Please see Mr. Ismail’s post in the Maryland Appellate Blog on “Twombly-Iqbal ‘Plausibility’ and Maryland’s Pleading Requirements. https://mdappblog.com/2017/04/19/twombly-iqbal-plausibility-and-marylands-pleading- requirements/#more-3068
President-Elect Donald Trump vowed, if elected, to “drain the swamp” in Washington, D.C. As part of that effort, Trump promised that he would undo many of the regulations enacted during President Obama’s eight years in office. With a Republican in the White House and Republicans controlling both the House and the Senate, the climate is ripe for Trump’s de-regulation promises to become a reality. One regulation likely to be targeted by President-Elect Trump – at least in part – is the Department of Labor’s (DOL’s) revised overtime rule, set to become effective December 1, 2016.
The overtime rule more than doubles the exempt salary threshold under the Fair Labor Standards Act (FLSA) from $455.00 weekly ($23,660 annually) to $913.00 weekly ($47,476 annually). Thus, beginning December 1st, employees making less than $913.00 per week (unless specifically exempted) must be paid time-and-a-half for any hours worked over a standard 40-hour week. The impact is not insignificant. It is estimated that over four million workers who previously would have been exempt will receive overtime pay under the revised law.
President-Elect Trump’s anti-regulation stance is no secret. He believes that fewer regulations will spur economic growth. Nevertheless, a whole-sale undoing of the overtime rule may not be in the cards. First, on the campaign trail, Trump did not cite the rule as a priority. When asked about it, he seemed to advocate for a small business exception to the rule, rather than doing away with the rule in its entirety. Second, given Trump’s higher priorities – like repealing and replacing the Affordable Care Act – he may not wish to use his political capital on this issue. Third, rolling back the overtime rule may be unpopular among Trump’s working-class supporters. Thus, rather than getting rid of the rule in its entirety, it is likely that President-Elect Trump will strike a middle-ground by phasing-in gradual salary threshold increases over time, carving-out a comprehensive exception for small businesses, or undoing that portion of the rule that requires the salary thresholds to increase automatically every three years.
Whatever changes may be on the horizon, absent success in the pending lawsuit that has been brought by twenty-one states and various business groups against the DOL seeking to enjoin implementation of the rule, nothing is likely to happen before the December 1 effective date. Thus, for now, the only prudent course is for employers to continue taking action to ensure that they will be in full compliance with the overtime rule by December 1st. Should there come a time when the regulation is rolled back – in whole or in part – employers will need to reevaluate the situation, keeping in mind the laws of their particular state, the time and effort already expended on compliance, the additional resources required to reclassify or change compensation, as well as morale and other workforce issues.
Is it reasonable for a patient to believe that her health insurer is the employer of its in-network physicians? If so, can the insurer be held liable for the actions of in-network physicians? Just how much should an insurer assume that patients know about healthcare finance? A recent case in Maryland addressed these very questions. The answers may change the way healthcare providers do business.
Bradford v. Jai Medical Systems
In Maryland, a hospital may be liable for the negligence of a non-employee physician under the doctrine of apparent agency.[i] Only recently, though, has the state’s highest court held that this doctrine extends to managed care organizations (MCOs) as well.
In Bradford v. Jai Medical Systems, the Maryland Court of Appeals[ii] considered whether an MCO could be held liable for the negligence of an in-network provider.[iii] The plaintiff, a member of an MCO, sought a referral from her primary care physician for a specific podiatrist for treating her bunion. As a result of the podiatrist’s negligent care, the plaintiff underwent partial amputation of her foot.[iv] The plaintiff then sued, naming her MCO as one of the defendants. Though the negligent podiatrist was not an employee of the MCO, the plaintiff claimed that the MCO was liable under the doctrine of apparent agency.
At trial, a jury found for the plaintiff, and the MCO appealed. The Maryland Court of Special Appeals reversed, finding that the plaintiff did not fulfill the criteria of apparent agency and faulting the lower court for not applying the “common knowledge” test.[v] The Maryland Court of Appeals, the state’s highest court, affirmed, but disagreed, in part, with the intermediate court’s reasoning.
MCOs may be liable under apparent agency
MCOs encompass a variety of organizational structures formed to reduce healthcare costs. They include preferred provider organizations (PPOs), which generally cover both in-network and out-of-network physicians and charge more for the latter, and health maintenance organizations (HMOs), which generally restrict coverage to in-network physicians and require members to select a primary care physician. The defendant MCO in Bradford operated like an HMO and did not directly employ any healthcare providers.
Maryland has adopted the doctrine of apparent agency as set forth in the Restatement (Second) of Agency § 267.[vi] The doctrine, as applied by Maryland courts, holds a person or entity (“the principal”) liable for the actions of a non-employee (the apparent agent) when three criteria are met. First, the principal must have created, or allowed creation of, an appearance of agency, i.e., that the principal employed the apparent agent. Second, the plaintiff must have subjectively believed an agency relationship existed and relied on her belief. Finally, the plaintiff’s belief and reliance on that belief must be objectively reasonable.
In prior cases, Maryland courts have held that hospitals may be liable for the actions of independent-contractor physicians, in the capacity of apparent agents of the hospital.[vii] For example, if an emergency room is operated by a hospital’s independent contractors, but the emergency room is within the same physical structure as the hospital and there are no signs indicating that the hospital does not directly run the emergency room, the hospital is liable for the negligence of the emergency room physicians.[viii] The Court of Appeals in Bradford reasoned that an MCO, like a hospital, may lead members to believe that in-network physicians are employed by the MCO. Explaining that “there is no reason to preclude application of the theory of apparent agency in the context of an MCO and a network physician,” the court thus joined the courts of Illinois, Florida, and Pennsylvania in holding that MCOs may be liable under the doctrine of apparent agency.[ix]
The Bradford court ultimately found that the plaintiff had failed to establish apparent agency. Though the plaintiff claimed that the text of the MCO’s directory of in-network physicians suggested that the physicians were employees of the MCO, the court found no such suggestion, especially considering that the directory listed the names of 4,000 providers, including numerous hospitals and nationally known retailers and pharmacies like Wal-Mart and Rite Aid. The plaintiff showed that she subjectively believed the podiatrist was employed by the MCO, but the court held that her belief was not reasonable—the MCO did not hold out its providers as employees, and the plaintiff did not receive treatment on or near the MCO’s premises. Had the podiatrist been located in the same building as the MCO’s offices, there might have been a different result—or at least a question of fact created. Then, it would have been left to a jury to determine whether the MCO had implied that the physician was its employee.
