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Is ePHI Encryption Required? The Failure to Properly Protect ePHI Can be Quite Costly.

(June 27, 2018):  Violations of the Health Insurance Portability and Accountability Act (HIPAA), where a Covered Entity[3] has failed to utilize ePHI encryption can be quite costly. The loss of unencrypted electronic media containing Protected Health Information (PHI)[1] can result in big fines as one Texas medical center has recently learned the hard way.  As a case ruling issued earlier this month reflects, the University of Texas MD Anderson Cancer Center (MD Anderson) was fined $4.3 million for their loss of two unencrypted USB drives and theft of an unencrypted laptop.  This article examines this case in more detail and discusses your obligations to protect electronic PHI (ePHI) from improper disclosure or access by unauthorized persons.

I.  Is ePHI Encryption Required by Covered Entities?

The Department of Health and Human Services (HHS) oversees compliance and enforces HIPAA’s sanctions for noncompliance through its Office for Civil Rights (OCR).  In cases involving possible criminal conduct, the OCR works with the Department of Justice (DOJ).

The HIPAA Omnibus Rule has changed the enforcement provisions.[2] Previously, the agency had discretion in choosing whether to investigate complaints or potential violation in cases where the Agency’s preliminary review reveals a possible violation due to willful neglect.  Now, the agency is required to initiate a formal investigation when a party appears to have exhibited willful neglect.  If an investigation is performed, it may include a review of pertinent policies, procedures, or practices of the Covered Entity and the circumstances of the alleged violation.  Documentation and evidence of compliance are key to ensuring no penalties are assessed by OCR.

Notably, the HIPAA Omnibus Rule modified HIPAA’s Privacy, Security and Enforcement Rules in order to implement the statutory amendments set out under the Health Information Technology for Economic and Clinical Health Act (HITECH).  Under HITECH, a Covered Entity is required to conduct a comprehensive “security risk analysis” of the administrative, physical, technical and operational aspects of your organization.  For each category, the Security Rule establishes both required and addressable implementation specifications.

Implementation specifications that are identified as required must be fulfilled by a Covered Entity.  The failure to implement required specifications will be automatically deemed to be a failure to fully comply with the requirements of the HIPAA Security Rule.  In contrast, specifications that are identified as addressable must only be implemented if, after a risk assessment, the Covered Entity has concluded that compliance with the specification is a reasonable and appropriate security risk safeguard for handling PHI and ePHI.

Contrary to popular belief, Covered Entities are not mandated by law to encrypt ePHI.  As the security risk assessment implementation specification covering encryption is expressly noted as an addressable specification, it is not required.  As 45 C.F.R. §164.312(a)(2)(iv)[4] expressly provides:

 “(iv) Encryption and decryption (Addressable). Implement a mechanism to encrypt and decrypt electronic protected health information.”

Clear as mud?  If you are still confused as to your obligations, you aren’t alone.  Although you may determine that it would be reasonable for you to NOT encrypt a certain set of ePHI, you need to keep in mind that if there is a potential breach (through loss, theft, negligence, etc.) the OCR will be second-guessing your decision-making in this regard.

II.  The Encryption “Safe Harbor”:

Section 13402 of HITECH extended the privacy provisions of HIPAA by requiring that Covered Entities and their business associates notify affected individuals after discovering breaches of unsecured PHI.[5] Breach, in this case, means the unauthorized acquisition, access, use, or disclosure of PHI that compromises the security or privacy of the information.[6] Generally, incidents within the Covered Entity (between employees) or unintentional disclosure to a business associate are not breaches. Thus, if an employee sends an email inappropriately but in good faith containing PHI to a co-worker and neither employee shares it with others, it is not a breach. If the email goes to someone who is not an employee of the entity or a business associate, it may well be.

Furthermore, the breach notification requirements apply only to “unsecured PHI— meaning PHI that is not secured through the use of technology or methodology specified by the Secretary, such as encryption or destruction that renders the paper unusable, unreadable, or indecipherable.[7]  Therefore, if a Covered Entity encrypts information to comply with the Security Rule and subsequently discovers a breach of that information (through loss, theft, accidental delivery to the wrong person, etc.), the Covered Entity is not required to provide notice of the breach.  If the information is protected through a firewall or some other means not approved by the Secretary, then notification would be required for a breach.  To ensure encryption keys are not breached, they should be kept on a separate device from the data to which they apply.

III.  The MD Anderson Case:

In the MD Anderson case, the cancer center supposedly lost two unencrypted flash drives and experienced the theft of an unencrypted laptop.  Collectively, the devices were estimated to have contained the PHI of approximately 33,500 patients. The OCR alleged that the cancer center did not comply with regulatory requirements by:

“(1) failing to perform its self-imposed duty to encrypt electronic devices and data storage equipment; and (2) it allowed ePHI to be disclosed. “

Pursuant to 45 C.F.R. pt. 160 and 45 C.F.R. pt. 164, subpts. A, C, D, and E, Covered Entities are generally required to:

“ensure the confidentiality, integrity, and availability of all ePHI that the entities create, receive, maintain, or transmit; protect such information against any reasonably anticipated threats or hazards to its security; protect ePHI against any reasonably anticipated impermissible uses and disclosures; and ensure compliance with these requirements by their workforces.”

While the cancer center had policies and procedures for maintaining the safety of ePHI, it was alleged that they did not implement those as required by 45 C.F.R. § 164.312(a)(1).  MD Anderson argued that they satisfied this regulation because there were technically policies and procedures put in place to allow PHI to be encrypted.  MD Anderson’s procedures for protecting ePHI included:

  1. Password protection of all computers and portable computing devices accessing potentially confidential information;

  2. A requirement that confidential or protected data stored on portable computing devices must be encrypted and backed up to a network server in the event of a disaster or loss of information;

  3. Annual employee training event that provided its employees with training in areas that included ePHI transmission and proper disposal; a prohibition against password sharing; a discussion of password necessity and integrity; an explanation of authorized and proper use of information systems, and training about information security resources.

Unfortunately, MD Anderson’s policies and procedures in this regard were shown to be incompletely or ineffectively implemented. The laptop and two USB drives in question were not encrypted as required by the cancer center’s policies and procedures.  MD Anderson’s attempts to ensure implementation of its ePHI protection policies and procedures were characterized as “half-hearted” by the ALJ handling the case.  MD Anderson was found to have delayed the encryption of devices and, after years, only proceeded slowly with the implementation of the encryption policy claiming financial issues were to blame.

The laptop in question was being used by a telecommuting employee as work computer and it was neither encrypted nor password protected. The laptop was stolen from the home of the employee and the ePHI was vulnerable although no breeches in the security of the patients concerned in the PHI resulted.  The first USB concerned was lost by a trainee while on an employee shuttle bus. The second USB was lost by a visiting researcher.

The OCR considered the theft of the laptop and the losses of the USB flash drives to be unlawful disclosures of ePHI because these actions constituted the “release, transfer, provision of access to, or divulging in any manner of information outside the entity holding the information.”

IV.  Defenses Raised by MD Anderson:

In its defense, the cancer center raised a number of arguments before the ALJ, several of which are outlined below.

  • As a State Entity, MD Anderson is Not a “Person” as Defined Under HIPAA.  In addition to arguing that the Secretary, HHS had acted beyond the authority of the position, MD Anderson also argued that as an entity of the State of Texas, it did not constitute a “person” and was therefore not covered under HIPAA.  The ALJ disagreed.
  • The Penalties Assessed by the Secretary Were Excessive.  Secondly, MD Anderson argued that any penalties assessed should be capped at $100,000 per year.  The cancer center also cited 45 C.F.R. § 160.546(b) and asked that the ALJ reduce the assessed penalties to below the statutory cap.  Notably, the ALJ refused to lower the penalties imposed by the Secretary, HHS, claiming that doing so would “constitute an end run around the Secretary’s intent as expressed in the regulation.”[8] The ALJ also cited 45 CFR 160.408 which allows aggravating factors such as the general pursuit of justice to dictate fine amounts.  Additionally, MD Anderson also claimed that the high penalties imposed were a violation of the excessive fines provision outlined in the 8th Amendment.  Not surprisingly, the ALJ responded that it did not have the authority to consider the constitutionality of the ruling.  Each of MD Anderson’s arguments were addressed in the ALJ’s decision.
  • The Theft and Loss of Devices Do Not Constitute a “Disclosure” Under HIPAA. MD Anderson further argued that stolen or lost property cannot constitute a “disclosure” of sensitive material mainly because there is no evidence the PHI was viewed by anyone. However, the mere fact that the PHI was compromised and rendered vulnerable to viewing by an unauthorized person was deemed enough to constitute a disclosure in violation of HIPAA. Finally, the cancer center argued that the behavior of the individuals who lost USB drives was unsanctioned along with the actions of the thief.  Therefore, there was no basis to hold MD Anderson responsible for these unauthorized acts.  Not surprisingly, the ALJ disagreed, holding that although the employees may have disobeyed MD Anderson’s policies, the actions of transporting the data were within the scope of their official duties.
  • The OCR Has Failed to Apply HIPAA’s Regulations Consistently.  Among concern by the Texas Cancer Center that their key arguments were not seriously considered, there was also concern that the OCR’s enforcement of HIPAA regulations is not transparent or consistent[9]. With the Texas Cancer Center’s fine being the 4th largest ever upheld, there seems to be merit to the claim that regulations are not being consistently or fairly enforced. For example, in a 2010 case involving Rite Aid, the large national drug store chain agreed to pay $1 million to settle HIPAA privacy violations after several of its pharmacies were videotaped disposing of prescription pill bottle labels which contained identifying information into dumpsters with public access[10]. It seems odd when comparing the two cases that one of the nation’s largest drug store chains was fined less than one quarter of the amount of fines assessed against MD Anderson for the violations discussed above.

