Issue: Fifth Circuit limits duty to affirmatively disclose negative information in employment reference

For the week of May 19, 2008

In a case with importance in both healthcare law and employment law, the 5th U.S. Circuit Court of Appeals reversed a lower court decision that would have required a hospital to affirmatively disclose that a physician with privileges to practice at that hospital had left his practice based upon performance issues related to drug use. Kadlec Medical Center v. Lakeview Medical Center, et al, 5th Circ., No. 06-30745, May 8, 2008.

Kadlec Medical Center and its insurer filed a lawsuit against Lakeview Medical Center, and against Louisiana Anesthesia Associates (LAA) and its shareholders. The suit was based upon the employment termination of Dr. Robert Berry – a member of LAA with privileges to practice at Lakeview – who was terminated from LAA after he was determined to have been impaired while under the influence of prescription drugs. In reference letters written by Lakeview Hospital and by members of LAA, Berry’s drug use was not disclosed. Subsequently, Berry applied to work as a locum tenens (temporary physician) at Kadlec Hospital in Washington State.
In October 2001, Kadlec began its credentialing process, and sent a request to Lakeview for information about Berry. Although the request included a detailed questionnaire and a signed consent for release of information, the hospital responded with a short letter that stated that: "Our records indicate that Dr. Robert L. Berry was on the Active Medical Staff of [Lakeview] in the field of Anesthesiology from March 04, 1997 through September 04, 2001." The letter did not disclose any information about Berry’s on-duty drug use, the investigation into that use, or any information about Berry’s termination from LAA. In addition, two LAA physicians submitted letters to Kadlec, one stating that Berry was an "excellent clinician" and would be an "asset" to any anesthesia practice, and the other recommending him "highly" as an anesthesiologist. Kadlec then credentialed Berry.

In November 2002, a patient for whom Berry acted as anesthesiologist at Kadlec suffered complications related to anesthesia, and is now in a permanent vegetative state. The patient’s family sued Kadlec and Berry, and the case was settled for over $7 Million. Kadlec and its insurer then filed a lawsuit against Lakeview, LAA, and the individual doctors who supplied the favorable reference letters. A jury awarded $8.24 Million to plaintiffs, and judgment was entered against Lakeview and LAA. (The judgments against the individual doctors were ascribed to LAA.)

On appeal, the Fifth Circuit upheld the judgment against LAA, but reversed it as to Lakeview. In a detailed opinion, the Court analyzed the claims of intentional misrepresentation and negligent misrepresentation against the defendants. It found that in order to prove either, the plaintiff first must establish an affirmative duty to disclose information.

The Court began by stating that after choosing to write referral letters, the defendants "assumed a duty not to make affirmative misrepresentations" in their letters. It concluded that the LAA defendants did, in fact, make misleading statements, while Lakeview did not. The Court also examined whether the defendants had an affirmative duty to disclose negative information about Berry in the reference letters, and concluded that no such duty existed. Based upon this analysis, the Court reversed the judgment against Lakeview, while upholding the judgment against LAA and its physicians.

Although this case was specifically decided under Louisiana law (which states that a former employer’s negative reference about an employee to a prospective employer can form the basis of a defamation claim), it is noteworthy in a number of respects. It does not stand for the proposition that every inadvertent incorrect statement leads directly to legal liability for a former employer. Instead, it underscores the fact that once an employer undertakes to provide information about a former employee, it may incur liability for misleading or intentionally false statements.

As a credentialing issue, this case is important, based on the fact that the credentialing process includes an original source verification requirement (including information related to licensure and current competence, and health fitness to perform the requested privileges), meaning that Kadlec was obligated to attempt to obtain such information from Lakeview. While the Court’s holding in this case does not modify that obligation, it does seem to excuse Lakeview’s failure to provide available information related to those very issues. Clearly, this is yet another case in which a Court’s employment-related decision may have an unintended but far-reaching impact on healthcare-related situations.