Texas Medical Liability Act & Preemption

By: Kyle Burke

On March 6, 2015, the Texas Supreme Court issued an opinion which some argue threatens the Texas Medical Liability Act (TMLA).

In Fredericksburg Care Co., L.P. v. Perez,[1] the Supreme Court of Texas held that the Federal Arbitration Act (“FAA”)[2] preempts a provision of the Texas medical liability statutes requiring specific, conspicuous language in arbitration agreements.  In Perez, suit was brought by the survivors and beneficiaries of a resident of a nursing home operated by Fredericksburg.  Fredericksburg moved to compel arbitration based on an arbitration clause contained in an agreement that the decedent signed prior to admission into the home.  The pre-admission agreement’s arbitration clause did not comply with a statutory requirement that an agreement to arbitrate a health care liability claim must contain a written notice in bold-type, ten-point font that conspicuously warns the patient of several important rights.  See Tex. Civ. Prac. & Rem. Code § 74.451(a).

Nonetheless, Fredericksburg moved to compel arbitration, asserting that the FAA controlled the enforceability of the arbitration clause because the underlying patient–provider transaction involved interstate commerce. In Fredericksburg’s view, the FAA preempted section 74.451 because the two laws directly conflicted, preventing the arbitration clause from being invalidated.  The beneficiaries argued that section 74.451 was part of a state law enacted for the purpose of regulating the business of insurance and fell within the protection of the McCarran–Ferguson Act (“MFA”),[3] which provides an exemption from preemption that applies to state statutes enacted for the purpose of regulating the business of insurance.  The trial court and court of appeals held that the arbitration clause was invalid and that the FAA did not apply because of the exemption in the MFA.  The Texas Supreme Court reversed.

The Court first concluded that—based on earlier precedent—section 74.451’s requirement that an arbitration clause provide a bold and conspicuous warning of a patient’s right to consult an attorney and the requirement that an attorney must sign the agreement are additional requirements that directly conflict with the FAA, which contains no such requirements.  Thus, the FAA preempted section 74.451 unless the MFA applied.

To answer this secondary issue, the Court inquired as to whether section 74.451, or Chapter 74 generally, was enacted for the “purpose of regulating the business of insurance,” which would save the law from preemption.  While the Court recognized that Chapter 74 was enacted for the purpose of making health care more affordable in Texas and aspired to lower insurance rates through tort reform, this “tenuous impact” on the “business of insurance” was insufficient to extend MFA protection to Chapter 74.  And the Court concluded that section 74.451 itself concerns the relationship between the patient and the health care provider and has little to do with “the relationship between the insurance company and its policyholders,” militating against a finding that the section was enacted for the purpose of regulating the business of insurance.  Accordingly, the MFA did not exempt section 74.451 from preemption by the FAA, and the trial court should have granted Fredericksburg’s motion to compel arbitration.

The petitioners in Perez have filed a motion for rehearing.  Before and after the court’s opinion, half a dozen amici curiae briefs were filed by organizations representing plaintiffs and defense bars, as well as insurers and health care providers.  All but one of these urged that the FAA should not preempt section 74.451.  The concerns are that the Court’s opinion will reduce the protections that section 74.451 (and Chapter 74 generally) provide to both patients and health care providers.  Indeed, the opinion essentially allows health care providers to omit the language required by section 74.451 from arbitration agreements and fall back on the FAA, increasing the likelihood of arbitration and loss of the right to a jury trial.  There are also concerns that the case could lead to broader preemption of Texas tort law.  At the time of this publication, the case remains pending on motion for rehearing. 

Read the opinion here:

http://www.txcourts.gov/media/885314/130573.pdf