V.  Next Steps for MD Anderson:

MD Anderson Cancer Center has expressed plans to appeal the ALJ’s ruling[11]. The cancer center feels not only that the $4.3 million in fines is too much but that the ruling does not take into account the policy and procedure the center had already created. At the end of the day, however, it isn’t the availability of a mechanism to keep ePHI safe that matters but that strong efforts are made to ensure ePHI is actually being protected. Failing to carry out policy and procedure can bring serious fines.

VI.  Steps You Can Take to Comply with Your Obligations Under HIPAA and HITECH:

  • Compliance Officer. Appoint a Compliance Officer for your organization.
  • Breach Insurance. Review your options for purchasing insurance to cover any damages and penalties that may result from an unintentional breach or unauthorized disclosure.
  • Notice of Privacy Practices. Ensure that an updated Notice of Privacy Practices is in place.
  • Patient Consent Form. Ensure that an appropriate “Patient Consent Form” is in place.
  • Business Associate Agreements. Ensure that an appropriate “Business Associate Agreement” is in place with each of the outside entities with whom you use or disclose PHI. Additionally, check with your business associates and verify that they understand their obligations and will only provide any subcontractors access to your ePHI with your permission. Will you require that your business associate obtain breach insurance?
  • Policies and Procedures. Review and update all of your policies and procedures required to meet your obligations under HIPAA and HITECH to comply with the law and implement safeguards to protect the integrity of the individually identifiable health information under your control:
    • Privacy Rule;
    • Security Rule;
    • Enforcement Rule;
    • As mandated in connection with your Security Risk Analysis;
    • Other policies and procedures needed to address risks involving social media, using your own cell phones, telecommuting, etc.
  • ePHI Encryption. Review your operational practices to ensure that ePHI is encrypted to prevent improper use or disclosure. Although encryption may not be mandated, it is essential if you are trying to reduce your organization’s level of risk.
  • Backup Procedures.  Review your backup procedures and ensure that in the event of a disaster or other unforeseen event, a complete encrypted copy of your patient’s ePHI is safely maintained.
  • Security Risk Analysis. Perform / update the Security Risk Analysis of your organization and assess any outstanding specifications that still need to be met. Additionally, review the risks and vulnerabilities of a potential breach and / or the wrongful disclosure of ePHI.
  • Employee Training. Ensure that all of your staff is trained on their obligations to comply with HIPAA’s requirements under the law.  Furthermore, ensure that all new members of your staff are trained on their obligations under the law within 30 days of entering on duty.
  • Minimum Necessary. Review your use and disclosure practices to ensure that the minimum necessary standard is being met.
  • Breach Response Plan. Develop a breach response plan (including, but not limited to breach notification when needed, analysis of the cause of the breach, remedial steps and any additional staff training that may be needed), to better ensure that your organization can effectively respond to a breach incident.

Robert Liles represents health care providers in RAC and ZPIC appeals.Robert W. Liles serves as Managing Partner at Liles Parker, Attorneys & Counselors at Law.  Is your organization dealing with a potential HIPAA breach or unauthorized disclosure?  For a free initial consultation, contact Robert or one of the other attorneys at Liles Parker.  1 (800) 475-1906.


[1] The term “Protected Health Information” (PHI) covers individually identifiable health information that is transmitted by electronic media, maintained in electronic media or transmitted or maintained in any other form or medium. The rules do not include “de-identified information,” individually identifiable information where all 18 identifiers have been removed.  Such information can be used without restriction or patient authorization. The following table describes the identifiers that must be removed in order to qualify as de-identified information.

18 Individual Identifiers
1Names10Account numbers
2All geographic subdivisions smaller than a state, except for the initial three digits of a ZIP code if the geographic unit formed by combining all ZIP Codes with the same 3 digits contains more than 20,000 people. 


 Certificate or license numbers

All elements of dates, except year, and all ages over 89 or elements indicative of such age

12Vehicle identifiers or serial numbers, including license plates
4Telephone numbers13Device identifiers and serial numbers
5Fax numbers14URLs
6E-mail addresses15IP addresses
7Social Security numbers16Biometric identifiers, like voice and fingerprints
8Medical record numbers17Fullface photography or comparable images
9Health plan beneficiary numbers



Any other unique, identifying number, characteristic, or code, excepted as permitted for re-identification in the Privacy Rule

[2] 78 Fed. Reg 5566 (Jan. 25, 2013), available at https://www.gpo.gov/fdsys/pkg/FR-2013-01-25/pdf/2013-01073.pdf (last accessed June 2018).

[3] A “Covered Entity” is a health plan, a health care clearinghouse, or a health care provider who transmits any health information in electronic form in connection with a standard transaction

[4] 45 C.F.R. §164.312(a)(2)(iv). https://www.gpo.gov/fdsys/pkg/CFR-2010-title45-vol1/pdf/CFR-2010-title45-vol1-sec164-312.pdf

[5] For additional information, see the Breach Notification Final Rule Update, available at

http://www.hhs.gov/ocr/privacy/hipaa/administrative/breachnotificationrule/finalruleupdate.html (last accessed April 2018).

[6] 45 C.F.R. § 164.404.

[7] 45 C.F.R. § 164.402.

[8] https://www.hhs.gov/sites/default/files/alj-cr5111.pdf

[9] https://www.beckershospitalreview.com/cybersecurity/md-anderson-slapped-with-4-3m-penalty-for-hipaa-violations.html

[10] https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/examples/rite-aid/index.html

[11] http://www.modernhealthcare.com/article/20180619/NEWS/180619897


Sexual Harassment: Cases Against Texas Physicians in 2017

Sexual Harassment(January 26, 2018): From Churches to Congress, sexual harassment and assault charges have plagued many of the institutions that our society holds dear. As revelations of sexual misconduct continue to surface, we continue to learn of the many abuses of those in powerful positions; those whom we once revered.  The rise of the #MeToo Movement (“Movement”) in late 2017 has brought about a national conversation over sexual assault and harassment. Women and men from all industries have been revealing tragic stories of sexual assault and harassment. Not surprisingly, healthcare practices and organizations haven’t been immune to this societal crisis.  In fact, it now appears that sexual assault and harassment may be far more prevalent in medicine than has been previously acknowledged. Recent studies have exposed that sexual misconduct by physicians is not only more common than previously thought, but also poorly disciplined when acknowledged. 

In this article, we have collected data on disciplinary actions for sexual misconduct by physicians in Texas throughout 2017.[1] This article breaks down the 2017 disciplinary actions into (1) the different forms of sexual misconduct cited, (2) the physician specialties involved, (3) the time frame of the disciplinary actions, and (4) the severity of the disciplinary action taken by the Texas Medical Board (“Board”) against the subject physician. Prior to examining the data, let’s delve into the #MeToo Movement and the prevalence and discipline of sexual misconduct in medicine. 

I. What is the #MeToo Movement?

The #MeToo Movement as we know it today emerged out of the revelations last October of sexual abuse by powerful men in the Hollywood and entertainment industry.[2] Since the first allegations surfaced, more and more powerful people, particularly men, have been exposed and alleged to have committed various types of sexual assault, harassment or other improper conduct. To many, the sheer volume of sexual misconduct allegations exposed has come as a great shock. The #MeToo Movement has showed us that perpetrators of sexual misconduct can be practically anyone. Celebrities, athletes, government officials, and otherwise seemingly ordinary individuals have all been named as wrongdoers.  To the extent that there is one, the silver lining of the #MeToo Movement is that it has empowered women to stand up for their rights and it has initiated a national self-evaluation on what is (and isn’t) appropriate interpersonal conduct between adults in the workplace.  Ultimately, we will all benefit from this conversation.

