Volume V, No. 4

November 2, 2005

Our current newsletter only discusses three cases as there have been few decisions by the Texas Supreme Court in the last three months. The Court is presumably working on its decision dealing with school finances which will affect all of us as citizens but will have no effect on us in connection with how we deal with claims.

The Court In Re Weekly Homes, L.P. (decided October 28, 2005) held that a nonparty to a contract can be compelled to arbitrate personal injury claims in certain situations. Diversicare General Partner, Inc. v. Rubio (decided October 14, 2005) held that a sexual assault claim by a nursing home resident involved the manner in which medical care was provided and as such the provisions of the Medical Liability Insurance Improvement Act applied to the claim. Finally, in Qwest International Communication v. AT&T (decided June 24, 2005) the Court continued its antagonism towards gross negligence claims and reversed and rendered a $315 million punitive damage award in favor of AT&T.

1. A NONPARTY TO A CONTRACT CAN BE COMPELLED UNDER THE FEDERAL ARBITRATION ACT (FAA) TO ARBITRATE PERSONAL INJURY CLAIMS

The Texas Supreme Court continued its strict enforcement of contractual arbitration provisions by holding that a nonparty to a contract can be compelled to arbitrate their personal injury claims. In Re Weekly Homes, L.P. (decided October 28, 2005).

Suit was brought against Weekly Homes based upon the purchase of a house by a 78 year old widower, Vernon Forsting, who had purchased a 4,000 square foot home in which his daughter, Ms. Von Bargen, would also live along with her husband and three sons. Despite the fact that Mr Forsting executed the various financing and closing documents, Ms. Von Bargen and her husband supervised and directed the construction of the home on behalf of Mr. Forsting. Ms. Von Bargen signed a letter of intent as the "purchaser" and made custom design choices as the house was being built.

After the closing on the house Mr. Forsting transferred the title of the house to the Forsting Family Trust in which both Forsting and Von Bargen served as the only trustees. The purpose of the Trust was to transfer Forsting's property to Von Bargen after his death.

Suit was brought due to the numerous problems that arose with the home after completion. The Court noted that Ms. Von Bargen admitted handling "almost... all matters related to the house, the problems in the warranty work and even the negotiations." Suit was brought by Forsting, Von Bargen, and the Family Trust. Ms. Von Bargen sued for personal injuries in that she claimed that she developed asthma due to repair work performed by the staff of Weekly Homes.

A motion to compel arbitration was filed by Weekly Homes under the Federal Arbitration Act. An arbitration provision was contained in the Purchase Agreement between Vernon Forsting and Weekly Homes. The trial court granted the motion to compel arbitration on behalf of both Forsting and the Family Trust. However, the court denied the motion to compel arbitration of Ms. Von Bargen's personal injury claim because she did not sign the Purchase Agreement on the sale of the home.

The Court found that while Ms. Von Bargen did not sign the Purchase Agreement containing the arbitration agreement that she was nevertheless suing for a "direct benefit" under the Purchase Agreement. The Court noted that Ms. Von Bargen resided in the home, supervised construction of the home, demanded repairs to the home, demanded (and received) reimbursement for expenses for repairs, and conducted negotiations in attempting to resolve her complaints. Furthermore, while Ms. Von Bargen brought the claim in her individual capacity, the Court noted that "...any recovery will inure to her benefit as the sole beneficiary and equitable title holder of the home."

The Court concluded that a nonparty to a contract who is seeking "direct benefits" pursuant to the contract is bound by the arbitration provision of the contract. The Court acknowledged that a claimant who is a nonsignatory to a contract cannot be forced to arbitrate personal injury claims unless the claimant is also asserting contractual claims. If the claimant asserts both contractual and noncontractual claims then all claims must be arbitrated pursuant to the arbitration provisions of the contract. The Court succinctly concluded that "A nonparty cannot both have his contract and defeat it too."

In Re Weekly Homes is another continuation of the Court's enforcement of arbitration provisions.