The “common knowledge” test is inapplicable to MCOs
The Court of Appeals affirmed the intermediate court’s decision, but it disagreed in regard to the application of the “common knowledge” test. Under this test, a plaintiff cannot prevail on a claim of apparent agency if his belief contradicts matters of common knowledge. For example, it is common knowledge that an oil company’s signs and emblems at a gas station indicate only that the company’s products are sold at the station, not that the oil company owns and manages the station. Therefore, a plaintiff may not successfully claim that an oil company’s signs led him to believe that a gas station attendant was an employee of the oil company.[x]
The intermediate court in Bradford ruled in favor of the defendant MCO, based in part on the common knowledge test. Here, the plaintiff’s belief that the MCO employed the podiatrist was not objectively reasonable, because “it is common knowledge that MCOs are the equivalent of insurance providers and not the provider of actual medical services.”
The Court of Appeals pointedly disagreed and instead held that the common knowledge test is inapplicable to healthcare finance. First, the Court noted that MCOs, due to their diversity, may be very different from traditional insurers. MCOs may finance healthcare services directly and may even employ healthcare providers. Thus, an assertion that MCOs do not provide medical services is not necessarily accurate and therefore not common knowledge.
Second, when a court finds that a decisive fact is a matter of common knowledge, it is taking judicial notice that no person of ordinary intelligence could possibly have a belief contradicting that fact. Citing research showing that only a small percentage of Americans understand fundamental insurance terms like “deductible” and “copay,” the court explained that “it is not clear that details of health care finance are ‘common knowledge’ even to well educated members of our society.”
Apparent agency is not a new concept in the health sector. Hospitals in Maryland know, or should know, that an independent-contractor physician can create liability if the hospital does not clearly communicate to patients the actual status of the physician as an independent-contractor. But MCOs may be surprised to learn that they are subject to the same test in regard to professional liability.
Based upon the recent decision in Bradford, MCOs should clearly state in their directories that in-network physicians are not employees of the organization. Also, if the in-network physicians are located in the same building as an MCO, that MCO should require that the physicians post signs clearly stating that the physicians are not employed by the MCO.
Finally, MCOs should consider requiring that their members sign a form containing an express acknowledgement that healthcare providers in the MCO’s network are not the employees or agents of the MCO. Such documentation would establish unequivocally that the MCO is not representing the providers in its network as its agents, rather than leaving it up to the courts to decide that such a presumption could not be inferred from the actions they did take. An express acknowledgement, signed by an MCO’s members, would also serve to contradict a plaintiff’s claim that he subjectively believed that there was an agency relationship between the MCO and the provider, and that his belief was reasonable.
This case shows that MCOs cannot rely on claims of “common knowledge” in asserting that patients realize that in-network physicians are not agents of the MCO. When it comes to healthcare finance, MCOs, hospitals, and physicians should not assume that patients understand basic terms and concepts. Taking the time to explain, and then fully document, fundamental concepts upfront may reduce the likelihood of litigation later on.
- Mehlman v. Powell, 281 Md. 269, 378 A.2d 1121 (1977).
- The Court of Appeals is Maryland’s highest court. The Court of Special Appeals is the intermediate appellate court.
- Bradford v. Jai Med. Sys. Managed Care Orgs., Inc., 439 Md. 2, 93 A.3d 697 (2014).
- The podiatrist’s negligence was undisputed, as a default judgment had been entered.
- JAI Med. Sys. Managed Care Org., Inc. v. Bradford, 209 Md. App. 68, 57 A.3d 1068 (2012) cert. granted, 431 Md. 219, 64 A.3d 496 (2013) and aff’d sub nom. Bradford v. Jai Med. Sys. Managed Care Orgs., Inc., 439 Md. 2, 93 A.3d 697 (2014).
- See B. P. Oil Corp. v. Mabe, 279 Md. 632, 370 A.2d 554 (1977).
- Mehlman, 281 Md. 269; Debbas v. Nelson, 389 Md. 364, 885 A.2d 802 (2005); Hunt v. Mercy Med. Ctr., 121 Md. App. 516, 710 A.2d 362 (1998).
- Mehlman, 281 Md. 269.
- Petrovich v. Share Health Plan of Illinois, Inc., 188 Ill. 2d 17, 719 N.E.2d 756 (1999); Ramos v. Preferred Med. Plan, Inc., 842 So. 2d 1006 (Fla. Dist. Ct. App. 2003); Boyd v. Albert Einstein Med. Ctr., 377 Pa. Super. 609, 547 A.2d 1229 (1988).
- Chevron, U.S.A., Inc. v. Lesch, 319 Md. 25, 570 A.2d 840, 845 (1990).
While it is generally difficult to recover attorneys’ fees in the absence of a statute, rule, or contract,[i] many attorneys often will ask for them at the outset of litigation, either because that is what they normally do or because their opposing counsel has asked for them. While ordinarily this might not be a significant issue, it can be if the forum is an American Arbitration Association (“AAA”) arbitration.
Reflexively asking for attorneys’ fees in a AAA arbitration, simply because your opponent did, can be a trap for a number of reasons. To begin with, Rule 47(d)(ii) of the AAA Rules provides that an arbitrator may award attorneys’ fees if either: (1) both parties request an award of attorneys’ fees; or (2) the award is authorized by law or the arbitration agreement.[ii] What this means is that the arbitrator may award fees even if the parties agreed otherwise in a document, including an arbitration agreement. This can happen either where the arbitrator determines that an award is authorized under the law – even if it’s at odds with an arbitration agreement – or because both sides have requested it. In some cases, we have seen respondents/defendants—who asked for attorneys’ fees simply because the other side did—get hit with a fee award after they lost the case.