II. An Overview of the Problem

At present, 1 in 5 women in the United States will be raped in their lifetime and nearly 1 in 2 women in the United States will be victims of sexual misconduct other than rape.[3] In accordance with the later statistic, 13% of women in the United States will be sexually coerced, 27.2% will be sexually assaulted, and 33.7% will be sexually harassed.[4] Despite the alarming prevalence, rape and sexual assault is the lowest reported crime, with an estimated 67% of victims not reporting their crime to the police.[5] In the workplace, the Equal Employment Opportunity Commission (EEOC) estimates that 75% of sexual harassment goes unreported.[6] This is often attributed to the stigma and lack of support that victims face in society. However, through raising awareness of the prevalence of this issue, the #MeToo Movement is expected to ignite social progress towards supporting victims and taking action against perpetrators. It is reasonably expected that this Movement will continue to empower many more victims to report to various authorities, whom will be expected to take further action to prevent and stop sexual misconduct.

III. What Constitutes Sexual Harassment / Sexual Misconduct? 

As you can imagine, there is no single definition of the terms “sexual harassment” or “sexual misconduct.” Moreover, there isn’t even agreement on when one of these specific terms should apply. Rather than get bogged down in semantics or spend all day comparing and contrasting how different courts have defined these terms, for the purposes of this article, we intend to utilize the terms interchangeably.

The term, “sexual harassment.” is defined at by the EEOC as the harassment of:

[A] person… because of that person’s sex. Harassment can include “sexual harassment” or unwelcome sexual advances, requests for sexual favors, and other verbal or physical harassment of a sexual nature… Both victim and the harasser can be either a woman or a man, and the victim and harasser can be the same sex.”[7]  (emphasis added).

In contrast, the Federation of State Medical Boards has adopted a more specific definition of the term that is focused on the physician-patient relationship.  The Federation of State Medical Boards defines physician sexual misconduct as:

“[B]ehavior that exploits the physician-patient relationship in a sexual way. Sexual behavior between a physician and a patient is never diagnostic or therapeutic. This behavior may be verbal or physical, and may include expressions of thoughts and feelings or gestures that are sexual or that reasonably may be construed by a patient or patient’s surrogate as sexual.[8] (emphasis added).

According to sections 22.011 and 22.021 of Chapter 22 of the Texas Penal Code, sexual assault includes all physical contact of a sexual nature in which consent was not or could not be given.  Sexual misconduct is most often predicated on a power dynamic between the perpetrator and the victim.[9] In medicine, the physician holds power over their patients and subordinates. Thus, this power dynamic between perpetrator and victim makes it such that consent is not a defense for physicians.[10] The Texas Penal Code specifically addresses this dynamic in Chapter 22, Section 22.011 (b)(9), which states that the act is not consensual if:

[T]he actor is a mental health services provider or a health care services provider who causes the other person, who is a patient or former patient of the actor, to submit or participate by exploiting the other person’s emotional dependency on the actor;” (emphasis added).

How does your health care practice or organization define sexual harassment or sexual misconduct?  Regardless of the definition ultimately adopted, there are a number of examples of conduct that are generally recognized as problematic.  These include, but are limited to:

  • Sexual jokes, pranks or teasing. This conduct can expressly allude to sexual matter or can refer to sex by innuendo.  It can be made in person, over the phone by e-mail, or by some other method of communication.
  • Touching, grabbing or making pretend motions or gestures of a sexual nature.
  • Verbally engaging in sexually discussions or making sexually charged comments at the workplace.
  • Repeatedly standing too close to a person, brushing up against them or otherwise getting in their personal space and making them uncomfortable.
  • Showing or otherwise posting sexually demeaning or offensive pictures, cartoons, comments or other materials in the workplace.
  • Repeatedly asking someone to socialize during off-duty hours when he or she has already that he / she is not interested in engaging in social activities.
  • Giving gifts or leaving objects that are unwanted, regardless of whether they are sexually suggestive.
  • Asking about someone’s sexual experiences or preferences and / or discussing your own sexual experiences, activities and / or preferences.

IV. Generally Speaking, how Common is Sexual Misconduct in Medicine?

As an elite profession, physicians are revered and given an elevated status. As far back as Ancient Greece, physicians have sworn oaths that forbade engaging in any form of sexual misconduct.[11] Despite moral and ethical oaths, this “elite” status is easily manipulated by perpetrators, especially against patients. In a 2016 report, the Atlanta Journal-Constitution uncovered that hidden and pervasive nature of sexual misconduct in medicine. Since 1999, more than 3,100 physicians have been formally accused of sexual misconduct, with at least 2,400 of those physicians engaging in sexual misconduct with patients. It is important to note that this makes up an extreme minority within the over 950,000 physicians practicing in the United States. However, akin to prior sexual misconduct scandals, one perpetrator is capable of routinely victimizing patients. In one particular case, a pediatrician sexually assaulted at least 1,200 children over 15 years.[12] However, most of the 3,100 perpetrators did not target children, but rather young women.

In all, the actual details on the prevalence of sexual misconduct are difficult to accurately unearth for a multitude of reasons. Doctors are viewed as educated and credible, giving way to a predisposition by authorities to believe the word of the physician over an alleged victim. Additionally, most states do not post rather detailed public records related to sexual misconduct.[13] The details of allegations are often left out or obscured, leaving the public with little knowledge of what any given physician may have done. Some state medical boards choose not to publicly release information about a first-time offense. Additionally, when the evidence is discovered through a peer-review at the medical institution, state laws often prohibit that information from being shared. To make matters worse, inadequate screening procedures prevent some state medical boards from discovering prior allegations made against physicians, allowing some perpetrators to move to a new location and continue to victimize patients and coworkers.

V. How is Sexual Harassment and Misconduct Disciplined in Medicine?

While state medical boards claim to take sexual misconduct seriously, the Atlanta Journal-Constitution seems to tell another tale. Of the 3,100 physicians disciplined for sexual misconduct since 1999, 2/3 were permitted to continue practicing.[14] In the case of some serial predators, this meant they could continue to victimize their patients and coworkers with no serious repercussions. The report found that cases were obscured as were disciplines. Not all cases of sexual assault and harassment were labeled as such, many were marked in general terms such as crossing “boundaries” or having a “sexual relationship” with a patient. In most states, state medical boards and healthcare institutions choose to make compromises with the physician in order to avoid protracted legal battles. This is because state medical boards can only operate within the statutory authority given by that state’s legislature. Thus, patient protection may be a priority for state medical boards, but they can only work within the framework provided to them. In addition, some state medical boards view the physicians as a scarce public health resource. In some rural areas, state medical boards have weighed the implications of removing a physician’s license on the ability of the populace to seek out a physician.

The actual disciplinary actions taken seem to echo past sexual misconduct scandals. Disciplinary actions are overwhelmingly aimed at rehabilitation rather than punishment. Physicians are frequently seen not as criminals, but rather as individuals suffering from mental illness. These disciplinary actions aimed at educating physicians on sexual misconduct, legal repercussions, and their “boundaries” with patients and coworkers. Many have been sent to “treatment,” as state medical boards seek to salvage the value they see in physicians. Many are even given the restriction of a required chaperone while they are seeing patients of the opposite sex. Not all disciplinary actions are as bleak for patient protection. Many of these perpetrators have been fined, publicly reprimanded, had their license suspended or restricted, or lost their license all together. Voluntary surrender does unfortunately offer perpetrators the ability to avoid further investigation. However, some state medical boards have also adopted the policy of revoking a medical license if that individual surrenders their license in another state in lieu of sexual misconduct allegations.

VI. How Well Does Texas Protect its Patients?

In conjunction with their damning report, the Atlanta Journal-Constitution also created a “report card” for how well each state protects its patient from sexual misconduct by physicians. Each state received a numerical score from 0-100, averaged from a similar scale judging the state’s transparency, duty-to-report laws, board composition, criminal acts, and discipline laws. The best state was Delaware, while the worst state was Mississippi. Since our research focused on the Texas Medical Board, we will examine the Texas State Report Card.

The good news is that Texas ranked second, with an overall rating of 80. Texas ranked as the most transparent state, with a score of 90. Though hospital sanctions are not listed, the Texas Medical Board maintains an accessible public record for all Board orders that provides details as to why Board orders were taken.

Unfortunately, the “duty-to-report” laws in Texas were not adjudged by Atlanta Journal-Constitution to be quite as superb. Texas was given a score of only 52 due to insufficient reporting laws. Hospitals are required to report the details of a peer review that results in a more than 30-day suspension, or when a physician surrenders their clinical privileges in exchange for not conducting an investigation. However, if a physician is disciplined for 30 or fewer days, the details are not required to be released. Additionally, there is no deadline for how long a hospital can wait to report, nor are there legally established repercussions for a failure to do so. Courts are not required to notify the Board of criminal convictions. Fellow physicians, however, are required by law to report any behavior by peers that may pose a threat to the public welfare.