1. THE NEGLIGENCE OF THE NURSING HOME STAFF IN FAILING TO PROVIDE ADEQUATE SUPERVISION WHICH RESULTED IN SEVERAL SEXUAL ASSAULTS CONSTITUTES A HEALTH CARE LIABILITY CLAIM

The Court in Diversicare General Partner, Inc, et al v. Maria Rubio, et al (decided October 14, 2005) held that the two year statute of limitations provision of the Medical Liability Insurance Improvement Act (hereinafter referred to as the MLIIA) governs an action brought by a patient who had been sexually assaulted. Ms. Rubio's claims of sexual assault were therefore barred as the claims were brought more than two years after the sexual assaults. In reaching this result in a 5 to 4 decision the Court held that the statute of limitations provisions of the MLIIA superceded the limitations provisions of the Civil Practice and Remedies Code.

Suit was brought by the next of friend (and daughter) of Maria Rubio, an incompetent individual, who had been a resident of the Goliad Manor Nursing Home from 1994 to 1999. Ms. Rubio had been diagnosed with Senile Dementia of the Alzheimer's type. She was therefore mentally incapacitated during her entire stay as a resident at the Goliad Manor Nursing Home.

Suit was originally brought on July 14, 1999, by Mr. Rubio's daughter, Mary Halcomb, as her next friend, for injuries that Ms. Rubio sustained in two separate falls while a resident at Goliad Manor. Ms. Rubio amended her petition on September 26, 2000, alleging that she had been sexually assaulted by another resident on multiple occasions between October 1994 and April 1995. Ms. Rubio sought damages for the sexual assaults due to the failure of the nursing home staff to adequately supervise and monitor her.

The nursing home moved for summary judgment on the assault claims contending that such claims constituted health care liability claims which were brought more than two years after the claims occurred. Ms. Rubio alleged that the basis of liability against the nursing home arose out of general negligence principles for injuries that occur on an owner's premises such that her mental incapacity tolled the statute of limitations for the sexual assault claims. All parties agreed that Ms. Rubio was mentally incapacitated while a resident at Goliad Manor. All parties also agreed that no sexual assault claims had occurred since 1995. Finally, all parties agreed that the suit for the sexual assaults was not brought until 5 ½ years after the date of the alleged claims.

The Court noted that it was addressing for the first time whether the limitations provisions of the MLIIA superceded the general limitations provisions of the Civil Practice and Remedies Code:

In this case, the commencement date of the limitations period for the claims arising from the alleged sexual assaults depends upon whether the statute of limitations in the MLIIA or the Texas Civil Practice and Remedies Code applies. If the Texas Civil Practice Remedies Code applies, the limitations period is tolled, and Rubio's claims are not barred. If the MLIIA supplies the statute of limitations, the limitations period is not tolled and Rubio's claims are barred.

The Court concluded that Ms. Rubio's claims of negligent supervision in allowing the alleged sexual assaults to occur constituted health care liability claims rather than premises liability claims. The Court found that:

The cause of action against a health care provider is a health care liability claim under the MLIIA if it is based on a claimed departure from an accepted standard of medical care, health care, or safety of the patient, whether the action sounds in tort or contract.

The Court agreed with Goliad Manor Nursing Home and held that in order for the plaintiff in a sexual assault case at a nursing home to recover the plaintiff must show that the actions of the nursing home deviated from an accepted medical standard of care. As such, the plaintiff would need expert testimony to establish a liability claim against a nursing home. The Court found that the claims of the plaintiffs were essentially complaints concerning the quality of health care provided to Ms. Rubio. The duty owed by Goliad Manor Nursing Home to Ms. Rubio therefore arose out of its obligation to care for Ms. Rubio as a patient. Because the nursing home's liability arose out of this health care relationship with Ms. Rubio, liability was not based on a premises liability claim of ordinary negligence. Ms. Rubio's health care liability claim was therefore governed by the two year limitations provisions of the MLIIA

The Supreme Court strictly interpreted the limitations provisions of the Medical Liability Insurance Improvement Act. All claims against a health care provider where expert medical testimony is needed to establish liability will therefore be governed by the procedures and defenses of the MLIIA.

