that "she would not be working at Las Palmas until further notice in light of her complaint against Dr. Harlass and his complaint against her."

Hospitals and certain other healthcare facility types are prohibited from retaliating against nonemployees for reporting a violation of the law. If adverse action is taken against someone within 60 days of a reported violation, there is a rebuttable presumption that the action was retaliatory. Not surprisingly, the CRNA claimed that she had been retaliated against by the hospital.

Las Palmas argued that the CRNA did not report a violation of law, as Dr. Harlass' disclosure satisfied the requirements of the Texas Medical Disclosure Panel. The court held that Dr. Harlass' rebuke to the patient was insufficient for an informed consent disclosure, and that as a result, the CRNA had reported a violation of law.

The CRNA also alleged that the action against her constituted tortious interference with her employment relationship. Las Palmas argued that because the CRNA did not have an employment contract, the hospital could not be held liable for interference with a prospective relationship, because its interference was not independently tortious. The El Paso Court of Appeals rejected the hospital's contention, because it did not object to the lower court's treatment of the CRNA's employment as an existing business relationship in the jury charge. To show interference with an existing relationship, the plaintiff need not show an independently tortious or unlawful act. All that must be shown with an existing contract is a willful and intentional act of interference that proximately caused the plaintiff's injuries and actual damages or loss.

Las Palmas then alleged that its conduct was justified because the hospital was exercising its contractual right with the CRNA's employer to "refuse personnel assigned to its facility." Here the court stated that the hospital "could [not] do anything under the guise of exercising that [contractual] right ..." In particular, it could not exercise the right "by resort to illegal or tortious means." In essence, it could not exercise this right to refuse the CRNA at its facility, if such refusal would constitute retaliation.

El Paso Healthcare Sys., Ltd. dba Las Palmas Medical Center v. Murphy, No. 08-13-00285-CV, 2015 WL 4082857 (Tex. App.—El Paso June 27, 2015, no pet. h.).

Slip and Fall Spells Caution for Safety-Related Claims

In this case, the Texas Supreme Court resolved a split of authority regarding the treatment of safety-related claims by healthcare facilities. A visitor sued the hospital after slipping and falling near the lobby exit doors. The hospital moved to dismiss the claim, asserting that it was a healthcare liability claim (HCLC) and that the visitor had not filed an expert report, as required for an HCLC. The Texas Supreme Court held that for a safety-based claim against a healthcare provider to be an HCLC "there must be a substantive nexus between the safety standards allegedly violated and the provision of health care." According to the court:

The pivotal issue in a safety standards-based claim is whether the standards on which the claim is based implicate the defendant's duties as a health care provider, including its duties to provide for patient safety. The court, however, acknowledged "the line between a safety standards-based claim that is not an HCLC and one that is an HCLC may not always be clear."

To assist in determining whether a claim is an HCLC, the court articulated seven nonexclusive considerations to aid in determining whether a safety standards-based claim is substantively related to the provision of medical or healthcare services:

  • Did the alleged negligence of the defendant occur in the course of the defendant's performing tasks with the purpose of protecting patients from harm?
  • Did the injuries occur in a place where patients might be during the time they were receiving care, so that the obligation of the provider to protect persons who require special medical care was implicated?
  • At the time of the injury, was the claimant in the process of seeking or receiving healthcare?
  • At the time of the injury, was the claimant providing or assisting in providing healthcare?
  • Is the alleged negligence based on safety standards arising from professional duties owed by the healthcare provider?
  • If an instrumentality was involved in the defendant's alleged negligence, was it a type used in providing healthcare?
  • Did the alleged negligence occur in the course of the defendant's taking action or failing to take action necessary to comply with safety-related requirements set for healthcare providers by governmental or accrediting agencies?

Ross v. St. Luke's Episcopal Hosp., No. 13-0439, 2015 WL 2009744 (Tex. May 1, 2015).

Who Is a Healthcare Provider Under the Texas Medical Liability Act?

The Texas Supreme Court determined that a pharmacy's compounding and delivery of a drug to a physician for use in the physician's office constituted the dispensing of a drug, even though the compounded drug was not labeled for an individual patient. Consequently, the plaintiffs were required to comply with the Texas Medical Liability Act's expert report and other requirements. Coverage under the Medical Liability Act is narrower for pharmacists than for most other health professions.