The Board composition score was slightly better, at 70. It is comprised of 19 total individuals including  7 consumers with no immediate or marital relation to medicine and 12 physicians. Only 3 of the 19 board members are female.

The criminal acts score for Texas is remarkably high, at 96. This is primarily because the Texas Medical Board requires a thorough background check for applicants, then continues to periodically monitor criminal records of licensed physicians. Additionally, state law requires that the board report criminal conduct to police. As mentioned earlier, Texas has also criminalized sexual misconduct by physicians by removing consent as a legal defense.

Lastly, Texas tied Delaware and Alaska for the highest score for discipline laws with a score of 90. As per state law, the Board must revoke any license for a felony conviction or a deferred adjudication involving sexual abuse of a child. However, this revocation is not permanent unless the physician agrees to that stipulation or permanently surrenders their license in lieu of further investigation. State law also requires that an applicant cannot be licensed if their license elsewhere is currently restricted, cancelled, suspended, or revoked. State law also prohibits licensing any applicant that is being prosecuted for a crime that, if prosecuted in Texas, would be felony or misdemeanor involving moral turpitude. In addition, the board may subpoena hospitals for peer review records and the standard of proof for board action is only a preponderance of evidence.

Overall, the Texas Medical Board is amongst the best in the nation at handling formally submitted complaints of sexual misconduct by physicians. However, that bar is still too low. Finding records of allegations remains difficult in Texas. Additionally, anonymous reporting is not permitted, likely contributing to some victims deciding not to report.

VII. Texas Medical Board Disciplinary Actions for Sexual Conduct in 2017:

In 2017, the Texas Medical Board took 18 total disciplinary actions against 17 physicians for sexual misconduct. Six physicians were disciplined for sexual assault, with 2 of the 6 also being disciplined for sexual harassment. The disciplinary action imposed by the Board in each of these actions except for one, was a suspension of the physician’s medical license. The one outlier was a physician who voluntarily surrendered his  license in lieu of investigation; this physician’s license had previously been suspended earlier in 2017 for sexual assault. Only one physician was disciplined for sexual harassment alone, which resulted in sanctions which including taking a medical jurisprudence exam and multiple educational courses. Two physicians were disciplined for sexual misconduct, though both actions were a result of actions by other institutions. In the first case, the Board found that one physician failed to report disciplinary action by his alma mater for sexual misconduct. This resulted in a fine and mandatory educational courses. The second case involved a physician licensed in Texas but practicing in Oklahoma. This individual’s license was revoked in Texas following the voluntary surrender of his license in Oklahoma due to pending sexual assault charges. The remaining sexual misconduct-related disciplinary actions were referred to as having a “sexual relationship with a patient.” All but one of these cases resulted in a punishment that included mandatory continuing education. Five of these disciplinary actions resulted in public reprimands. Other forms of disciplinary action taken in these cases included fines, chaperones while with female patients, a medical jurisprudence exam, psychiatric treatment, and a temporary license restriction.[15]

Sexual HarassmentFigure 1: Allegations that resulted in disciplinary actions taken by the Texas Medical Board in 2017.[16]

Sexual HarassmentTable 1: Types of disciplinary actions taken by the Texas Medical Board in 2017 for each type of allegation.[17]

There did not appear to be any large trends within the type of physician specialty. The most common specialty was internal medicine, with a total of 5 internists out of 17 total disciplined physicians. No significant geographical trend was observed, with the cases largely spread out amongst relatively populated areas of Texas. Over 50% of the disciplinary actions occurred in the first half of the year. Surprisingly, there was no particular increase in disciplinary actions following the rise of the #MeToo Movement in October 2017.

Sexual Harassment Table 2: Allegations that resulted in disciplinary action by physician specialty.[18]

Sexual HarassmentFigure 2: Sexual misconduct-related disciplinary actions taken each month by the Texas Medical Board in 2017.[19]

VIII. The Texas Medical Board Weighs In on Sexual Harassment Complaints:

In the January 2018 Texas Medical Board Bulletin, two interesting topics appear on Page 3 and 4: the use of chaperones and duty to report impairment. Each bulletin published offers news and reminders relevant to hot topics. Most bulletins in the last 5 years have covered topics related to prescription drugs, but none of those bulletins have covered either of these topics. It is worth noting that this is the first bulletin to be published since the #MeToo campaign began.

The first of the seemingly relevant topics is the use of chaperones. This section seeks to remind physicians that there are many ways to make patients feel comfortable during their visit,” highlighting the use of a chaperone as one particularly ethical method of doing so, in addition to providing gowns and using drapes. The second seemingly relevant topic was the duty to report impairment. As addressed earlier in this article, state medical boards frequently view perpetrators of sexual misconduct as mentally ill rather than criminals. This section of the January 2018 bulletin seems to echo that narrative, reminding physicians that they may report themselves and fellow physicians that pose a continuing threat to the public welfare. Additionally, it highlights that in certain circumstances, civil liability may be lifted from the reporting party.

While this was not a direct response to the #MeToo Movement, it does appear relevant, and perhaps anticipatory. This bulletin appears to remind physicians that patient comfort and safety is an ethical priority in medicine. Impairment does not automatically indicate sexual misconduct, though sexual misconduct has certainly been attributed to impairment by the board in the past.[20] Through this bulletin, it is plausible to say that the Board may be anticipating, and perhaps encouraging, more reports of sexual misconduct by physicians in the near future.

The #MeToo Movement seems to have struck a chord with the American public. It seems that society may finally begin to address the pervasive nature of sexual misconduct. All of this comes as we learn of tragic stories of abuses and cover ups. Like many other industries, medicine appears to have a dark past of turning a blind eye to physicians who abused patients and coworkers. While the number of physicians engaging in sexual misconduct may be far and few between, their actions have harmed, at the least, thousands of patients and coworkers. As the #MeToo Movement carries into 2018, perhaps we will learn more about the true scale of sexual misconduct in medicine as more victims come forward.

While no state medical board appears to be perfect at addressing sexual misconduct, the Texas Medical Board is currently one of the best. Their 2017 data shows that sexual misconduct appears to be rare amongst physicians in Texas, at least on the surface. Considering how Board investigations into these matters can take months, it is plausible that the 2017 does not reflect the societal shifts in reporting since the beginning of the #MeToo Movement. The Movement may have effectively changed the national environment that felt hostile to most victims. Some have likened its energy of the #MeToo Movement to that of the civil rights movement, hoping that the social media campaign will result in coordinated efforts to achieve legal and cultural reform.[21] With more victims feeling supported, it is almost certainly expected that reports of sexual misconduct will rise across.

If the Movement does translate to more reports of sexual misconduct generally, it is plausible that a better portrait of sexual misconduct in medicine may emerge. Thus, we will conduct this same assessment of the Texas Medical Board’s disciplinary actions against sexual misconduct at the conclusion of 2018. It is likely that more physicians are guilty of sexual misconduct than the Board is aware of or has taken action against. In comparing the 2018 and 2017 results, we will be able to determine how the #MeToo campaign has impacted medicine. We can expect to see more disciplinary action by the Board in 2018. The causes of the disciplinary actions may become less vague and the punishments more severe. For the time being, this is only speculation. Only time will tell how the #MeToo Movement will impact sexual misconduct in medicine.

IX. Healthcare Organizations Need to Conduct a Top-Down Review of Their Policies and Procedures:

Even as state medical boards enact stronger policies against sexual misconduct, it is important to note that the organizations and individuals who failed to adequately prevent, stop, or report sexual misconduct by a physician have been held liable, and will likely continue to be held liable into the future. In the case of the pediatrician who sexually assaulted hundreds of children, the hospital he sometimes worked for, a medical society, and doctors that referred patients to this physician were sued, which was resolved through a final settlement of $122 million for the defendant’s former patients.[22] Therefore, it is important for any organization hoping to avoid liability to create detailed policies and procedures on sexual harassment and sexual misconduct. In doing so, health care organizations should ensure that they are preemptively educating both patients and employees on what constitutes sexual harassment and sexual misconduct and what the ramifications are not only for perpetrators, but also bystanders who do not report. Health care organizations should require reporting such that allegations are not covered up nor overlooked.  A low-cost, comprehensive, anonymous reporting system such as that provided by ComplianceHotline.com can provide your practice or other health care organization with a full range of reporting options that can be made available to patients and employees alike if they are concerned about sexual harassment or misconduct.[23] Moreover, this anonymous hotline tracks the recommended steps recommended by HHS-OIG in its recent guidance, “Measuring Compliance Program Effectiveness: A Resource Guide.”  The bottom line is straightforward — encouraging the early reporting of sexual misconduct can significantly reduce your health care entity’s level of regulatory risk and improve the quality of work life for your staff.

