‘Little’ FTC Act Claims Are Some Big Deal

The National Law Journal July 5, 1999 (In Focus: Health Care, p. B7)

Plaintiffs Increasingly Are Relying On These
Friendly State Consumer Protection Laws
In A Widening Variety of Claims And Lawsuits.

By David J. Federbush
Special to The National Law Journal

Antitrust, fraud and traditional malpractice actions have been staples of the health care litigation explosion. There has been steady growth, however, in claims based on state consumer protection laws modeled after the Federal Trade Commission Act.  (1) These laws prohibit unfair or deceptive acts or practices in trade or commerce and refer to FTC precedent for guidance.  (2)

State, or “little,” FTC act causes of action often are included in health care suits because they are attractive to plaintiffs. They can reach conduct not rising to the level of common law fraud (3) and often provide for recovery of attorney fees. (4) Some permit treble damages for willful, knowing or bad faith violations, enabling plaintiffs to raise the stakes in a manner similar to asserting civil RICO claims. (5) They also let state authorities obtain injunctive and, sometimes, monetary relief.

Little FTC act claims usually are brought by consumers against providers, but some courts have held that physicians, alleging professional reputation or other competitive damage, and even insurers have standing. Such rulings often note in dictum that the challenged practices have broad consumer implications.

U.S. Supreme Court decisions in the 1970s (6) established that “learned professions” have commercial aspects and thus are not immune from Antitrust law. These paved the way for state court rulings holding that entrepreneurial and business aspects of legal and medical practices are not exempt from little FTC act coverage.

The Washington state Supreme Court’s seminal 1984 little FTC act decision, citing these precedents, indicated that business aspects of law practice include setting prices, billing, collection, and obtaining, retaining and dismissing clients. The principle was extended to medicine in 1986, and the trend continues in other states. (7)

Little FTC act decisions generally have held representations by physicians, hospitals, dentists and other providers as to qualifications, quality of care and likely outcome of surgery or treatment to be inherent in the practice of medicine, and hence non-entrepreneurial. (8) Connecticut’s high court, for example, held that Yale-New Haven Hospital’s holding itself out as meeting the standard of competency for a major trauma center “is simply what all physicians and health care providers represent to the public–that they are licensed and impliedly that they will meet the applicable standards of care.” (9)

There are exceptions. A 1984 California decision held that a nursing home’s inadequate staffing not only violated state regulations but was also unfair. (10) Under the Michigan and Oregon little FTC acts, false representations that goods or services have specific qualities or meet certain standards are prohibited. (11)

A 1981 Oregon decision held that a dentist’s statement that a bridge would be permanent was actionable. (12) In 1996, a Michigan appellate court upheld a little FTC act claim framed as allegations that a pharmacy advertised that it used a computer system to detect harmful drug interactions, but that a pharmacist using the system failed to detect such an interaction and the patient had a stroke. (13)

That same court, however, later held that a surgeon’s statements to a patient that sutures were dissolvable, when they were not and broke through her nose, gave rise to a malpractice claim but not to a little FTC act claim. The court reasoned that advertising necessarily was commercial. The distinction is sensible–ads, unlike treatment, seek to obtain revenue from new patients–but does not appear to have been widely adopted.

Texas’ little FTC act (14) provides that it does not apply to the rendering of professional services except as to express misrepresentations of material fact, certain failures to disclose, unconscionable acts and breaches of express warranty that cannot be characterized as advice, judgment or opinion. Texas’ high court has held that a plastic surgeon’s representation that a patient’s breasts, after augmentation surgery, would look like those of a nude model in a picture he showed to the patient, was actionable under the statute as an express warranty. (15)

Lack-of-informed-consent claims generally sound in negligence, (16) but Washington state’s first little FTC act health care decision held that such a claim can relate to medicine’s commercial aspect if a physician’s failure to explain risks or alternatives is designed to increase patient volume and profits. (17) Proof of such a motive could entail delving into financial details of a physician’s practice and dealings with other patients.

