Trustees of Northwest Laundry and Dry Cleaners Health & Welfare Trust Fund v. Burzynski

• Citation: 27 F.3d 153
• Decision Date: 28 July 1994
• Docket Number: No. 93-2071,93-2071
• Parties: TRUSTEES OF THE NORTHWEST LAUNDRY AND DRY CLEANERS HEALTH & WELFARE TRUST FUND, Plaintiff-Appellee, v. Stanislaw R. BURZYNSKI, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 153

27 F.3d 153

TRUSTEES OF THE NORTHWEST LAUNDRY AND DRY CLEANERS HEALTH &amp WELFARE TRUST FUND, Plaintiff-Appellee, v. Stanislaw R. BURZYNSKI, Defendant-Appellant.

No. 93-2071.

United States Court of Appeals Fifth Circuit.

July 28, 1994.

Richard A. Jaffe, Houston, TX, for appellant.

Brad Beers, Hardin, Beers, Hagstette & Davidson, Houston, TX, for appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before WISDOM, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.

WISDOM, Circuit Judge:

Today we write the latest chapter in a medical iconoclast's long history of litigation over an unorthodox cancer treatment. The district court granted summary judgment for the plaintiff/appellee, the Northwest Laundry and Dry Cleaners Health & Welfare Trust Fund, an ERISA health insurance fund, after finding that the defendant/appellant, Dr. Stanislaw R. Burzynski, had defrauded the plaintiff and violated the terms of the health plan. We agree that the defendant may not trick the plaintiff into paying for an unlawful, unapproved drug. We AFFIRM.

I.

A. The Prior Litigation and Injunction

Dr. Stanislaw R. Burzynski is a Houston physician who developed an unorthodox treatment for cancer called "antineoplastons". ¹ The antineoplastons treatment has never been approved by the Food and Drug Administration ("FDA") or the Texas Department of Health. Dr. Burzynski's antineoplastons treatment has been the subject of frequent litigation. ²

In 1983, the United States sued Dr. Burzynski's research organization, the Burzynski Research Institute, alleging several violations of the Food, Drug, and Cosmetic Act, 21 U.S.C. Sec. 301 et seq. On May 24, 1984, Judge Gabrielle K. McDonald of the United States District Court for the Southern District of Texas partially granted the request of the United States for a permanent injunction. Judge McDonald's order prohibited Burzynski from distributing his antineoplastons treatment in interstate commerce, but did not forbid intrastate distribution of the drug. ³

B. The Antineoplastons Treatment of Huey Roberts

Huey Roberts, a resident of Oregon, developed cancer of the esophagus in 1986. Radiation treatments and chemotherapy did not reverse the progress of the disease. In 1988, Dr. Burzynski began administering a series of antineoplastons treatments to Roberts. After an initial series of treatments in Dr. Burzynski's Houston office, Roberts continued taking antineoplastons at his home in Oregon from a supply furnished by Dr. Burzynski. The antineoplastons treatments in Texas violated part of the Texas Food, Drug, and Cosmetic Act barring the use of any non-FDA-approved drug in Texas. ⁴ The treatments in Oregon violated the permanent injunction Judge McDonald imposed on Dr. Burzynski in 1984. These treatments apparently proved ineffectual, and Huey Roberts discontinued antineoplastons therapy on July 4, 1989.

Huey Roberts was a beneficiary under the health plan of plaintiff/appellee Northwest Laundry and Dry Cleaners Health & Welfare Trust Fund ("the Fund"). Dr. Burzynski submitted claim forms to the Fund and received over $90,000 in reimbursements for the treatments he administered to Roberts.

When the Fund learned that it had reimbursed Dr. Burzynski for illegal treatments, it brought this lawsuit in Oregon state court to try to get its money back. The Fund charged Dr. Burzynski with fraud and with violations of ERISA ⁵ and RICO. ⁶ Dr. Burzynski, invoking diversity jurisdiction, removed the case to the United States District Court for the District of Oregon, and on his motion for a change of venue, the case was transferred to the United States District Court for the Southern District of Texas.

On cross-motions for summary judgment, the district court entered summary judgment for Dr. Burzynski on the Fund's RICO claims and for the Fund on its fraud and ERISA claims. Dr. Burzynski appealed.

II.