Unfortunately, drafting the proper Policies and Procedures to be used in your health care organization can be tricky.  You need to take both federal and state requirements into account. Please feel free to contact us for assistance with both the policies and with staff training on these important issues.

Health care LawyerAshley Morgan, J.D., serves as Senior Associate Attorney at Liles Parker, PLLC.  Liles Parker is a health law firm health care providers and suppliers around the country in connection with compliance-related matters and Medicare / Medicaid / Private Payor audits.  For a complimentary consultation, give Ashley a call at: (202) 298-8750.



[1] Specifically, we reviewed Texas Medical Board Bulletins posted in April 2017, September 2017, and April 2017.


[3] https://www.nsvrc.org/sites/default/files/nsvrc_one_pager_0.pdf

[4] https://www.cdc.gov/ViolencePrevention/pdf/NISVS_Report2010-a.pdf

[5] https://www.bjs.gov/content/pub/pdf/rsarp00.pdf


[7] https://www.eeoc.gov/laws/types/sexual_harassment.cfm



[10] http://doctors.ajc.com/doctors_sex_abuse/

[11] http://www.pbs.org/wgbh/nova/body/hippocratic-oath-today.html


[13] http://doctors.ajc.com/states_discipline_sex_abuse/

[14] http://doctors.ajc.com/doctors_sex_abuse/?ecmp=doctorssexabuse_microsite_nav

[15] http://www.tmb.state.tx.us/dl/A1BB2B98-02FD-3A3C-9022-D99248F0EEBF;



[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] https://www.documentcloud.org/documents/2940026-combined-164-pdf.html

[21] http://www.cnn.com/2017/10/30/health/metoo-legacy/index.html


[23] Paul Weidenfeld and Robert W. Liles established www.compliancehotline.com to provide health care providers and suppliers with a comprehensive anonymous complaint reporting system that could be incorporated into their overall Compliance Program.

Maryland Limits on Opioid Prescriptions

(June 30, 2017):  In March 2016, the Centers for Disease Control and Prevention (CDC) published “CDC Guideline for Prescribing Opioids for Chronic Pain – United States, 2016” [1] in an effort to address the seemingly ever-increasing deaths that have been attributed to opioid-related overdose. A number of states have passed legislation or enacted regulatory provisions designed to better safeguard patients from abuse and the public from illegal diversion.

For instance, Indiana,[2] Ohio[3] and Kentucky,[4] have all taken action to better ensure that physicians, nurse practitioners and physician assistants with qualified to prescribe opioids do in a manner that will protect patients from abuse and the public from illegal diversion.  Many of the requirements put in place by these states track one or more of the recommendations set out in the CDC’s March 2016 guideline.  The State of Maryland is merely the latest jurisdiction to take action in this regard.  This article examines the approach that the Maryland legislative has taken and discusses the collateral impact that opioid prescribing practices can have on a provider’s license and financial health.

I.  Purpose of Maryland’s Legislation “The Prescriber Limits of 2017”:

 On May 25, 2017, Maryland Governor Larry Hogan, signed-off on The Prescriber Limits of 2017.”  The legislation was enacted as an emergency measure and was found to be needed for the immediate preservation of the public’s health and safety. As an emergency measure, it was passed by a “yea” and “nay” vote supported by three-fifths of all the members elected to the each of the two Houses of the General Assembly.

The statute’s requirements are codified in several sections of the Code of Maryland, Article – Health Occupations.  Several amendments were made to Section 1-223. As the Preamble to the legislation notes:

“The rise in overdose deaths is attributable to the surge of opioid dependence that has emerged in Maryland over the past two decades, stemming from a dramatic increase in the number of opioid medications prescribed by the medical community and the influx of cheap, potent heroin and fentanyl

II. Guidelines a Health Care Provider Must Follow When Prescribing an Opioid for Pain:

As set out under Section 1-223(B), a Maryland health care provider must base pain treatment decisions based on his / her clinical judgement.  The health care provider must prescribe:

 (1) The lowest effective dose of an opioid, and

(2) a quantity that is no greater than the quantity needed for the expected duration of pain severe enough to require an opioid that is a controlled dangerous substance unless the opioid is prescribed to treat:[5]

A substance-related disorder;

Pain associated with a cancer diagnosis;

Pain experienced while the patient is receiving end-of-life, hospice or palliative care services; or

Chronic pain.

Section 1-223(c) requires that the dosage, quantity and duration of an opioid prescribed under Section 1-223(B) SHALL “be based on evidence-based clinical guideline for prescribing controlled substances that is appropriate” for:

(1) The health care service delivery setting for the patient;

The type of health care services required by the patient; and

The age and health status of the patient.”

As Section 1-223(D) notes, if a prescribing health care provider violates one of the requirements set out under Section 1-223(B), the violation constitutes grounds for disciplinary action and the responsible Maryland Health Occupational Board[6] can take action against a licensee.

The prescriber is required to carefully document in the patient’s medical record the reasons(s) why a drug other than an opiate was not appropriate in the care and treatment of a particular patient.  Additionally, the prescriber must document that the patient is receiving palliative care or that the decision is based on the prescriber’s professional judgment that the exemption is reasonable and appropriate.

An interesting component of the law’s requirement is that a prescriber is required, if requested by a patient, the patient’s legal representative or guardian, to issue an opioid prescription for a lesser amount that the prescriber initially intended to prescribe.  The prescriber must also document in the patient’s medical records that such a request was made and who made it.

III. Maryland Licensing Boards are Authorized to Discipline Physicians, Nurse Practitioners, Physician Assistants, Podiatrists and Dentists Who Violate “The Prescriber Limits of 2017.”

As the Preamble to the legislation notes, state licensing boards play an important role in the education and supervision of licensees under their jurisdiction who prescribe opioids and other controlled substances.  It was the intent of the General Assembly that the:

“. . . State Board of Dental Examiners, State Board of Nursing, State Board of Physicians, and State Board of Podiatric Medical Examiners shall work to educate practitioners to ensure that the residents of Maryland are aware of the risks associated with the use of opioid drugs, including the risks of dependence, addiction, and overdose, and the dangers of taking an opioid drug with alcohol, benzodiazepines, and other depressants;”

  • Amendments to the Authority of the Maryland Board of Dentistry.

The amendments made to Section 4-315(a) modified the list of reasons that the Board may “deny a general license to practice dentistry, a limited license to practice dentistry, or a teacher’s license to practice dentistry to any applicant, reprimand any licensed dentist, place any licensed dentist on probation, or suspend or revoke the license of any licensed dentist.”  Under the legislation, these actions may now also be taken if an applicant or licensed dentist:

            . . .

(33) Fails to comply with any Board order; [or]

(34) Willfully and without legal justification, fails to cooperate with a lawful investigation conducted by the Board; OR

(35) Fails to comply with § 1-223 of this Article.

  • Amendments to the Authority of the Maryland Board of Nursing.

The amendments made to Section 8-316(a) modified the list of reasons that the Board may “deny a license or grant a license, including a license subject to a reprimand, probation, or suspension, to any applicant, reprimand any licensee, place any licensee on probation, or suspend or revoke the license of a licensee. . .”  Under the legislation, these actions may now also be taken if an applicant or licensed nurse:

(34) When acting in a supervisory position, directs another nurse to delegate a nursing task to an individual when that nurse reasonably believes:

  • . . .

(ii) The patient’s condition does not allow delegation of the nursing task; [or]

(35) Has misappropriated the property of a patient or a facility; OR

(36) Fails to comply with the opioid prescribing limitation established under §1–223 of this article.

  • Amendments to the Authority of the Maryland Board of Medicine.

Consistent with the amendments made to Section 14-404(a), subject to the hearing provisions of §14-405 of this subtitle:

. . .a disciplinary panel, on the affirmative vote of a majority of the quorum of the disciplinary panel, may reprimand any licensee, place any licensee on probation, or suspend or revoke a license if the licensee:

(41) Performs a cosmetic surgical procedure in an office or a facility that is not:

(ii) Certified to participate in the Medicare program, as enacted by Title XVIII of the Social Security Act; [or]

(42) Fails to submit to a criminal history records check under § 14–308.1 of this title; OR

(43) Fails to comply with the opioid prescribing limitation established under § 1–223 of this article.

  • Amendments to the Authority of the Maryland Board of Podiatric Medical Examiners.