Deceptive Practices

Consistent with Washington state high court guidelines, courts have held that patients stated little FTC act claims when providers discharged them rather than provide represented help in obtaining Medicare or Medicaid benefits, and when, instead of applying for such benefits, billed at higher, private rates. (18)

A 1998 Texas appellate ruling held that a facility run by anti-abortion activists violated the little FTC act in holding itself out, in the yellow pages and statements to prospective patients, as an abortion clinic and then trying to dissuade patients from having abortions. (19) Courts have allowed claims by health care providers or insurers, as many little FTC acts accord standing to any injured person. (20) A 1998 Washington ruling affirmed that an insurance company could bring such a claim against a chiropractor for filing false injury reports and medical bills in a staged auto accident scheme. (21) The claim was “in accord with the broad legislative intent to protect the public.”

In a 1991 Illinois case, a nursing home told its contract pharmacy that it would assume the pharmacy’s billing but retain 15% of charges for “services.” The pharmacy refused, was replaced by another, and residents’ bills increased without explanation. The court held that the displaced pharmacy had standing to bring a little FTC act claim against the new one for “deceptive” billing practices, noting that they hurt the public. (22)

Months later, a federal court in Illinois upheld a claim by a hospital’s psychiatrist against the hospital for paying a $90-per-day fee to a psychiatric clinic for patients referred and admitted, (23) ruling the practice deceptive to patients as a hidden incentive to hospitalize them. The psychiatrist was accorded standing, as the conduct raised consumer issues in addition to harming his practice.

Courts have also upheld little FTC act claims for manufacturers’ failures to disclose to providers the risks of health products. In a case over adverse drug reaction in Washington, and a breast implant decision in New York, courts held that physicians had standing to bring claims for damage to professional reputation based on failure to warn. (24)

Such claims also have been upheld when made by patients. New Jersey and Minnesota courts denied defendants’ summary judgment motions on women’s claims that manufacturers of intrauterine devices failed to disclose health risks to their doctors. (25) A Massachusetts breast implant decision similarly upheld a judgment for a patient. (26)

In comparable claims, several states’ suits against tobacco companies included little FTC act counts alleging suppression of smoking’s documented health risks. (27)

There are fewer little FTC act health care decisions in the area of unfairness. (28) The FTC’s unfairness test, codified in a 1994 amendment to the FTC Act, (29) is unjustified consumer injury. It requires that injury be substantial, not outweighed by offsetting benefits to consumers or competition, and not reasonably avoidable by consumers. Public policy violations are evidence of, but cannot serve as “a primary basis for,” an unfairness violation.

The amendment’s legislative history, however, indicates that Congress did not intend that it control state statutes. (30) A few states have applied the current FTC test; (31) others rely on an earlier, broader formulation (32) or have developed their own unfairness jurisprudence. (33)

Most unfairness claims have involved insurance settlements. Courts in four states have held that insurers or claims-review contractors that denied or delayed coverage when liability was reasonably clear, or that provided unreasonably low indemnifications, engaged in unfair practices. (34) In Illinois, a chiropractor’s claim was based on harm to reputation from “sham reviews” of the reasonableness and necessity of his charges. A New York court allowed a physician’s claim, noting that the insurer’s conduct could affect accident victims’ access to treatment. (35) Connecticut’s high court let patients assert an unfairness counterclaim in a collection suit solely on the basis of a hospital’s alleged violations of federal and state hospital statutes (36) –allegations insufficient under the FTC test.

One of the few FTC unfairness rulings affords a separate basis for product defect failure-to-warn claims. Applying its 1980 test, the FTC found an unfairness violation in International Harvester’s failure to adequately warn purchasers that its tractors had a known defect that injured and killed a relatively small number of owners. (37)

The FTC issued an administrative complaint in 1997, based only on unfairness, against R.J. Reynolds, alleging that its Joe Camel ad campaign posed unjustified health and safety risks to children and adolescents who could not appreciate those risks. (38) The FTC dismissed the case after the states’ settlement with the tobacco industry. (39) Some of the state suits also had contained allegations that the tobacco companies unfairly directed ads at minors.