An award of attorneys’ fees at arbitration is likely to surprise clients and insurance adjusters, particularly in cases where an agreement did not allow for an award of fees but their counsel mistakenly asked for them. Indeed, we have taken part in panel discussions with adjusters and in-house attorneys who believe it is below the standard of care to seek attorneys’ fees reflexively at AAA arbitrations. As such, it is possible that legal malpractice claims will arise out of the decision to seek attorneys’ fees in a AAA arbitration. Accordingly, the best course of action is to scrutinize whether seeking an award of attorneys’ fees makes sense given the facts, and refrain from asking for the fees simply because your opponent has done so.
[i] Pacific Employers Ins. Co. v. Eig., 864 A.2d 240, 160 Md. App. 416 (2004).
[ii] See AAA Rules, 47(d)(ii).
5 Things That Can Make Or Break A Case Involving Intentional Acts Committed By An Employee
Recently, we handled a case in Maryland involving claims made against a private school for the intentional acts of one of its employees. In an effort to recover money damages and reach a possible insurance policy, plaintiffs often assert claims that center on the school’s purported negligence in (1) supervising; and (2) hiring the employee. When faced with similar claims in Maryland, it’s important at the outset to remember five key things that can make or break the case.
1. Were The Alleged Acts Within The Scope Of Employment?
The law in Maryland is clear that an employer may be vicariously liable for the tortious acts of its employees, but only if those acts are within the scope of employment. Tall v. Bd. of School Commissioners of Baltimore City, 120 Md. App. at 251, 706 A.2d at 667.[i] “An employee’s tortious conduct is considered within the scope of employment when the conduct is in furtherance of the business of the employer and is authorized by the employer.” Id. When faced with a case involving employee intentional torts, the Court of Appeals of Maryland has concluded that:
To be within the scope of the employment the conduct must be of the kind the servant is employed to perform and must occur during a period not unreasonably disconnected from the authorized period of employment in a locality not unreasonably distant from the authorized area, and actuated at least in part by a purpose to serve the master.
Sawyer v. Humphries, 322 Md. 247, 255, 587 A.2d 467, 471 (1991).
Stated more simply, the test for whether an employee is acting within the scope of employment “is whether the servant was advancing his master’s interests in doing what he did at the time he did it.” Rusnack v. Giant Food, Inc., 26 Md. App. at 265, 337 A.2d at 454.[ii]
2. Were The Alleged Acts Of A More Personal Nature?
In contrast to the above, where “an employee’s actions are personal, or where they represent a departure from the purpose of furthering the employer’s business, or where the employee is acting to protect his own interest, even if during normal duty hours and at an authorized locality, the employee’s actions are outside the scope of his employment.” Sawyer v. Humphries, 322 Md. at 256-57, 587 A.2d at 471 (citations omitted) (emphasis added). Indeed, “‘[w]here the conduct of the servant is unprovoked, highly unusual, and quite outrageous’ courts tend to hold ‘that this in itself is sufficient to indicate that the motive was a purely personal one’ and the conduct outside the scope of employment.” Id. at 257, 587 A.2d at 471 (emphasis added).
3. Did The Alleged Acts Involve Sexualized Contact?
Courts interpreting Maryland law specifically have held that employers cannot be vicariously liable for sexual assaults committed by their employees because such conduct is by its nature personal, does not further an employer’s business and, as a matter of law, is not an act within in the scope of employment. Selective Ins. Co. v. Oglebay, 242 Fed. Appx. 104, 106 (4th Cir. 2007) (“[U]nder Maryland law, the intentional acts committed by Mr. Oglebay [a driving instructor alleged to have sexually assaulted a mildly mentally retarded student] were not ‘within the scope of his employment.’”); Morash v. Anne Arundel County, 2004 WL 2415068, * 5 (D. Md. Oct. 28, 2004) (“Actions taken out of ‘a desire to fulfill sexual urges may not be actuated by a purpose to serve the employer’ and are outside the scope of employment. . . . [Accordingly], Morash’s claim of respondeat superior liability will be dismissed.”) (quoting Lewis v. Forest Pharm., Inc., 217 F.Supp.2d 638, 659 (D. Md. 2002)); Green v. The Wills Group, Inc., 161 F.Supp.2d 618, 626 (D. Md. 2001) (“[U]nder Maryland law, an employer is not vicariously liable for the torts of assault and battery based on sexual assaults by another employee as they are outside the scope of employment.”).[iii]
4. Did The Employer Use Reasonable Care In Hiring The Employee?
When analyzing liability for the hiring of an employee who committed an intentional tort, under Maryland law, “an employer’s liability [for negligent hiring/retention] is not to be reckoned simply by the happening of an injurious event. Rather, there must be a showing that the employer failed to use reasonable care in making inquiries about the potential employee[.]” Economides v. Gay, 155 F.Supp.2d 485, 489 (D.Md. 2001) (citations omitted) (emphasis added). In Economides, the Court granted the defendant’s motion to dismiss, holding:
Although Plaintiffs allege that Dean Witter demonstrated negligence in hiring and retaining Mr. Gay, they fail to allege a specific instance illustrating that Dean Witter failed to use reasonable care in employing this particular employee. Consequently, the court shall dismiss this claim.
Id. at 489-90 (emphasis added).
Thus, a dispositive motion will often be successful unless the plaintiff can demonstrate more than bald allegations of negligent hiring.[iv]
5. Did The Employer Have Reason To Believe That The Employee Might Have A Propensity To Engage In Improper Conduct?
In order to succeed on a claim for negligent supervision, a plaintiff would have to establish, among other elements, that a defendant knew or should have known that the employee in question had a propensity to engage in improper conduct. Williams v. Cloverland Farms Dairy, Inc., 78 F. Supp. 2d 479, 484 (D. Md. 1999); Evans v. Morsell, 284 Md. 160, 395 A.2d 480 (1978). Often, in cases involving the intentional acts of employees, another issue will center on whether the acts were reported. The acts often go unreported or underreported, with the plaintiff arguing that he/she failed to report the acts for fear of being retaliated against by the employer. Under Maryland law, however, a generalized fear of retaliation does not excuse a failure to report improper actions and/or sexual harassment on the part of one offended or purportedly injured by the employee. Barrett v. Applied Radiant Energy Corp., 240 F.3d 262, 267 (4th Cir. 2001); Matvia v. Bald Head Island Mgmt., 259 F.3d 261, 270 (4th Cir. 2001); Bush v. Potter, 2009 WL 5177286, No. AW-06-959 *6 (D.Md. Dec. 21, 2009).