Amendments were made to Section 16-313 to bring provisions governing applicants and licensed podiatrists into alignment with the requirements of “The Prescriber Limits of 2017.”  Amendments made include:

Subject to the hearing provisions of § 16–313 of this subtitle, the Board, on the affirmative vote of a majority of its members then serving, may deny a license or a limited license to any applicant, reprimand any licensee or holder of a limited license, impose an administrative monetary penalty not exceeding $50,000 on any licensee or holder of a limited license, place any licensee or holder of a limited license on probation, or suspend or revoke a license or a limited license if the applicant, licensee, or holder:

 (8) Prescribes or distributes a controlled dangerous substance to any other person in violation of the law, including in violation under §1–223 of this article;

IV.  Conclusion:

Physicians, nurse practitioners and physician assistants authorized to prescribe opioids and other controlled substances, need to review both the CDC guidance and any state requirements that have been issued to protect both patients and the public from abuse and diversion.  Prescriptions for opioids are continuously monitored by a variety of law enforcement agencies and government program integrity contractors. In addition to the Drug Enforcement Agency[10] (DEA), your prescribing and billing practices are actively being assessed by Medicare, Medicaid and private payor auditors and investigators.  You should monitor and audit your practices as part of your overall Compliance Program. To the extent that your prescribing and / or billing practices are different from those of your peers, there is a significant likelihood in today’s enforcement environment that you will be audited.

Should you receive an audit request from a ZPIC or UPIC, we strongly recommend that you contract a qualified health lawyer to advise you regarding the records submission and appeals process.  This initial level of the audit is a provider’s best opportunity to present his / her arguments in support of payment in a positive light.

Robert W. Liles represents licensed health care providers in connection with opioid prescribing complaints.Robert W. Liles is Managing Partner at the health law firm, Liles Parker, PLLC.  With offices in Washingtonn, DC, Houston, TX, McAllen, TX and Baton Rouge, LA, our attorneys represent pain management physicians and practices around the country in connection with Medicare / Medicaid audits, Compliance Plan reviews and state peer review actions.  Should you have any questions, please call us for a free consultation.  Robert can be reached at: 1 (800) 475-1906.  

[1] Dowell D, Haegerich TM, Chou R. CDC Guideline for Prescribing Opioids for Chronic Pain — United States, 2016. MMWR Recomm Rep. 2016;65:1-49. http://dx.doi.org/10.15585/mmwr.rr6501e1.

[2] A copy of Senate Enrolled Act No. 226 (SEA 226), amended the Indiana Code and established “Chapter 9.7. Prescribing and Dispensing Opioids.”  A copy of the legislation can be found at:  https://iga.in.gov/legislative/2017/bills/senate/226#document-b9523207

[3]State of Ohio, Board of Pharmacy.  “FAQ: New Limits on Prescription Opiates for Acute Pain, Updated 4/3/2017.” http://www.pharmacy.ohio.gov/Documents/Pubs/Special/ControlledSubstances/New%20Limits%20on%20Prescription%20Opiates%20for%20Acute%20Pain%20-%20Frequently%20Asked%20Questions.pdf

[4] See Kentucky House Bill 333 http://www.lrc.ky.gov/recorddocuments/bill/17RS/HB333/bill.pdf

[5] Although Maryland’s statute does not provide dosage recommendations, prescribers may wish to consider the recommendations made by the CDC in its March 2016 guidance.  As Recommendation #6 provides:

Long-term opioid use often begins with treatment of acute pain. When opioids are used for acute pain, clinicians should prescribe the lowest effective dose of immediate-release opioids and should prescribe no greater quantity than needed for the expected duration of pain severe enough to require opioids. Three days or less will often be sufficient; more than seven days will rarely be needed.

[6] The State Board of Dental Examiners, State Board of Nursing, State Board of Physicians, and State Board of Podiatric Medical Examiners.

[7] HHS OIG. “High Part D Spending on Opioids and Substantial Growth in Compounded Drugs Raise Concerns” (OEI-02-16-00290)(Page 4). 6/21/2016. https://oig.hhs.gov/oei/reports/oei-02-16-00290.pdf

[8] Lembke A, Chen J. Use of Opioid Agonist Therapy for Medicare Patients in 2013. JAMA Psychiatry. 2016; 73(9): 990-992.

[9] Ghate SR, Haroutiunian S, Winslow R, McAdam-Marx C. Cost and comorbidities associated with opioid abuse in managed care and Medicaid patients in the United States: a comparison of two recently published studies. Journal of Pain & Palliative Care Pharmacotherapy. 2010 Sep; 24(3): 251-8.

[10] DEA is an agency of the U.S. Department of Justice. A link to the agency’s diversion program description is: https://www.deadiversion.usdoj.gov/


Cell Tower Ground Lease Renewals and Purchases

September 15, 2015 by  
Filed under Regulatory Issues | Privacy

Call Andy ALynch for assistance with your cell towen ground lease or purchase.(September 15, 2015): A landowner/ground lessor considering a renewal or easement buyout of his cell tower lease is making a MAJOR financial decision. As a businessman (or woman), you understand that. You may also realize that information about what’s “market rent” or “market price” is hard to come by.

Your operator is likely one of the big three public tower companies, American Tower, Crown Castle or SBA Communications (Big Three) – well capitalized and extremely sophisticated in dealing with ground leases. Of course, your lessee is trying to make the best deal for itself.

What’s market? What is a fair or good deal for you the landowner? How can negotiations be positioned to your advantage? In a pinch, what might your lessee ACTUALLY BE WILLING TO PAY to secure your land for the long-term? In addition to price, what terms of a renewal lease are most important to the landowner?

Because data is not readily available about the current market, a landowner should seek industry insight. Andrew C. Lynch, a business attorney at Liles Parker PLLC, has years of experience in the cell tower industry, access to industry data and sources (for all states in the U.S.), and a specialized focus on ground lease renewals. By virtue of years of working collaboratively with clients, Mr. Lynch offers insight and strategic approaches that can position your renewal or buyout negotiations to your advantage.  To make an informed decision, a landowner should consider:

  • The rental stream that the cell tower on your land generates for its Big Three operator

  • What rents the Big Three have recently paid for ground lease renewals (ie. rent comparables) – the magnitude of price increases may surprise you

  • What amounts have the Big Three paid for lease or easement purchases – you might be pleasantly surprised

  • Whether the cell tower on your property might be relocated or de-commissioned

  • Industry standards for annual rent increases (escalators)

  • Tower industry economics

  • The value of the tower asset to your lessee – generally speaking, a very healthy multiple of net tower cash flow

  • The Big Three’s ROI (return on investment) model and its impact on ground lease renewals or purchases

  • Ground lease aggregators – a competitive threat to which the Big Three are responding

  • The corporate priority of the Big Three to securing tower sites for the long term and the substantial capital being allocated to that effort

  • Other key lease terms and conditions for a ground lease renewal

The landscape has changed dramatically in the tower industry since your cell tower was put in service. Your land is substantially more valuable to the tower operator than it was many years ago. The wireless industry has taken flight and your Big Three lessee and its dominant customers – AT&T, Verizon, Sprint, etc. – want to retain access to the tower and cellular antennas elevated thereon.

Third-party investment groups may have contacted you about purchasing your ground lease or an easement. These investors are also experienced and sophisticated in the cell tower industry and generally well capitalized. They represent A COMPETITIVE THREAT and the Big Three have responded. For each of the Big Three, securing its ground leases for the long-term, either by renewal or purchase, is a major corporate priority.

The result – IT’S A SELLER’S MARKET for an astute and informed landowner/ground lessor. If you arm yourself with INFORMATION AND A GOOD ADVISOR, you won’t be taken advantage of and can secure a fair and advantageous deal for yourself. And now is a good time, even if your ground lease has years to run.

Of course, if you are like most lessors, you appreciate the ultra dependable rent check that arrives every month — you don’t want to overplay your hand and jeopardize the income stream. We can help you understand and navigate the ample room that you now have to maximize the present value income from your tower site.

Lynch_AndyContact Andy Lynch at 202-298-8750 (office) or 703-447-4959 (mobile) for a no-obligation, free telephone consultation about your ground lease renewal or buyout. Or email Mr. Lynch at alynch@lilesparker.com. Or if you prefer, have your local attorney or advisor contact Mr. Lynch.

OIG Proposes New Anti-Kickback Law Safe Harbors

(November 10, 2014): The U.S. Department of Health and Human Services Office of Inspector General (“OIG”) recently published a Proposed Rule that would amend the safe harbor regulations under the Federal Anti-Kickback statute[1] (“AKS”) as well as add new safe harbors. The Proposed Rule would also establish new exceptions to the Civil Monetary Penalty (“CMP”) statute related to the beneficiary inducement CMP.[2] OIG will accept comments on the Proposed Rule by mail or electronically until December 2, 2014 at 5 p.m. (Eastern).

I.  The Anti-Kickback Statute and Safe Harbor Regulations:

The AKS provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit, or receive remuneration in order to induce or reward the referral of business reimbursable under Federal health care programs. The types of remuneration covered specifically include, but are not limited to, kickbacks, bribes, and rebates, whether made directly or indirectly, overtly or covertly, in cash or in kind. Additionally, prohibited conduct includes not only the payment of remuneration intended to induce or reward referrals of patients, but also the payment of remuneration intended to induce or reward the purchasing, leasing, or ordering of, or arranging for or recommending the purchasing, leasing, or ordering of, any good, facility, service, or item reimbursable by any Federal health care program.