However, in a separate case the Court of Appeals for the First District of Texas held that Shiloh Treatment Center, a residential treatment center licensed by the Child-Care Licensing Division of the Texas Department of Family and Protective Services, was not a healthcare provider protected by the Texas Medical Liability Act. The plaintiff cited the purpose clause in Shiloh's articles of incorporation, which state that Shiloh provides "community homes and supervision," as evidence that Shiloh was not a healthcare provider. Shiloh argued that because its child-care license includes treatment services, it was "licensed ... to provide health care."

The court disagreed holding that (1) Shiloh provided no evidence of what treatment services it provided and (2) the broad range of services authorized under its license suggested that its services were general in nature rather than medical services. Shiloh argued that it was authorized to provide treatment services for emotional disorders and that this authorization alone was sufficient to make it a healthcare provider. The court held that authority to provide healthcare services alone is not enough to make an entity a healthcare provider for purposes of the Medical Liability Act.

Randol Mill Pharmacy et al. v. Miller et al., No. 13-1014, 2015 WL 1870058 (Tex. Apr. 24, 2015); Shiloh et al. v. Ward, No. 01-14-00626-CV, 2015 WL 1825757 (Tex. App.—Houston [1st Dist.] Apr. 21, 2015, no pet.).

There Must Be 50 Ways to Leave Your Employer?

A group of senior executives from Horizon Health (Horizon) decided to leave the company after it was sold to Universal Health Services. Feeling lucky, the group coined their exit strategy "Project Shamrock." Lady Luck was not on their side for very long, however, as a jury, after a lengthy trial, found that the executives and their new employer were liable for:

  • Breach of covenant not to compete
  • Breach of non-solicitation covenants
  • Breach of fiduciary duty
  • Intentional interference with noncompetition covenants
  • Misappropriation of trade secrets
  • Conversion
  • Theft of trade secrets
  • Harmful computer access
  • Fraud
  • Conspiracy
  • Aiding and abetting
  • Malice

This case is a good example of how a management team "lift out" can quickly lead to liability for a new employer, and highlights some of the steps that a provider can take to minimize the damage done by departing employees.

The president of Horizon, Mike Saul, approached Acadia Healthcare Company (Acadia) with a proposal to establish a management program for mental health services similar to Horizon's for Acadia. After Acadia approved the proposal, Saul went about recruiting senior executives from Horizon (the defendants) for the new Acadia subsidiary. Prior to leaving Horizon, Saul and the executives met to discuss their plans for Acadia, with some charging their travel expenses for this meeting to Horizon.

The short time between the resignations prompted Horizon to conduct a forensic investigation of the company's computers, where it was found that the executives were regularly using Horizon's e-mail system to plan and discuss their departure to Acadia. These exchanges included such colorful expositions as the following: new clients would come out of "Horizon's hide," their departures would leave Horizon "dead," they would hurt Horizon early and often, and they would need to "gut punch" Horizon as they left.

The investigation also found that Saul had purchased an external hard drive for his work computer, which he used to download a "massive, massive amount" of Horizon's data, and that the other executives had also copied and e-mailed themselves numerous Horizon documents. Additionally, the group used the company's confidential contract form by substituting the Acadia subsidiary's name wherever Horizon was mentioned.

Horizon received the following award from the jury: lost profits – $4,198,000; misappropriation and conversion, breach of fiduciary duty, theft of trade secrets, etc. – $6,003,049; restitution for the fair market value of the stolen property – $50,000; exemplary damages – $1,750,000; and attorneys' fees – $769,432. The court, however, reduced the lost profits and exemplary damages portions of the judgment significantly.

Thereafter, the Court of Appeals for the Second District of Texas held that lost profits must be proven with reasonable certainty, and that the inquiry is fact-intensive. The court further instructed that opinions or estimates of lost profits must be based upon objective data where the amount of lost profits can be ascertained, and held that Horizon's expert failed to establish such certainty. Consequently, the court reversed the award of lost profits. The exemplary damages award was modified such that only the individual defendants were assessed exemplary damages, and the total amount of exemplary damages was reduced to just over $1 million in light of the amount of actual damages. The trial court's judgment regarding attorneys' fees was reversed and remanded for a new trial in light of the reduction in compensatory and exemplary damages.

Horizon Health Corp. v. Acadia Healthcare Co. et al., No. 02-13-00339-CV (Tex. App.—Ft. Worth July 23, 2015, no pet. h.).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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