1. A CORPORATE POLICY OF HASTE IN LAYING TELECOMMUNICATIONS FIBER OPTIC CABLE THAT RESULTED IN DAMAGE TO A COMPETITOR'S CABLE IS NOT SUFFICIENT TO SUPPORT AN AWARD FOR EXEMPLARY DAMAGES

AT&T brought suit against its competitor, Qwest, and its subcontractors, to recover damages for cutting AT&T's fiber-optic cables while Qwest was laying its own fiber-optic cables. Following a jury trial the district court entered judgment awarding economic damages of approximately $750,000 and exemplary damages of $350 million to AT&T due to the business interruption caused when the Qwest crew cut the AT&T fiber-optic cable while laying a line between Seguin and Austin. The Supreme Court reversed the award of exemplary damages against Qwest, Qwest International Communication, et al v. AT&T (decided June 24, 2005).

During late 1997 Qwest laid fiber-optic cables for itself, GTE, and others in utility rights-of-way between Seguin and Austin, Texas. On three occasions, cable-laying crews for Qwest or its subcontractors cut AT&T's fiber-optic cable.

On two occasions the cuts on the cable resulted from the decisions of lower-level employees on-site. In the first cut, a Qwest foreman told a plow driver to continue digging after an AT&T observer requested a delay to retrieve a tool and find the exact location of AT&T's cable. The other cut occurred when, according to the subcontractor, the AT&T cable "ended up where I didn't think it was supposed to be." Qwest corporate officers did not authorize or ratify the cuts or know about these circumstances until after the accidents occurred.

The evidence also showed that cable cuts are frequent and anticipated occurrences in the industry, that AT&T's cables are cut about 27 times annually, and that most of AT&T's calls on the lines are rerouted in a matter of seconds. There was also evidence presented that Qwest was facing substantial delay penalties because the cable project was behind schedule; that its workers were primarily new hires with limited training or experience who worked long shifts; and that upper management was "pushing to get the job done." What was not presented was evidence that Qwest's upper management had actual knowledge that a policy to lay cables rapidly posed a degree of risk that was extreme.

The jury found negligence on all three occasions and further found that Qwest was liable for damages due to all three cuts as it controlled the activities of its subcontractors. The jury awarded actual damages (representing the cost of temporary and permanent repairs and rerouting) of $205,187.69 for the first cut, $339,809.98 for the second cut, and $143,583.83 for the third cut. The jury also found Qwest acted with malice in the first and third cuts and awarded exemplary damages of $350 million. The trial court reduced the punitive damage award to $467,808.91 pursuant to statute.

The Supreme Court held that the evidence was legally insufficient to support exemplary damages. The Court found that both cuts on which the malice findings were based resulted from the decisions of lower-level on-site employees. Most importantly, in neither case did Qwest corporate officers authorize or ratify the cuts or know about these circumstances until after the accidents occurred.

While the Court of Appeals found Qwest acted maliciously by "fostering a corporate environment of rapid cable-laying operations in the same rights-of-way and in close proximity to AT&T's cable," the Supreme Court found, as to the latter, Qwest had little choice. It was undisputed that (as the Court of Appeals noted) the narrow width of the utility easements "dictates that underground cables be buried near to one another." The Court found that a general corporate policy to work rapidly is insufficient (without more) to support exemplary damages:

Few businesses do not have such policies, as quick work is often a matter of survival in a competitive market, both for the one doing the work and the customers who want it done. Such policies cannot, standing alone, constitute malice.

In explaining its decision, the Court noted the public policies underlying the decision:

We recognize that when haste risks waste to life and limb, it may justify exemplary damages. But we also recognize that in a competitive global economy, time is often of the essence for businesses, jobs, and national productivity and prosperity. The Legislature's balance of such competing interests requires courts to adhere to the standard that exemplary damages are available only if a corporation ignores an extreme risk of harm.

This case reiterates the Supreme Court's reluctance to uphold exemplary damages in nearly any context. The court has spent a great deal of time and effort defining what conduct is not sufficient to support exemplary damages but has not been nearly as clear in defining what type of conduct will support a punitive damage award.