Due to the broad reach of the statute, interested parties expressed concern that some relatively innocuous commercial arrangements would be covered by the statute. This could, in turn, potentially subject entities to unwarranted criminal prosecution. As a result, Congress drafted certain “Safe Harbor” provisions. These regulations describe various payment and business practices that, although they potentially implicate the Federal AKS, are not treated as offenses under the statute.

II.  Changes to the Anti-Kickback Statute:

The Proposed Rule would modify certain existing safe harbors under the AKS as well as add new safe harbors that provide new protections or codify certain existing statutory protections. These changes include:

      • A technical correction to existing safe harbor for referral services;
      • Protection for certain cost-sharing waivers, including pharmacy waivers of cost-sharing for financially needy Medicare Part D beneficiaries and waivers for state- or municipality-owned emergency ambulance services;
      • Protection for certain remuneration between Medicare Advantage organizations and federally qualified health centers;
      • Protection for discounts by manufacturers on drugs furnished to beneficiaries under the Medicare Coverage Gap Discount Program; and
      • Protection for free or discounted local transportation services that meet specified criteria.

III.  Changes to the Beneficiary Inducement CMP:

The Beneficiary Inducement CMP statute generally prohibits any person or entity from offering remuneration to a Medicare or Medicaid beneficiary if that remuneration is likely to influence the beneficiary’s selection of a provider. The Proposed Rule would also amend and narrow the definition of “remuneration” to include certain exceptions for the following:

  • Copayment reductions for certain hospital outpatient department services
  • Certain remuneration that poses a low risk of harm and promotes access to care;
  • Coupons, rebates, or other retailer reward programs that meet specified requirements;
  • Certain remuneration to financially needy individuals; an
  • Copayment waivers for the first fill of generic drugs.

OIG also proposes to codify the gainsharing CMP[3]. The gainsharing CMP prohibits a hospital from knowingly paying, either directly or indirectly, a physician to induce the physician to reduce or limit the services provided to Medicare or Medicaid beneficiaries under the physician’s direct care. The Proposed Rule would narrow the prohibition in light of today’s health care landscape, which focuses on “accountability for providing high quality care at lower costs.”

IV.  Conclusion:

Health care providers should be interested in the Proposed Rule and make comments as necessary. The Proposed Rule makes pertinent changes to the AKS Safe Harbors and CMP laws that should give providers greater leeway to enter into beneficiary arrangements without fear that they will be subject to criminal penalties under the statutes. In a sense, the Proposed Rule follows OIG’s ongoing efforts to adopt regulations that promote lower costs and greater health care services while protecting patients and federal health care programs from fraud and abuse.

As a provider, if you have any questions about the current regulations found within the Anti-Kickback Statute or the proposed changes, please do not hesitate to give us a call today. We would be more than happy to assist you so that you remain compliant with all federal and statute regulations regarding potentially fraudulent activity.

Saltaformaggio, RobertRobert Saltaformaggio, Esq., serves as an Associate at Liles Parker, Attorneys & Counselors at Law.  Liles Parker attorneys represent health care providers and suppliers around the country in connection with Medicare audits by RACs, ZPICs and other CMS-engaged specialty contractors.  The firm also represents health care providers in HIPAA Omnibus Rule risk assessments, privacy breach matters, State Medical Board inquiries and regulatory compliance reviews.  For a free consultation, call Robert at:  1 (800) 475-1906

[1] 42 U.S.C. § 1320a-7b(b).

[2] 42 U.S.C. § 1320a-7a.

[3] 1128A(b)(1) of the Social Security Act.

Peddling and Soliciting, Municipal Regulations These Issues Can be Complex. Is Your City Clear on These Points?

January 8, 2013 by  
Filed under Regulatory Issues | Privacy

(January 8, 2013):  As a general rule cities can regulate hawking, canvassing, peddling and soliciting within city limits. International Society for Krishna Consciousness, Inc. v. Lee, 505 U.S. 672, 112 S. Ct. 2711, 120 L. Ed. 2d 541 (1992) The public policy that allows cities to regulate peddlers or the solicitation of contributions is to prevent fraud upon the public and to protect privacy.  See Watchtower Bible and Tract Society of New York,Inc. v. Village of Stratton, 536 U.S. 150, 165 (2002). Most states will have statute (laws) that will provide a city with the authority to regulate peddlers or solicitors.  The regulation has to reasonably relate to the public policy to protect citizens, promote safety, prevent fraud, protect privacy, and other public concerns such as morals, welfare and convenience.  Municipal regulations of this types wil be balanced against the equal protection First Amendment rights of peddlers and solicitors.

The city regulation may include the requirement for peddlers or solicitors to register with the city government, apply for a license or permit and set fees to be paid before being allowed to sell or solicit within the city limits.    A city may deny or revoke a licensed based on the city’s investigation or other factors.  The city may regulate what hours a peddler may approach a private residence or work in city streets or public areas, for example from sunrise to sunset. Regulations may reasonably restrict hours that a peddler may approach private residences or work in city streets or public areas (for example, from sunrise to sunset). See Houston Chronicle Publ’g Co. v. City of League City, 488 F.3d 613 (5th Cir. 2007).  Additionally municipal regulations may restrict what city streets and public property vendors and solicitors may or may not use for their business, so long as there are adequate alternate places for solicitation.

However, a city may not completely prohibit peddlers from approaching private residences.  A city may compile a “no solicitations” list that residents may sign, and the city can give this list to potential peddlers. The peddlers and solicitors can be required to comply with “no solicitor” signs, and if they are licensed, they could have their license revoked if they fail to comply with “no solicitation” signs.

The laws and factors concerning peddling and soliciting, and what can and cannot be done by cities, will vary from situation to situation and from state to state.  Whether you are a city that wishes to regulate peddlers or solicitors or a private individual or company that wants to engage is peddling or soliciting, it is recommended that you contact an attorney with experience in this area for proper advice.

Leonard Schneider can assist you in drafting municipal regulations.Leonard Schneider, Esq,, has extensive experience representing Texas cities, towns and municipalities.  Should you have questions regarding this article, please call Leonard Schneider for a complimentary consultation.  You may contact us at: 1 (800) 475-1906.

What is Civil Fraud?

November 29, 2012 by  
Filed under Regulatory Issues | Privacy

What is "Civil Fraud"?  How Does it Differ from "Criminal Fraud"?(Updated June 18, 2018):  According to the Association of Certified Fraud Examiners, money lost due to fraud costs businesses and private parties over $3.5 trillion per year. This information, coupled with their assertion that instances of fraud have been dramatically increasing within the last few years, offers an eye-opening revelation not only for business, but all citizens of the United States. Individuals, businesses, and health care providers alike must become more informed on what fraud constitutes. This article intends to help inform readers regarding the irregularity of definition, differences in governmental levels, and the distinguishing characteristics between civil and criminal fraud.

Civil fraud cases are complex and can have substantial effects on your business and on your personal assets. This, however, becomes concerning news upon learning that civil fraud does not have a strictly uniform definition. Generally, fraud is founded upon a willful misrepresentation of past or present fact. Courts have defined fraud as trickery, deceit, intentional misrepresentation, concealment, or nondisclosure for the purpose of inducing another to part with something of value. It also includes false representation of a matter of fact by words or conduct or by the concealment of what should have been disclosed that deceives or is intended to deceive another so he shall act upon it to his legal injury. See In re E.P., 185 S.W.3d 908 (Tex. App. Austin 2006).

I.  Common Elements of Civil Fraud:

These elements found in Texas legislation represent most legal definitions of fraud:

1.  There was a material representation made that was false;

2. The person who made the representation knew the representation was false or made it recklessly as a positive assertion without any knowledge of its truth;

3. The person who made the representation intended to induce another to act upon the representation; and

4. The person to whom the material representation was made actually and justifiably relied on the representation, which caused the injury.

See Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001).

Similarly, Virginia offers much of the same structure:

A party alleging fraud must prove by clear and convincing evidence(1) a false representation, (2) of a present, material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reasonable reliance by the party misled, and (6) resulting damage to him. See Thompson v. Bacon, 245 Va. 107, 111 (1993.)

II.  Civil Fraud at the State Level:

Nevertheless, courts have broadly defined the elements of civil fraud in various situations and there is no single definition that covers civil fraud entirely.  There are laws passed by the legislature that define fraud.  Courts of law have provided common law definitions of fraud. There are actions for negligent misrepresentation, a cause of action which is similar to fraud. It then becomes pertinent to mention that fraud by itself is not a fact, but rather a conclusion that is reached after the facts of the relationship or transaction complained of have been reviewed.

