June 14, 2010
“Dr. P.,” an anesthesiologist, was hired as the medical director of a for-profit ambulatory surgery center, “ASC-D.” Dr. P. and the other members of the anesthesiology department were to provide anesthesia services at ASC-D and at a number of off-site private physicians' offices. Dr. P.’s employment contract required him to turn over all fees earned from anesthesia services, including cases performed off the ASC’s premises. Under the contract, Dr. P., like other anesthesiologists employed by the ASC, was to receive a share of those fees back in the form of distributions from the annual “Net Anesthesia Revenue Pool” in addition to his base salary.
ASC-D never made any of the promised “Net Anesthesia Revenue Pool” payments to any of the anesthesiologists. Dr. P. began withholding a portion of the fees he received for off-site anesthesia. In due course ASC-D informed the anesthesiologists that, unless they signed contract amendments eliminating their right to pool payments, they would be terminated.
Dr. P. refused to sign, and he was fired. He filed a lawsuit for breach of contract against ASC-D, seeking his share of pool payments as well as severance pay. The ASC counter-claimed for the off-site anesthesia fees Dr. P. had withheld.
The trial court awarded nearly $1 million damages plus attorneys’ fees to Dr. P., finding that he had been fired without “just cause” and was therefore entitled to severance pay under the contract. As for the ASC’s counter-claim, the court held that by requiring Dr. P. to turn over his fees for services provided to non-ASC patients, the contract provided for illegal fee-splitting. It rejected ASC-D’s arguments that the statute prohibiting fee-splitting applied only to physicians and not to hospitals or surgery centers and that it was irrelevant in the context of an employer-employee relationship.
The trial court held that an agreement for an illegal activity is unenforceable. There was thus no basis for ordering Dr. P. to honor his commit to give ASC-D his professional earnings from off-site services. The illegal provision was severed from the rest of the contract. ASC-D then argued that the entire contract should be unenforceable – not just the fee-splitting provision, but also the unjust termination and other contractual provisions on which Dr. P.’s damages were based. If the court had any views on the ASC’s audacious attempt to leverage its own authorship of illegal provisions to deny the other party the protection of the rest of the contract, such views do not appear in the written record.
ASC-D lost the argument for invalidating the entire contract, appealed the decision, and lost again on the first-level appeal. (Most jurisdictions, including the federal system and the individual states, have three judicial levels: the trial court, the intermediate appellate court, and the court of final appeal.) The first appellate court affirmed the trial court’s ruling enforcing the contract except for the fee-splitting provision. ASC-D appealed again.
The highest court in the state where this litigation was conducted reversed both lower courts. In a decision published in early June, the highest court wrote a new wrinkle into the saga: even if the fee-sharing arrangement were illegal, it was not repugnant to public policy but was merely malum prohibitum as opposed to conduct that was evil in and of itself, or malum in se.A malum prohibitum is enforceable in a contract. The court wrote: “Forfeitures by operation of law are disfavored, and allowing parties to escape their contractual obligations, freely entered into, is especially inappropriate” in this instance where there were regulatory mechanisms such as sanctions by the state medical board to penalize the illegal conduct.
Appellate courts generally resolve only the narrow questions before them. Here the high appellate court only had to decide whether the agreement to split fees was enforceable. Having decided that it was, the court sent the case back down to the trial court to “consider whether defendant [ASC-D] is entitled, under the terms of the agreement, to a set off derived from the funds, if any, held by [Dr. P.], against the amount of recovery in this case.”
To summarize in plain English,
- Anesthesiologists should be wary of agreements to give their hospitals or surgery centers any of the fees that they earn for providing services to patients particularly at other facilities.
- Under state statutes, such agreements may amount to illegal fee-splitting.
- Illegal fee-splitting can occur within an employer-employee relationship; a hospital or ASC does not necessarily enjoy special privileges in demanding a share of its employed physicians’ professional service income earned off campus.
- The law will not invariably protect anesthesiologists from owing money under otherwise-illegal agreements to split fees.
- The law of fee-splitting varies from state to state and the outcome in Dr. P’s case might be quite different in another state.
As readers can probably see for themselves, this Alert was written by a lawyer who enjoys poking fun at the way in which the law can complicate issues as well as at “legalese.” We hope, nonetheless, that our brief review of fee-splitting provisions in anesthesia employment contracts is useful to you.
With best wishes,
Tony Mira
President and CEO