While litigation centering on intentional acts committed by employees often grabs headlines and can be embarrassing – particularly when the acts are sexual in nature – Maryland law generally protects employers who take reasonable precautions. Generally, in Maryland, an employer is not liable for the intentional acts of an employee that were not committed within the scope of his or her employment. Further, intentional, sexualized contact (such as abuse) generally can never be within the scope of employment. As for a claim of negligent hiring tethered to other sexualized contact claims, a plaintiff must show that the employer failed to use reasonable care in hiring the employee in question and that the employer knew that the employee had a history of engaging in the kind of acts called into question.
[i] See also Dhandraj v. Potomac Electric Power Co., 62 Md. App. 94, 98, 488 A.2d 512, 514 (1985); Rusnack v. Giant Food, Inc., 26 Md. App. 250, 261, 337 A.2d 445, 451-52 (1975); Perry v. FTData, Inc., 198 F.Supp.2d 699, 708-09 (D. Md. 2002) (dismissing respondeat superior claim, in part on the grounds that plaintiff “does not allege that FTData knew or should have known of the conduct so as to authorize it or that FTData ratified it”).
[ii] See also Guzel v. State of Kuwait, 818 F.Supp. 6, 10 (D.D.C. 1993) (“As solely a question of common sense, it is difficult to comprehend how any sexual assault could be committed for a purpose other than that of the individual. Sexual assault is, by its nature, a crime committed for personal reasons.”).
[iii] See also Thomas v. BET Sound-Stage Restaurant/BrettCo., Inc. 61 F.Supp.2d 448, 454 (D. Md. 1999) (dismissing claims against the employer/restaurant for the alleged sexual assault of an employee by the restaurant’s manager, holding “as a matter of law, an employer is not vicariously liable for sexual assault and harassment of its employee, as such acts are outside the scope of employment”); Wolfe v. Anne Arundel County, 374 Md. 20, 34, 821 A.2d 52, 60 (2003) (police officer who made a traffic stop and then raped the female motorist was not acting within the scope of his employment); Tall v. Bd. of School Comm’rs of Balt. City, 120 Md. App. at 257, 706 A.2d at 670 (school is not vicariously liable, as a matter of law, for the sexual assaults committed by a school employee upon a student).
[iv] As the Court of Appeals of Maryland has aptly noted, a complaint in a negligence action must “allege, with certainty and definiteness, facts and circumstances sufficient to set forth (a) a duty owed by the defendant to the plaintiff, (b) a breach of that duty and (c) injury proximately resulting from the breach.” Scott v. Jenkins, 345 Md. 21, 28, 690 A.2d 1000, 1003 (1997) (quoting Read Drug and Chemical Co. v. Colwill Constr. Co., 250 Md. 406, 412, 243 A.2d 548, 553 (1968)) (underlining added). “Merely stating that a duty existed, or that it was breached, or that the breach caused the injury does not suffice[.]” Horridge v. St. Mary’s County Dept. of Social Services, 382 Md. 170, 183, 854 A.2d 1232, 1238 (2004).
FINRA Expungements And Proposed Rule 2081
Over the last few years, the chorus of voices demanding a change in the way FINRA handles expungements has grown louder. From Iowa Senator Charles Grassley to the influential Public Investors Arbitration Bar Association (PIABA), concerns have been raised that it has been too easy for brokers and other financial services professionals to scrub customer complaints from FINRA’s Central Registration Depository. Regardless of the fact that from 2007 through 2012 FINRA granted expungements in less than 5% of cases (838 out of 17,765 cases), FINRA, in 2014, has made a proposal to the Securities and Exchange Commission to adopt Rule 2081, which will make expungements more difficult to obtain. This presentation provides an overview of FINRA’s approach to handling expungements and what the industry can expect if Rule 2081 is implemented.
The Central Registration Depository
Every financial services professional who is licensed to sell securities in this country has a “CRD” number. CRD stands for Central Registration Depository, which is a central licensing and registration database that contains the registration records of over 6,800 broker-dealers and 660,000 securities representatives. The CRD contains information about registered personnel, including customer complaints, arbitration claims, and court filings made by customers, and the arbitration awards or court judgment that may result from those claims or filings – what is commonly called “customer dispute information.”
FINRA’S Expungment Framework
Brokers who wish to have customer dispute information removed from the CRD system must seek expungement – which FINRA has long described as an “extraordinary remedy” (see footnote 14, infra) – pursuant to FINRA Rule 2080 (formerly NASD Rule 2130). FINRA Rule 2080 provides that firms and associated persons seeking expungement of customer dispute information from the CRD system must name FINRA as a party and obtain a court order that either directs expungement or confirms an arbitration award containing expungement relief. Upon request, FINRA may waive the obligation to name it as a party if FINRA determines under Rule 2080 that the expungement relief is based on an affirmative judicial or arbitral finding that one of three elements are present:
- The claim, allegation or information is factually impossible or clearly erroneous;
- The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
- The clam, allegation or information is false.
Interestingly, under the plain language of Rule 2080(a), the only requirement for expungement seems to be that the party seeking expungement “obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.” This appears to be at odds with later guidance provided by FINRA, including in its “Expanded Expungement Guidance,” where FINRA emphasizes the need to find one of the three elements listed above. In actuality, Rule 2080 does not appear to require a finding of the three elements in order to grant expungement relief (the three elements only relate to the waiver requirement pertaining to FINRA), although FINRA continues to intimate that arbitrators must describe which of the three elements are present to support expungement.
Problems Associated With FINRA Rule 2080
The above notwithstanding, FINRA has continued to express concern at the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement relief. Essentially, FINRA takes issue with what it perceives as defense counsel “purchasing” expungements while settling cases. FINRA has taken certain steps over the years to address these concerns, including adopting NASD Rule 2130 in 2004 (FINRA was formerly known as the NASD, or the National Association of Securities Dealers) which stated that the Rule’s affirmative determination requirement imposed on arbitrators would reduce, if not eliminate, the risk of expunging information that is critical to investor protection and regulatory interests based on an agreement between the parties. FINRA also cautioned associated persons and firms that negotiating settlements with customers in return for exculpatory affidavits that the firm or associated knows or should know are false or misleading was a violation of FINRA Rules.
