The Arizona Court of Appeals recently explained the appropriate test to determine the existence of apparent agency.  The court further highlighted courts should not use respondeat superior to determine the existence of apparent agency.[i]

Background

Plaintiff Terrell Fadely (“plaintiff”) had a sixth back surgery with Dr. Michael Chang in March 2016 when she was 73 years old.  This surgery entailed a spinal fusion, which included inserting a titanium rod to permanently connect to vertebrae and stabilize the spine.  This surgery was conducted at HonorHealth Scottsdale Hospital (“HonorHealth”).  After the surgery, plaintiff spent a week at HonorHealth recovering and was discharged with the ability to walk with a walker.

Plaintiff was transported from HonorHealth to Encompass for inpatient recovery and rehabilitation.  Plaintiff chose Encompass as she had recovered there from previous spinal surgery.  Plaintiff did not choose a specific doctor, but Dr. Christopher Barnes was provided as the physician for her.  Dr. Barnes leased space at Encompass and had medical staff privileges.

Dr. Barnes examined plaintiff the day of the admission and she was stable.  A few days later, plaintiff had complaints of sharp, throbbing back pain, and had significant neurological decline.  Dr. Barnes was unavailable, but Dr. Atul Patel examined plaintiff.  Dr. Patel found plaintiff to be “‘mostly non-verbal’” and “‘unable to answer questions unless prodded.’”[ii]  Dr. Patel indicated close monitoring of plaintiff’s neurological status was needed, but he did not perform a neurological exam.

Two days later, Dr. Barnes again examined plaintiff, who had continued to decline.  However, Dr. Barnes did not perform a neurological exam or order any tests.  Dr. Barnes did not call Dr. Chang either as plaintiff had an appointment the following day.

The following day, plaintiff was seen by Dr. Chang’s physician’s assistant, who was concerned of a spinal cord compression.  Plaintiff was rushed to HonorHealth, where she was diagnosed with a spinal compression.  Dr. Chang operated, but the damage was already done.  Plaintiff has never walked again.  She also required a tracheotomy tube for months and spent almost two years in long-term facilities.

Bench Trial

Plaintiff sued Encompass in 2017.  Her complaint alleged abuse and neglect under the Adult Protective Services Act (“APSA”), but she never sued Dr. Barnes or Dr. Patel individually.

The bench trial was 12 days, and the superior court ruled for plaintiff.  The court awarded Plaintiff $1.7 million in compensatory damages, based on finding Drs. Barnes and Patel had abused or neglected plaintiff under APSA.

The superior court did not find Encompass directly caused the injuries to plaintiff, but found “Encompass liable for the ‘actions and inactions’ of Drs. Barnes and Patel because either (1) the doctors were the “apparent agents of Encompass,” making Encompass “vicariously liable for [their] acts and omission,” or (2) Drs. Barnes and Patel were “part of Encompass’[s] ‘enterprise’ for providing [plaintiff]’s care.””[iii]  Encompass then appealed the ruling.

Appeal

The court of appeals affirmed the “enterprise” finding but reversed as it related to apparent agency.

Enterprise

Under enterprise theory, the “APSA defines ‘enterprise’ as ‘any group of persons associated in fact although not a legal entity’ involved in caring for “a vulnerable adult.”[iv]  Further, a “person” is generally defined as “a corporation, company, partnership, firm, association, or society, as well as a natural person.”[v]

As such, Encompass, and Drs. Barnes and Patel formed an “enterprise” to provide care for plaintiff, the vulnerable adult.  Further, using the analogy under RICO’s definition of enterprise, the court found they worked as a “continuing unit” towards the common purpose of treating plaintiff.[vi]

The appellate court found Encompass could not “care for patients without human beings,” and Encompass had assigned Dr. Barnes for the primary responsibility to care for plaintiff.[vii]  Additionally, the appellate court found there was a framework existed, whether formal or informal, between Encompass and Drs. Barnes and Patel to “discharge their common purpose.”[viii]  Further, Drs. Barnes and Patel could not treat Encompass’s patients unless they complied with Encompass’s policies, procedures, and bylaws.  Thus, the appellate court upheld the finding Encompass and the physicians formed an enterprise to care for plaintiff, which subjected Encompass to liability under APSA.

Apparent Agency Theory

Under apparent agency theory, the trial court found apparent agency because plaintiff “looked to Encompass for treatment, not a specific physician, and Plaintiff had no choice of treating physicians.”[ix]  The appellate court determined this was improper because the superior court applied the incorrect legal standard.

The trial court applied a respondeat superior analysis.  Respondeat superior applies during an employer-employee relationship, but Encompass did not employ Drs. Barnes or Patel.  As such, the respondeat superior analysis was improper.

Apparent agency is created “only when (1) a principal “intentionally or inadvertently” leads on party “to believe an agency exists,” and (2) the party justifiably relies on the principal’s representations.”[x]  Here, however, Encompass never led or misled plaintiff to believe Drs. Barnes and Patel were agents or employees of Encompass.  Further, plaintiff signed a form titled “Consent to Treat and Conditions of Admission”, which stated, “Encompass did not control the “medical services” of independent practitioners who “practice independently under their state license and privileges granted by the hospital,” “Maintain sole responsibility for their medical judgment and professionalism,” and “bill and collect their services independently from the hospital.”[xi]  Thus, the consent form clearly informed plaintiff the independent relationship between itself and Drs. Barnes and Patel, and plaintiff could not show either a representation or justifiable reliance for apparent agency.

Plaintiff argued the consent form was ambiguous, but the appellate court disagreed.  The appellate court found the consent form described the relationship between Encompass and Drs. Barnes and Patel.

Takeaway

While a medical entity can be vicariously liable for the conduct of its physicians who are direct employees, if a medical entity hires independent contractors as physicians, it is important to expressly outline in a writing, such as a consent form (where the patient signs and understands the consent) when the specific physicians are independent contractors and not employees.  This will limit potential liability to the medical entity based on the actions of the independent contractors.  Further, a medical entity may want to have independent contractor physicians sign indemnification agreements to protection the medical entity from possible enterprise liability arising, such as an APSA claim.

[i] Fadely v. Encompass Health Valley of the Sun Rehab. Hosp., 1 CA-CV 21-0478, (Ariz. Ct. App. Jun. 28, 2022).

[ii] Id. at 6.

[iii] Id. at 10.

[iv] Id. at 26; A.R.S. §46-455(Q).

[v] A.R.S. §§ 1-215(29).

[vi] Id. at 27.

[vii] Id.

[viii] Id.

[ix] Id. at 13.

[x] Id.; See Brown v. Ariz. Dep’t of Real Estate, 181 Ariz. 320, 326, (App. 1995) (citing Gershweir, 160 Ariz. at 205); see also Restatement (Second) of Agency § 267 (1958) (justifiable reliance).

[xi] Fadely at 16.

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