A. The Fund's ERISA Claim

The ERISA plan under which Roberts was covered provided that:

When medically necessary treatment is provided by a legally qualified physician for an illness or injury, and that physician is practicing within the scope of his license, payment will be made for expenses incurred for Hospital, Home and Office visits as shown in the Schedule of Benefits. ⁷

To be "medically necessary" under the Plan, a treatment must meet two requirements, measured under Oregon law. First, the treatment must be "appropriate and consistent with the diagnosis (in accord with accepted standards of community practice)". Second, "medically necessary" treatments "could not be omitted without adversely affecting the covered person's condition or the quality of medical care". ⁸

Dr. Burzynski correctly points out that these requisites do not, by their express terms, hold all non-FDA-approved treatments medically "unnecessary". An Oregon court, however, construed nearly identical language in an insurance contract to bar coverage of an experimental cancer treatment. In Jacob v. Blue Cross & Blue Shield of Oregon, ⁹ the insurance contract defined "medically necessary" as treatment that

[i]s appropriate and consistent with the diagnosis and which in accordance with accepted medical standards in the State of Oregon could not have been omitted without adversely affecting the patient's condition or the quality of medical care rendered[.] ¹⁰

Under that definition, the court held that the contract did not cover the insured's "Gerson therapy" or "immuno-augmentive therapy", two unorthodox cancer treatments. The court noted that the treatments had "not been approved by the appropriate government agencies" and were "not in accordance with accepted medical standards". ¹¹ Accordingly, it concluded that the cancer treatments were not covered under the contract and upheld the trial court's summary judgment for the insurer.

We find the Jacob court's reasoning persuasive and its conclusion sound. Dr. Burzynski's antineoplastons treatment had not been approved by the FDA, nor by the Texas Department of Health, and was not in accordance with accepted medical standards. ¹² Accordingly, the treatments were not "medically necessary" as the Plan defines that term. We uphold the district court's summary judgment for the Fund on the Fund's ERISA claim.

B. The Fund's Fraud Claim

The district court held that Dr. Burzynski defrauded the Fund by, inter alia, materially misrepresenting the legality of his antineoplastons treatment. After Judge McDonald's 1984 injunction, Dr. Burzynski was on notice that interstate use of antineoplastons violated federal law. The portion of the Texas Health & Safety Code barring use or sale of non-FDA-approved drugs in Texas ¹³ put Dr. Burzynski on notice that intrastate distribution of antineoplastons was also illegal. Accordingly, Dr. Burzynski was on notice that both the intrastate and interstate applications of antineoplastons in Huey Roberts's case were illegal. It is this illegality that the Fund charges Dr. Burzynski fraudulently withheld from it. Dr. Burzynski admitted that he never disclosed to the Fund that his antineoplastons A and B treatments were not approved by the FDA. The question, then, is whether the district court correctly ruled that this omission constituted fraud.

We begin with some basic principles. Texas law defines fraud as the "misrepresentation of a material fact with intention to induce action or inaction, reliance on the misrepresentation by a person who, as a result of such reliance, suffers injury". ¹⁴ A defendant's failure to disclose a material fact is fraudulent only if the defendant has a duty to disclose that fact. ¹⁵ A duty to speak can arise by operation of law or by agreement of the parties. In the absence of an agreement, there must be some special relationship between the parties, such as a fiduciary or confidential relationship, before a duty to disclose arises. ¹⁶ The nondisclosing party must have had knowledge of the facts it withheld. ¹⁷ Even without a special relationship, there is always a duty to correct one's own prior false or misleading statement. ¹⁸ A speaker who makes a partial disclosure assumes a duty to tell the whole truth even when the speaker was under no duty to make the partial disclosure. ¹⁹

1. Knowledge

Several of Dr. Burzynski's arguments challenge the district court's finding that he knew his antineoplastons treatment was illegal. He asserts that (1) Judge McDonald's injunction authorized the use of antineoplastons in Texas; (2) intrastate distribution of antineoplastons is authorized by the Texas Medical Practice Act; (3) he cannot be held to have known that antineoplastons were illegal because no Texas court has ever so decreed; and (4) the district court applied the wrong standard of scienter to the Fund's fraud claim. Because Dr. Burzynski's latter two challenges verge on the frivolous, we will discuss only the first two.

Dr. Burzynski acknowledges that Judge McDonald's 1984 injunction barred him from interstate distribution of the drug. He argues, however, that Judge McDonald authorized him to distribute antineoplastons in Texas. As did the district court, we find this argument unpersuasive. Judge McDonald limited the injunction to barring interstate distribution. Although the injunction did not forbid intrastate distribution, neither did it excuse Dr. Burzynski from compliance with state laws governing intrastate distribution of antineoplastons. The injunction simply is silent on the legality of intrastate distribution.

Dr. Burzynski next asserts that, even if Sec. 431.114 of the Texas Health & Safety Code bars intrastate distribution of antineoplastons, that bar is superseded by Sec. 5.09 of the Texas Medical Practices Act ("TMPA"), ²⁰ which provides:

A physician licensed to practice medicine under this Act may supply patients with any drugs, remedies, or clinical supplies as are necessary to meet the patient's immediate needs. This subsection does not permit the physician to...