The Adoption Of FINRA Rule 12805
In 2008, FINRA adopted FINRA Rule 12805 to require arbitrators to perform additional fact finding before recommending expungement of customer dispute information from the CRD system. FINRA Rule 12805 requires arbitrators, among other things, to do the following when presented with a request for expungement:
- Review settlement documents;
- Review the amount of payments made to any party, and any other terms and conditions of the settlement;
- Indicate in the award which of the grounds in FINRA Rule 2080 serves as the basis for their expungement recommendation, and;
- Provide a brief written explanation of the reasons for recommending expungement.
In implementing this Rule, FINRA believed the requirements listed above would alleviate any concerns over arbitrators recommending expungement under what might appear to be questionable facts and circumstances.
FINRA Comments Suggesting Expanded Expungement Requirements
In addition to the requirements of Rules 2080 and 12805, FINRA has also made various comments in proposals and notices stating that expungement relief can only be granted when the information being expunged “has no meaningful investor protection or regulatory value.” This language has always been viewed as problematic since a claim could be found to be factually impossible, clearly erroneous, or false under Rule 2080, and yet the claim could relate to an issue of “meaningful investor protection or regulatory value” that would preclude expungement. Importantly, FINRA has not announced that this language is a necessary element for granting expungement relief, but it is something to be mindful of as we have seen arbitration panels mention it at hearings and in telephone conferences when considering the issue of expungement.
Proposed FINRA Rule 2081
Despite the steps it has taken previously, FINRA continues to be concerned about whether firms and associated persons should be prohibited from otherwise compensating customers in return for the customer’s agreement not to oppose expungement of customer dispute information from the CRD system. As a result, in 2013, FINRA sent to arbitrators and published on its website guidance stating that, in determining whether to recommend expungement relief in settled arbitration claims, arbitrators should inquire whether a party conditioned settlement on an agreement not to oppose a request for expungement relief.
Following that, FINRA proposed adopting Rule 2081, which would provide that no member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to agree or not oppose the member’s or associated person’s request to expunge such customer dispute information from the CRD system.
Rule 2081’s proposed prohibition would apply to both written and oral agreements and agreements entered into during the course of settlement negotiations, as well as to any agreements entered into separate from such negotiations. The proposed rule change would, for instance: (1) preclude a firm or associated person from conditioning the settlement of a customer’s claim on the customer’s agreement to consent to, or not to oppose, the firm’s or associated person’s request for expungement; and (2) would preclude a firm or associated person, following a settlement of the dispute at issue, from compensating the customer in return for the customer not opposing the firm’s or associated person’s expungement request.
Not surprisingly, the plaintiff’s bar supports the idea of adopting Rule 2081, with PIABA declaring that while “FINRA has taken steps in the past to discourage the practice of conditioning settlements on the customer’s consenting to or not opposing expungement, this practice nonetheless persists and remains a threat to the transparency and integrity of the CRD.” Of course PIABA does not believe that the new rule would go far enough, suggesting instead that expungements should be done away with, but the organization believes Rule 2081 would be a good first step in curtailing the efforts of defense attorneys to “cleanse” the records of rogue financial services professionals.
The Practical Effect Of Rule 2081
It is unclear at present what the final decision of the SEC will be. To the extent that Rule 2081 is adopted, it may result in closer scrutiny of cases, allegations, and documents and ultimately make it slightly more difficult to obtain expungement, though it is likely parties will continue to seek expungement in much the same way they did before Rule was adopted (with a few differences). For instance, if Rule 2081 is adopted, it will likely be useful for parties seeking expungement to include certain language in settlement agreements that states some or all of the following:
- The Respondent/Respondents intend to seek expungement relief;
- The Respondent/Respondents has/have not paid any consideration in relation to the expungement request;
- The request for expungement was not a condition of the settlement agreement.
Including the above language (or something similar), would allow defense counsel to work within the language of Rule 2081 and assist in obtaining expungements, assuming FINRA does not further alter or narrow the expungement framework.
 See Notice to Members (“NTM”) 04-16 (March 2004).
 See Securities Exchange Act Release NO. 48933 (December 16, 2003), 68 FR 74667 (December 24, 2003), (Order Approving File No. SR-NASD-2002-168).
 See FINRA Rule 2080(b)(1)(A)-(C).
 See Notice to Arbitrators and Parties on Expanded Expungement Guidance, available at http://www.finra.org/arbitrationandmediation/arbitration/specialprocedures/expungement/.
 Courts have determined that Rule 2080 does not provide a substantive test that must be met in order to obtain expungement, rather, it is a procedural rule that “does not provide any substantive criteria as to when expungement would be appropriate.” See Lickiss v. FINRA, 208 Cal.App. 4th 1125, 1135 (Cal. 2012).
 See www.finra.org/web/groups/arbitrationmediation/@arbmed/@arbtors/documents/arbmed/p016853.pdf. In particular, see page 6 of 11.
 See NTM 04-43 (June 2004).
 See Securities Exchange Act Release No. 58886 (October 30, 2008), 73 FR 66086 (November 6, 2008) (Order Approving File No. SR-FINRA-2008-010).
 See Securities Exchange Act Release No. 57572 (March 27, 2008), 73 FR 18308 (April 3, 2008) (Notice of Filing File No. SR-FINRA-2008-010).
 See Notice to Arbitrators and Parties on Expanded Expungement Guidance, available at http://www.finra.org/arbitrationandmediation/arbitration/specialprocedures/expungement/.
 The proposed rule change would not affect the processes relating to requests for expungement relief set forth in FINRA Rules 2080, 12805 and 13805. Thus, if an arbitration panel is considering the appropriateness of expungement in accordance with FINRA Rule 12805, a customer could express support for, or opposition to the firm’s or associated person’s request for expungement as part of the recorded hearing session required by that Rule.
 Id. at 1.
