National Medical Enterprises, Inc. v. Godbey

• Citation: 924 S.W.2d 123
• Decision Date: 06 June 1996
• Docket Number: No. 95-0401,95-0401
• Parties: 39 Tex. Sup. Ct. J. 698 NATIONAL MEDICAL ENTERPRISES, INC. and Psychiatric Institutes of America, Inc. n/k/a NME Psychiatric Hospitals, Inc. and Ron Cronen, Relators, v. Honorable David C. GODBEY, Judge, Respondent.
• Court: Supreme Court of Texas

Page 123

924 S.W.2d 123

39 Tex. Sup. Ct. J. 698

NATIONAL MEDICAL ENTERPRISES, INC. and Psychiatric Institutes of America, Inc. n/k/a NME Psychiatric Hospitals, Inc. and Ron Cronen, Relators, v. Honorable David C. GODBEY, Judge, Respondent.

No. 95-0401.

Supreme Court of Texas.

June 6, 1996.

Michael P. Carnes, Robert B. Krakow, Dallas, Robert H. Fairbank, Los Angeles, CA, Stacy L. Brainin, Arnold A. Spencer, Dallas, Craig Dummit, Los Angeles, CA, Barry F. McNeil, Austin, for relators.

Ronald L. Palmer, Larry D. Carlson, Samara L. Kline, Parks W. Bell, Dallas, Joe R. Greenhill, Austin, for respondent.

HECHT, Justice, delivered the opinion of the court in which PHILLIPS, Chief Justice, and GONZALEZ, CORNYN, SPECTOR, OWEN and ABBOTT, Justices, joined.

Two questions are raised by this original mandamus proceeding. One is whether a lawyer is disqualified from representing plaintiffs in a lawsuit against a corporation if another lawyer in the same firm, who, while retained by the corporation to represent an ex-employee in matters substantially related to the lawsuit, received from the corporation information that he is obliged to treat as confidential. The other is whether, in the circumstances before us, the lawsuit against the corporation is adverse to the ex-employee though he is not named as a party. The district court answered both questions no. We disagree with the district court on a question of law and thus conclude that relators are entitled to relief by mandamus.

I

National Medical Enterprises, Incorporated, Psychiatric Institutes of America, Incorporated, and other related entities, to which we refer collectively as NME, have for several years been targets of criminal investigations and defendants in civil lawsuits arising out of their operation of more than seventy psychiatric hospitals in Texas and across the United States. Broadly speaking, the accusations against NME have been that it mistreated psychiatric patients and defrauded their insurers, public and private, to obtain payment for treatment without medical justification. These charges, and the numerous criminal and civil cases they have spawned, have drawn widespread publicity. Psychiatric Institutes has pleaded guilty to federal criminal charges.

A corporation acts only through its human agents, but its liability for their misconduct does not absolve the agents from individual liability. The employees and former employees of NME who were involved in its alleged misconduct have faced the threat of personal liability, creating the potential for conflicts of interest between one employee and another, and between them and NME. For example, a former NME employee facing criminal indictment might choose, in exchange for immunity or a recommendation of leniency, to cooperate with law enforcement authorities, contrary to NME's interests or those of former co-workers. For persons in such circumstances, NME retained independent counsel to represent them at NME's expense, something not uncommon for employers in similar situations.

NME retained Ed Tomko, then with the law firm of Doke & Riley and later with the firm of Baker & Botts, to represent Ronald L. Cronen, who had been NME's regional administrator for Texas for eleven months before he left its employ, and who had previously been the administrator of a NME hospital in Texas. Tomko advised Cronen concerning criminal investigations into NME's activities and discovery in various related civil lawsuits. At the time Cronen's employment with NME terminated, he stated to NME under oath that he had not been involved in any wrongdoing. He has steadfastly maintained this position since, as have Tomko and Baker & Botts. Cronen has never been indicted and has never received a letter from law enforcement authorities stating that he was a target of investigation, but he has received information from time to time indicating that he was, and still is, within the scope of such investigations. Cronen's present attorney--not Tomko--testified:

I have had numerous conversations with government agents and government attorneys regarding the scope of their investigation. The scope of the investigation is extremely broad, encompassing all aspects of [NME's] psychiatric hospital business including patient admission, billing, treatment and discharge and inducements to referral sources. Ron Cronen is considered to be a "target" of the investigation. Ron Cronen is at risk in the investigation by virtue of his position alone.