A suit filed on May 24 by San Francisco and Los Angeles against gun-makers alleges that their practices violate California’s statute by failing to use available technology to include safety features in handgun designs. (40)

Health care entities making purchases still can use little FTC act claims as standard litigation tools to seek attorney fees and treble damages. Class actions on behalf of providers have been filed recently in New Jersey, Illinois and elsewhere against vendors of physician practice management software systems that allegedly were not Y2K compliant. Many contain little FTC act deception claims. (41) Some have settled for substantial sums. (42)

With the accumulation of precedent, little FTC act claims likely will be used increasingly as weapons in the health care litigation wars.

(1) 15 U.S.C. 41 et seq.

(2) E.g., Conn. GSA § 42-110b(b); Mass. ALM ch. 93A § 2(b); Ill. 815 ILCS 505 § 2.

(3) See, e.g., D.D.D. Corp. v. FTC, 125 F.2d 679, 682 (7th Cir. 1942); Day v. AT&T Corp., 74 Cal. Rptr. 2d 55, 59 (Cal. App. 1998).

(4) E.g., Wash. RCW 19.86.090; Mass. ALM ch. 93A § 9(3); N.Y. McKinney’s Gen. Bus. Law § 349(h).

(5) See, e.g., Mass. ALM ch. 93A § 9(3); Miller v. Risk Mgmt. Foundation of Harvard Med. Institutes, 632 N.E.2d 841, 846 n.13 (Mass. App. Ct. 1994).

(6) Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975); Nat’l Soc. of Prof’l Engineers v. U.S., 435 U.S. 679 (1978).

(7) Short v. Demopolis, 691 P.2d 163, 168 (Wash. 1984). Quimby v. Fine, 724 P.2d 403, 406 (Wash. App. 1986). Fink v. Golenbock, 680 A.2d 1243, 1259 (Conn. 1996); Nelson v. Ho, 564 N.W.2d 482, 484 (Mich. App. 1997).

(8) Burnet v. Spokane Ambulance, 772 P.2d 1027 (Wash. App. 1989); Gatten v. Merzi, 579 A.2d 974 (Pa. Super. 1990); Evanston Hosp. v. Crane, 627 N.E.2d 29, 35 (Ill. App. 1993); Gormley, D.D.S. v. Stover, 907 S.W.2d 448, 450 (Texas 1995).

(9) Haynes v. Yale-New Haven Hosp., 699 A.2d 964, 974-75 (Conn. 1997) (citing Quimby, supra, n.7.

(10) People v. Casa Blanca Convalescent Homes, 206 Cal. Rptr. 164 (Cal. App. 1984).

(11) Michigan M.S.A. § 19.418(3)(c); Oregon O.R.S. § 646.608.

(12) Investigator’s Inc. v. Harvey, 633 P.2d 6, 9 (Ore. App. 1981).

(13) Baker v. Arbor Drugs Inc., 544 N.W.2d 727, 732 (Mich. App. 1996).

(14) Tex. Bus. & C. Code § 17.49(c).

(15) Sorokolit v. Rhodes, 889 S.W.2d 239, 242 (Texas 1994).

(16) E.g., Faya v. Almaraz, 620 A.2d 327, 334 n.6 (Md. 1993); Tex. Bus. & C. Code § 17.46 (b)(23); Drennan v. Community Health Investment Corp., Inc., 905 S.W.2d 811, 823 (Texas App. 1995).

(17) Quimby, supra, n.7; accord, Eriks v. Denver, 824 P.2d 1207, 1214 (Wash. 1992).

(18) Chalfin v. Beverly Enterprises Inc., 741 F. Supp. 1162 (E.D. Pa. 1989); Smith v. Caggiano, 421 N.E.2d 473 (Mass. App. 1981).

(19) Mother & Unborn Baby Care of N. Texas v. State, 749 S.W.2d 533, 542 (Texas App. 1988).

(20) E.g., Wash. RCW § 19.86.090; Conn. GSA § 42-110g; Ill. 815 ILCS 505 § 10a(a).