The conventional wisdom in consumer class action litigation has long been that cases are won or lost when the court decides the plaintiffs’ motion for class certification. Virtually no class representative continues to pursue an individual claim after a court denies class certification. And defendants have long treated certified consumer class claims as too risky to defend at trial, preferring instead to settle the overwhelming majority of them. Many courts have accurately recognized that as “a practical matter, the certification decision is typically a game-changer, often the whole ballgame, for plaintiffs and plaintiffs’ counsel.”[i] Accordingly, “denying or granting class certification is often the defining moment in class actions.”[ii]
But conventional wisdom can shift. For many reasons, defendants have been reconsidering their traditionally strong aversion to taking consumer class actions to trial. First, many plaintiffs’ lawyers, enticed by the prospect of a lucrative settlement soon after certification, have pushed the boundaries of traditionally viable class actions and are now simply over-reaching. So concerned with crafting a claim that meets the procedural requirement of presenting some common questions of law or fact for classwide resolution, many have lost sight of the need to have a meritorious underlying dispute and legitimately-aggrieved named plaintiffs. Plaintiffs can no longer celebrate class certification as crossing the goal line because frivolous claims are increasingly likely to be tried.
Second, the procedural demands for a viable class action are rising. The Supreme Court’s continued emphasis on all federal courts’ requirement to conduct rigorous analysis to ensure compliance with Rule 23 makes class certification more difficult to obtain – at least in federal court. It also makes class certification more difficult to preserve as the trial unfolds and plaintiffs must fully articulate how they plan to prove their damages on a classwide basis.[iii]
Third, many permissive consumer-protection statutes have been amended to prevent frivolous claims and class action abuse. Most notably in California, which remains a popular forum for class action plaintiffs, voters passed Proposition 64 to amend their state’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200 et seq. The UCL broadly proscribes any “fraudulent,” “unlawful,” and even “unfair” business practice, often a low threshold for plaintiffs at the motion to dismiss or summary judgment stages. To represent the class, named plaintiffs now must show “actual reliance” on the challenged practice.[iv]
Given these changes, conventional wisdom on the fallout of class certification has shifted. Companies faced with baseless class actions are not always compelled to settle them after they are certified, even in jurisdictions that plaintiffs favor. If plaintiffs have their class certified, they will often waste their leverage in settlement negotiations by seeking relief that does not materially differ from what they could prove they are entitled to recover after a full trial and neutrally administered claims process. If the claimed injury exists more in theory than in reality, plaintiffs are stuck with the fact that they ultimately have few, if any, customers who can come forward with meritorious claims. In such cases, defendants should no longer simply accept dubious class action payouts as the cost of doing business but should, instead, put the plaintiffs to their proof.
[i] Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 591 n.2 (3d Cir. 2012) (citing Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 167 (3d Cir. 2001) (“[D]enying or granting class certification . . . may sound the ‘death knell’ of the litigation on the part of plaintiffs, or create unwarranted pressure to settle nonmeritorious claims on the part of defendants . . . .”)).
[ii] In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 310 (3d Cir. 2008).
[iii] See Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1433, 185 L. Ed. 2d 515 (2013) (holding “at the class-certification stage (as at trial), any model supporting a plaintiff’s damages case must be consistent with its liability case”) (internal quotation marks omitted). See also Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 180 L. Ed. 2d 374 (2011).
[iv] In re Tobacco II Cases, 46 Cal. 4th 298, 314-15 (2009).
A trend towards facts and away from statistics when evaluating future earning capacity claims.
While the origin of this fabled quote is in doubt, we know Mark Twain was right about one thing: people manipulate statistics. One tool frequently used to manipulate statistics in litigation is the Gamboa-Gibson Work Life Expectancy Tables. Fortunately for defendants, courts are increasingly seeing these tables for what they are: unreliable tools developed for litigation and not used by statisticians outside the courtroom. For example, the Circuit Court for Baltimore City recently precluded a damages expert from relying upon these tables as they were not based on a reliable scientific methodology.
The Gamboa-Gibson tables, developed by David Gibson and Anthony Gamboa, purport to “adjust” United States Census Bureau statistics regarding how long Americans can be expected to work despite particular disabilities. The tables operate on the assumption—not always valid–that individuals with disabilities won’t work as long as individuals without disabilities.
By reducing their supposed work life expectancy, personal injury litigants claiming either a loss of earning capacity or lost future wages can argue for increased economic losses as a result of disability. Forensic economists rely upon work life expectancy as a basis for calculating economic loss. Thus, the Gamboa-Gibson tables can significantly affect the size of the claimed economic damages.
For years, plaintiffs have touted the Gamboa-Gibson tables as “the only source that provides worklife expectancy statistics adjusted for disability as defined by the U.S. Census Bureau” and “provide the number of years that a person is expected to be alive and actively employed.” Yet, their reliability is suspect. Economists and courts recognize the tables use flawed data and flawed methodology. These myriad flaws include:
- The tables were created for litigation purposes
- The methodology used has not and cannot be tested
- The methodology used is not generally accepted
- There is no known error rate for the data in the tables
- The underlying survey data are unreliable
- The tables’ conclusions are too general and not individualized
Put simply, the survey data on which the tables are based were not designed to support the conclusions drawn by the authors. They are not specific to specific types of disabilities. And, when considering the effect of disability on individuals’ ability to work in the future, detailed facts about individuals and their disabilities are far more accurate.
Because of these flaws, defense counsel would be wise to consider attacking the admissibility of any economic loss report which relies upon the Gamboa-Gibson tables. Indeed, federal and state courts applying the Daubert, Frye/general acceptance or other standards have excluded economic loss reports and testimony which rely upon the tables. As Thomas Ireland, a leading critic of the tables has stated, the tables are bad science.
Most recently, a defense team that included Goodell, DeVries attorneys Tom Cullen and Gus Themelis convinced Judge Steven Sfekas of the Circuit Court for Baltimore City that a plaintiff’s economist could not rely upon the tables as a basis for his economic loss projections. Stevenson v S&S Partnership, et al. (Cir. Ct. Balt. Cty., Case No. 24-C-11-00008722). Like other courts before him, Judge Sfekas found the data on which the tables relied to be unreliable. Other courts are likely to follow.
In light of the foregoing, in cases in which work life expectancy is an issue, defense counsel should counter with strong factual and expert testimony based on individual plaintiffs’ particularized medical and vocational rehabilitation evidence and be prepared to attack the basis of the claimant’s economic loss claim. Evidence such as family history, personal history, education records, criminal records and financial records, especially in the hands of competent medical and vocational experts, can provide valuable pre- and post-injury evidence, of the extent to which a claimed disability affects future work life expectancy, if at all.