Cronen's immediate predecessor as Texas regional administrator, Peter Alexis, was indicted and pleaded guilty to federal criminal charges. Cronen was named a defendant in at least thirty-three civil lawsuits, but in each case the claims against him were dismissed. Tomko and Baker & Botts never represented Cronen in any lawsuit. No judgment has ever been rendered against Cronen, and he has never paid money to settle any claim, based upon his employment with NME.

NME also retained Tomko to provide legal counsel on similar matters to Dr. James Wicoff, formerly the Medical Director of NME's hospital in San Antonio. Wicoff, like Cronen was named as a defendant in several civil proceedings and was the subject of a federal grand jury investigation, but it does not appear that a judgment was ever rendered against him or that he was ever indicted.

Tomko represented Cronen and Wicoff for about a year. For the first seven months, before he joined Baker & Botts, he billed NME about $18,000 for his work. For the last five months he billed only about $700. Whether Tomko's work was sensitive in nature or significant in the scheme of things is disputed. What is undisputed, however, is that while Tomko represented Cronen and Wicoff he received confidential information not only from them but from NME as well in conferences and meetings at which a joint defense was discussed. Tomko has expressed doubt about whether the information was of much importance and whether it has not since been made public in all the various legal proceedings, but he has not denied that he has information from NME and Cronen that remains confidential. To the contrary, he has taken pains to prevent every lawyer at Baker & Botts, other than those assisting him, from obtaining any access to such information.

Tomko's discourse with NME, its employees and former employees, and their counsel was subject to a written joint defense agreement. (Although Cronen never signed the agreement, Tomko and Wicoff did, and Cronen and NME acknowledge that the same agreement applied to them.) By signing the agreement, Tomko agreed with NME and others who were parties to the following:

1. Unless expressly stated in writing to the contrary, any communications between or among any of the client members and/or the attorney members concerning the [investigations and litigation involving NME] are confidential and are protected from disclosure to any third party by the joint defense privilege, the attorney-client privilege and the work product doctrine.

. . . . .

3. None of the information obtained by any client member or attorney member pursuant to this agreement shall be disclosed to any third party without the consent of the attorney member who disclosed the information in the first instance.

. . . . .

6. Each client member understands and acknowledges ... that he or she is represented only by his or her own attorney in this matter; that while the attorneys representing the other members have a duty to preserve the confidences disclosed to them pursuant to this agreement, they will not be acting as his or her attorney in this matter; and that the attorney representing the other client members will owe a duty of loyalty to their own respective clients only. Each client member further understands and acknowledges that the attorney members representing other client members have the right, and may well have the obligation, to take actions against his or her own interest....

Over NME's objections, Tomko and Baker & Botts withdrew from representing Cronen and Wicoff for reasons that have no bearing on any matter now before us. About seventeen months later, Baker & Botts lawyers who had not been involved in representing Cronen and Wicoff filed suit against NME on behalf of a large number of former patients at NME's psychiatric hospitals. Kelly A., et al. v. National Medical Enterprises, Inc., et al., No. 94-10808 (160th D.Ct., Dallas County, Texas, filed Oct. 17, 1994). The current petition names more than ninety plaintiffs and summarizes their allegations as follows:

As a result of a fraudulent, illegal scheme devised and executed by the Defendants, Plaintiffs were lured or forced to psychiatric treatment centers operated for profit by the Defendants. Once confined there, Plaintiffs, mainly adolescents and children, some as young as six years old, were subjected to outrageous physical and mental abuse by Defendants....

Defendants were motivated--not by a desire to provide competent and appropriate psychiatric care to Plaintiffs--but by greed. They typically admitted only patients who were well-insured and only for as long as their insurance lasted. By manipulating diagnoses and paying kickbacks to a network of referral doctors, Defendants were able to force Plaintiffs' confinement in psychiatric hospitals and reap the reward of insurance benefits when there was no legitimate medical justification for such confinement. Defendants collected hundreds of millions of dollars from insurance companies duped into subsidizing services Defendants claimed to have provided and from taxpayers through fraudulent Medicare reimbursements. Defendants' unconscionable conduct and the greed that motivated [them] only recently have been exposed by Congress, state legislatures, law enforcement authorities and courts. In connection with the activities that are the subject matter of this lawsuit, Defendants have plead guilty to federal criminal charges of conspiracy and fraud...