(21) State Farm v. Huynh, 962 P.2d 854, 858 (Wash. App. 1998).

(22) Sullivan’s Wholesale Drug v. Faryl’s, 573 N.E.2d 1370, 1376 (Ill. App. 1991).

(23) Gadson v. Newman, 807 F. Supp. 1412, 1419 (C.D. Ill. 1992).

(24) Washington State Physicians Ins. Exchange & Assoc. v. Fisons Corp., 858 P.2d 1054, 1061 (Wash. 1993); accord, Vitolo v. Dow Corning Corp., 634 N.Y.S.2d 363, 365-67 (Sup. 1995).

(25) Jones v. Sportelli, 399 A.2d 1047 (N.J. Super. 1979); Kociemba v. G.D. Searle & Co., 680 F. Supp. 1293, 1303 (D. Minn. 1988).

(26) Vassolo v. Baxter Healthcare Corp., 696 N.E.2d 909, 915, 924 (Mass. 1998).

(27) E.g., Maryland v. Philip Morris, No. 96122017/CL211487 (Circ. Ct. Baltimore City); Minnesota v. Philip Morris, Civil No. C1-94-8565 (Minn. Dist. Ct.); Florida v. Amer. Tobacco Co., Civil No. 95-1466AO (Circ. Court, 15th Jud’l Dist.) See www.stic.neu.edu/.

(28) See, David J. Federbush, “The Unexplored Territory of Unfairness in Florida’s Deceptive and Unfair Trade Practices Act,” Fla. Bar J. (May 1999).

(29) 15 U.S.C. 45(n).

(30) See S. Rep. No. 103-130, U.S. Code Cong. & Admin. News, 103d Cong., 2d Sess. (1994), vol. 4 at 1779, 1787-88.

(31) E.g., Legg v. Castruccio, 642 A.2d 906 (Md. App. 1994); Suminski v. Maine Appliance Warehouse Inc., 602 A.2d 1173 (Maine 1992).

(32) See, e.g., People ex rel. Hartigan v. Knecht Svcs. Inc. 575 N.E.2d 1378, 1385 (Ill. App. 1991); People v. Casa Blanca, supra, n.10; Podolsky v. First Healthcare Corp., 58 Cal. Rptr. 2d 89, 102 (Cal. App. 1996).

(33) See, e.g., Anthony’s Pier Four v. HBC Associates, 583 N.E.2d 806, 821 (Mass. 1991).

(34) Zinser v. Rose, 614 N.E.2d 1259 (Ill. App. 1993); Greenspan, M.D. v. Allstate Ins. Co., 937 F. Supp. 288 (S.D.N.Y. 1996); Miller v. Risk Mgmt. of Harvard, supra, n.5; Leingang v. Pierce County Medical Bureau, 930 P.2d 288 (Wash. 1997).

(35) Some little FTC acts, however, specifically exempt insurers and other regulated industries. See Fla. Stat. 501.212(4).

(36) Yale-New Haven Hosp. v. Wilczynski, 683 A.2d 1362, 1368 (Conn. Super. 1995).

(37) 104 F.T.C. 949 (1984). (38) In the Matter of R.J. Reynolds Tobacco Co., Docket No. 9285.

(39)Order dated Jan. 26, 1999.

(40) See, e.g., Roberto Suro, “Calif. Cities, Counties Sue Firearms Makers,” Washington Post, May 26, 1999, at A14.

(41) See, e.g., Courtney, D.O. v. Medical Mgr. Corp., Docket No. ATLL 203198 (N.J. Super)(www.2000law.com / my_html / courtney.html); Yu, M.D. v. IBM, No. 98C8241 (N.D. Ill., filed Dec. 22, 1998) (www.thefederation.org / Public / Y2K / yu.pdf).

(42) See www.medicalmanager.com / press / press36.htm.

This article is reprinted with permission from the July 5, 1999 edition of The National Law Journal © 1999 NLP IP Company. All rights reserved. Further duplication without permission is prohibited.