The risks of exposure to businesses concerning data breaches and the need for cyber security policies.
Every day we read about a new virus, a new hacking, or a new data breach. On May 8th, 2014 the United States Department of Health and Human Services announced another settlement for the unauthorized disclosure of electronic Personal Health Information (ePHI). This time, New York and Presbyterian Hospital (NYP) and Columbia University (CU) paid $4.8 million dollars after it was discovered that the ePHI of 6,800 individuals, including their patient status, vital signs, medications, and laboratory results had been disclosed. The ePHI had been held on their network. According to the HHS press release, the breach occurred when a CU employed physician who developed applications for both NYP and CU attempted to deactivate a personally owned computer server on the network containing NYP patient ePHI. Because of a lack of technical safeguards, deactivation of the server resulted in ePHI being accessible on internet search engines.
Fines are not the only risk when ePHI or other protected data is exposed. HIPAA regulations require notification of prominent media outlets if more than 500 individuals’ ePHI is exposed. When data breaches become public, the effects can be devastating. Think how many people did not shop at Target when their credit card information was stolen. USA Today estimated the loss at $61,000,000. And, as a result, Target’s CEO, President and Chairman Gregg Steinhafel stepped down following the data breach and other problems. 
So what does this mean for you and your business? Well, one possible answer is you need to do more, even if you think you are doing enough. Stotz Freidberg recently reported the results of a study that employees give their employers a below average grade on cyber security issues.  And, even senior leaders believe their own efforts are inadequate:
• Nearly half (45%) of senior management acknowledge that the C-suite and senior leadership themselves are responsible for protecting their companies against cyber-attacks.
• Yet, 52% of this same group indicated they are falling down on the job, rating corporate America’s ability to respond to cyber-threats at a “C” grade or lower.
• Rank-and-file workers differ in their opinions about cyber security accountability, with 54% of those respondents saying IT professionals are responsible for putting the right safeguards in place.
Given there is consensus among business leaders and their employees that businesses are not doing enough to protect from potential data breaches, perhaps it is time to assess whether your business is prepared. Goodell, DeVries, Leech & Dann’s forward thinking attorneys are at the forefront of helping our clients formulate a risk management strategy to protect our clients. We advise local businesses and health care providers about current developments to answer important questions and ensure that appropriate safeguards are protecting your bottom line. Has your business appointed a security official to oversee the use and maintenance of electronic data? Have you conducted a risk assessment to determine your business’s potential vulnerabilities and compliance with applicable regulations? Is there an insurance policy in place to cover any losses or fines you might incur as a result of a data breach? We can help develop policies to protect you and your business. By knowing where the problems come from, we can help you on the front end.
Reducing Medicaid Liens to Facilitate Settlement.
Although statistics vary, nearly 95% of all lawsuits are settled before trial. There are myriad reasons for this, but at the end of the day, the amount of money to be paid or received almost always drives a case to settlement. Plaintiffs make a decision that the amount they will receive is worth ending the legal process. Defendants make a decision that the amount to be paid is worth eliminating the risk of going to trial.
But even when there is a fair offer on the table, there can be an unpredictable obstacle to settlement—a lien asserted by the Government. A lien asserted by the Government can take money out of a Plaintiff’s pocket and cost a Defendant more to settle a case. Is this another example of unreasonable government intrusion? Is it permissible? Can you as a litigant, lawyer or insurer proactively take steps to get your case settled when the Government makes it harder for you to resolve a case? The answer is yes—especially when dealing with Medicaid.
Medicaid, the ever expanding program to provide health insurance to our nation’s poor and disabled, often pays medical bills that are the subject of major personal injury and medical malpractice lawsuits. In some high exposure cases, Goodell, DeVries attorneys have dealt with circumstances where Medicaid has paid in excess of $800,000 in medical bills. When the parties then sit down to discuss a possible settlement, Medicaid asserts its statutory right to reimbursement, also known as a lien, on the settlement funds. Attorneys, litigants and insurers all have varying degrees of responsibility to reimburse Medicaid out of the settlement funds. When large sums of money are at stake, the process becomes complicated, time consuming, and can hinder the settlement of cases. Indeed, Goodell, DeVries attorneys are aware of many cases where Medicaid tries to obtain reimbursement for an unfair amount of bills paid. Yet Medicaid is not entitled to such sums.
The Supreme Court of the United States has ruled that Medicaid should only be reimbursed for a fair portion of bills paid, not all monies paid. Arkansas Dept. of Health and Human Servs. v. Ahlborn, 547 U.S. 268 (2006); and Wos v. E.M.A., 133 S. Ct. 1391 (2014). After these cases, states have routinely been thwarted in their efforts to take unreasonable sums from a settlement by striking down anti-lien provisions in Medicaid statutes. Federal and State courts have consistently required an allocation of funds based on the facts of a case, allowing Medicaid to only be reimbursed for a percentage of bills paid based on a percentage of overall recovery and damages sought. This amount is almost always much less than Medicaid initially seeks to recover. In our experience, we have seen cases in which Medicaid has ultimately accepted approximately 20% of the amount initially claimed. In real dollars, this can mean a case can resolve for tens or even hundreds of thousands less.
How does this help you as a defendant, insurer or health care provider? The answer is obvious. When a case can resolve for less, with the same amount of money ultimately being paid to the plaintiff, it is more likely to resolve. Goodell, DeVries lawyers are intimately familiar with this process and are up-to-date with this developing trend. Goodell, DeVries lawyers can work with Plaintiffs and mediators to reduce or eliminate claims of reimbursement by Medicaid, making it faster, cheaper and easier to resolve claims. And claims resolution is best for everyone.
Why equity, and not money, is what matters when pursuing a separate claim for breach of fiduciary duty in Maryland.
More than sixteen years after the decision in Kann v. Kann, 344 Md. 689, 690 A.2d 509 (1997), confusion still exists concerning the scope and viability of independent claims for breach of fiduciary duty in Maryland. Indeed, the decision in Kann has recently prompted one federal court in Maryland to conclude, “[to] be sure, the post-Kann landscape has been a bit muddled,” Novara v. Manufacturers and Traders Trust Co., No. ELH-11-736, 2011 WL 3841538, at *11 (D.Md. Aug. 26, 2011), and another to remark that “[c]ourts have not entirely agreed on how to interpret the language of Kann.” McGovern v. Deutsche Post Global Mail, Ltd., JFM-04-0060, 2004 Lexis 15215, at *37-38 (D.Md. Aug. 4, 2004). Much of the confusion stems from Kann’s elliptical analysis of the issue and some of the reasoning used by several cases that followed, particularly as to what kind of actions could give rise to independent claims for breach of fiduciary duty. Important for practitioners, it appears clear that breach of fiduciary duty claims for money damages will largely, if not entirely be disallowed, while claims seeking equitable relief remain viable.
The tort of breach of fiduciary duty has a relatively recent and unusual history in Maryland, and was first recognized as a potential, independent cause of action in Hartlove v. Maryland School for the Blind, 111 Md.App. 310, 681 A.2d 584 (1996). In Hartlove, the Maryland Court of Special Appeals relied on the Restatement (Second) of Torts § 874 in concluding that a separate and independent cause of action did indeed exist for breach of fiduciary duty.
After Hartlove, however, the Maryland Court of Appeals in the aforementioned Kann v. Kann, 344 Md. 689, 690 A.2d 509 (1997), ruled that “there is no universal or omnibus tort for the redress of breach of fiduciary duty by any and all fiduciaries.” 690 A.2d at 521. Expressly disapproving of Hartlove, the Court of Appeals reasoned that breach of fiduciary duty as an independently viable tort would lead to the duplication of existing remedies at law in some cases, and the elimination of the “nearly complete exclusivity of equitable jurisdiction” in others. Just months after Kann, the Maryland Court of Special Appeals, Bresnehan v. Bresnehan, 115 Md. App. 226, 693 A.2d 1, 5 (1997), held, “[i]n light of Kann, it is doubtful that Hartlove’s creation of an independent tort of breach of fiduciary duty has survived.”
Equity In, Money Out
There is a particular passage in Kann that has been cited numerous times by courts and practitioners. This language, coming directly after the court concluded that there was no universal tort for breach of fiduciary duty states, this “does not mean that there is no claim or cause of action available for breach of fiduciary duty.” Kann, 344 Md. At 690, 690 A.2d at 521. See also Stewart v. Baltimore Teachers’ Union, 243 F. Supp. 2d 377, 379 (D. Md. 2003) (“Maryland law is clear that there is no free-standing, independent tort for breach of fiduciary duty.”) Counsel, the Kann court continued, have an obligation to “identify the particular fiduciary relationship involved, identify how it was breached, consider the remedies available and select those remedies appropriate to their client’s problem.” Id. at 521.
What does this mean? The U.S. District Court for the District of Maryland recently held that “Maryland courts have limited independent causes of action for breach of fiduciary duty to those seeking equitable relief.” Allstate Ins. Co. v. Warns, No. CCB-11-1848, 2012 WL 681792, at *7 (D.Md. Feb. 29, 2012). Kann and its progeny therefore do not obliterate the possibility of a separate cause of action for breach of fiduciary duty in an action seeking equitable relief. Wasserman v. Kay, 197 Md. 586, 631, 14 A.3d 1193, 1219 (2011).
Pursuing Disgorgement Vis-à-Vis Breaches Of Fiduciary Duties
One kind of claim that practitioners should be cognizant of, particularly in the area of professional liability, is for disgorgement of fees. Because disgorgement is not a claim for money damages, but lies in equity, disgorgement can be sought vis-à-vis a claim for breach of fiduciary duty. S.E.C. v. Resnick, 604 F.Supp. 2d 773, 782 (D.Md. 2009); Benjamin v. Erk, 138 Md. App. 459, 471, 771 A.2d 1106, 1113 (2001). Disgorgement is often tethered, at least in legal malpractice cases, to other claims for, among others, negligence and breach of contract. While the law in Maryland concerning claims for disgorgement is not as well developed as the law of the District of Columbia. See, e.g., Nat’l R.R. Passenger Corp. v. Veolia Transp. Services, Inc., No. 07-1263 (BJR), 2012 WL 3574350 (D.D.C. Aug. 21, 2012); Bode & Grenier, L.L.P. v. Knight, 821 F.Supp.2d 57 (D.D.C. 2011); Hendry v. Plelland, 73 F.3d 397 (D.C. Cir. 1996); Avianca v. Corriea, No. 85-3277 (RCL), 1992 WL 93128, *12 (D.D.C. April 13, 1992), disgorgement can still be a valuable tool, even though it is viewed by some Maryland courts as an extraordinary remedy. See Lerner Corp. v. Three Winthrop Props., Inc., 124 Md. App. 679, 691, 723 A.2d 560, 566 (1999) (analyzing various jurisdictions’ approaches to disgorgement in breach of fiduciary duties case and holding that “Maryland has recognized the restitutionary remedy of disgorgement” when, for instance, an agent breaches a fiduciary duty to a principal).
Disgorgement In Legal Malpractice Cases
A claim for disgorgement can be extremely disquieting to those against whom it is sought. In point of fact, claims for disgorgement are often used in legal malpractice cases (in addition to claims for compensatory damages), to place additional leverage on defendants who are extremely leery of having to produce all of their billing records or other materials relating to the fees they charged former clients. Breach of fiduciary duty and disgorgement claims can be particularly effective in regards to corporate plaintiffs seeking redress against prior counsel and law firms. Often, when a corporate client asserts legal malpractice claims against prior counsel, the scope and substance of billed time will necessarily also be at issue. It is important for defense counsel to recognize that there is authority for the proposition that disgorgement may not be an appropriate remedy when a client is overbilled by his or her former law firm absent some other showing of a breach of fiduciary duty. Fairfax Sav., F.S.B. v. Weinberg & Green, 112 Md. App. 587, 627-28, 685 A.2d 1189, 1209 (1996). However, the argument can certainly be made even if an overbilled client cannot recover all of the fees he or she has been billed, they should be able to recover those portions directly attributable to the breach or breaches of fiduciary duty.
The bottom line is this: breach of fiduciary duty remains a viable claim in Maryland under certain circumstances. It can be particularly useful when combined with a claim for disgorgement of fees in the legal malpractice context, although counsel should strive to fully delineate the scope of the breach or breaches, since there is authority limiting recovery to fees associated with the alleged breach.