It is also important to note that fraud and legislation concerning fraud often vary from state to state. That is to say, certain jurisdictions give way to different interpretations regarding what exactly constitutes civil fraud, such as certain requisites that qualify committed acts as fraud or various burdens of proof needed in a given case. Texas and Virginia (both mentioned above), are both Common Law states, and share similarities in the make-up of their legislation. However, one might observe differences, for example, in Louisiana, where the governing body is guided by Napoleonic code. While certainly not vastly different in content and structure, less uniformity certainly can lead to more room for interpretation, as has been the status quo regarding civil fraud. Though most state legislatures can agree on the above elements of fraud as they apply specifically to the civil sphere, it is vital to recognize that state legislation can indeed vary.

III.  Civil Fraud at the Federal Level:

As previously discussed, civil suits regarding fraud centrally focus on restitution on behalf of the victim. At the federal level, the victim is the United States government, and one of the primary methods through which civil suits are filed is through the False Claims Act (FCA). The False Claims Act was enacted by Congress in 1863. Though concerned with the fraudulent practices of suppliers to the Union Army in the Civil War, the FCA is still heavily utilized today and provides relevant information regarding the definition of Civil Fraud holistically. The Department of Justice states:

A person does not violate the False Claims Act by submitting a false claim to the government; to violate the FCA a person must have submitted, or caused the submission of, the false claim (or made a false statement or record) with knowledge of the falsity. In § 3729(b)(1), knowledge of false information is defined as being (1) actual knowledge, (2) deliberate ignorance of the truth or falsity of the information, or (3) reckless disregard of the truth or falsity of the information (DOJ).

This definition sheds light on the similarities of civil fraud at all governmental levels with the unifying factor being the knowledge of the falsehood of an individual’s own statements, claims, etc. The FCA describes the seven types of conduct that result in liability and appear in the act as follows:

(a) LIABILITY FOR CERTAIN ACTS. (1) IN GENERAL.—Subject to paragraph (2), any person who—

 (A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;

 (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent;

 (C) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G)

(D) has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property;

 (E) is authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true;

 (F) knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property; or

 (G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government,

 is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000 … plus 3 times the amount of damages which the Government sustains because of the act of that person

See 31 U.S.C. §§ 3729 – 3733

As previously mentioned, the False Claims Act is one of the most effective tools used by the government to combat fraud. It should come as no surprise then that the FCA is primarily targeted at health care providers. In fact, over 80% of the recoveries derived by the FCA come directly from the health care industry. Notably, the private right of action, or qui tam, provisions of the FCA make it one of the most widely used and accessible tools, because private individuals are, such as employees and patients, can bring suit on behalf of the government. FCA litigation is highly complex, with many technical and pleading requirements.

IV.  Differences in Civil Fraud versus Criminal Fraud:

Perhaps the most confounding aspect of fraud, distinguishing between civil claims and criminal proceedings offers deeper understanding into how fraud cases are dealt in all variations of government. The following aspects help identify whether a fraud case is civil or criminal, and the accompanying actions that follow both activities.

  • Origins of Civil and Criminal Fraud Cases.

The first distinguishing aspects to notice are the manners in which civil and criminal cases are brought about. In Civil fraud cases, claims are often private party disputes. In other words, if an individual is suspected of committing fraud, the alleging party initiates and pursues the case. In the criminal realm, proceedings are brought about by regulatory authorities, the government or extensions of the government, and are tried criminally. Criminal cases can be tried by local, state, or federal prosecutors.

  • Level of Success Required for Conviction for Civil and Criminal Fraud.

One key difference between both types of fraud is that damage must actually occur to the victim in a civil fraud case. The alleging party must be able to demonstrate that they suffered damage as a result of their reliance upon the false representation. In contrast, criminal cases only require that fraudulent activity has occurred with the intent to harm another party. In other words, fraudsters need not succeed in damaging another party, prosecutors only need to establish their intent in doing so.

  • Differing Burdens of Proof for Civil and Criminal Fraud.

The most important difference between Civil and Criminal fraud contends primarily with the amount of proof needed to convict within each individual case. As we know, criminal proceedings require prosecutors to prove guilt “beyond a reasonable doubt”. Civil cases however, require a much lower standard to prove an individual’s guilt. In civil law, the burden of proof in trial is known as the “balance of probabilities” or the “preponderance of evidence”. In this scenario, one party’s case only needs to be stronger than the other side. In essence, the alleging party need only cross the fifty percent threshold in order to succeed in conviction.

  • Severity of Punishment for Civil and Criminal Fraud.

As one could guess, the outcome of civil and criminal cases produces significantly different results. Civil claims focus largely on recovering monetary compensation on behalf of the victim. Civil claims often do not reach completion within the litigation process due to negotiation from both parties’ counsel. As for criminal proceedings, prosecutors pursue alleged fraudsters on behalf of the state. In other words, those convicted of criminal fraud are subject to incarceration, fines paid to the state, as well as financial compensation to victims. Referencing our previous discussion regarding variations in legislation at the state level, citizens of different states may be subject to harsher penalties based upon where they live. That is to say, the punishment for both civil and criminal fraud offenses is subject to state statutes. The nature of the penalty will often depend on the severity of the crime committed.

V. Conclusion:

With the inherent costly and expensive nature of fraud, along with the continued growth of instances of fraud within the United States, it is important not to overlook where and when fraud can occur. State legislation can offer different judicial interpretations based upon the state in which you reside. Beyond the non-uniformity regarding the legal definition of fraud in the United States, fraud cases are complex and can result in significant penalties. This culminates in a difficult area of practice that requires a firm that understands the nuances of state laws concerning fraud and the role of the False Claims Act at the federal level.

Are you or your practice facing allegations of civil fraud or criminal fraud?  Call the health care lawyers at Liles Parker for a free consultation.  1 (800) 475-1906. 

Guide to Efficient Business Transactions: Part III

(July 6, 2012):  This article is a continuation of our discussion on how a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize the costs and risks.  A link to Part II is provided:  Click here for Part II.

Business TransactionsI.  Efficient Business Transactions, Continued:

(k)  Conform to Conventions about Roles of Parties in Transactions. In most transactions, the buyer, investor or lender (i.e. the money side of the deal) will expect their legal counsel to produce the first draft of most documents in the transaction, on which the other side will make comments and negotiate changes. While this means the documents start out skewed in favor of the money side, there are sound reasons why the seller or issuer side should allow this. If the seller, say, insists on providing a first draft document, the process of the buyer negotiating it into a form signable by his side will add more time and expense to the closing for all concerned than will be justified by any drafting advantage.

(l)  Understand what Legal Documents are involved in your Deal, and What Function Each Serves. The day is long past (if it ever came) when a business person can turn an important transaction over to legal counsel, say “Close this deal for me please”, and walk away. By now the reader will see that his or her relationship with their professionals should be less like a patient’s relationship with a physician than a boss’s relationship with highly-skilled employees. Your transaction counsel may have been through a hundred transactions, and you through none, but you still need to play a leadership role, and make business (i.e. economic) decisions. While you don’t need to know all the law to do these things, you do need to understand the basics, and know the functions on a business level of all significant documents.

(m)  Respect the Negotiation Process. Store up Credits when you Concede a Point.  Table small negotiating items, and Trade them down the road for a bigger point you Know Is Coming. Westerners often view the process of negotiation with disdain. I have had clients approach a negotiation saying “I will just open with my bottom line number, and let them take it or leave it. We will cut to the chase.” This is seldom effective. Business people of all cultures hate to take a first offer in any important matter. Rigid intransigence in negotiation usually repels the other side. And humans seldom view any decision as binary, with a fixed bright-line dollar amount where it stops being desirable. The prudent business person allows for this, starts every negotiation a bit away from his bottom number, and assumes the other side is doing likewise.

In section (g) above I mentioned the psychological bonding that usually arises when parties negotiate. There is a natural tendency for a party winning a point in negotiation to feel softer about the next point. Bear this human trait in mind, and use it.

If you are communicating well with your professionals, they will alert you to issues they expect to emerge in the transaction process which may be serious problems for you. Every significant deal has hurdles. One of your biggest challenges will be to keep track of these matters and plan how to deal with them. Most issues in a business negotiation are more important to one side than the other. Experienced deal people look for points more significant to the other side than to themselves, and position themselves to grant the other side one or more “gives” on such points, in exchange for a concession important to them.

(n) Keep Business and Legal Issues Separate. Don’t let Attorneys get Stalemated; Make sure Yours Knows when to Hand-off an Issue. After the drafting side presents its initial draft of a transaction document, the commenting attorney reads the document, flags language possibly creating a problem or “issue” for his client, speaks to his client if necessary to clarify what are and what aren’t problems, replies to the drafting attorney with descriptions of the issues, and (usually) proposed text changes to fix them.  When the commenting attorney describes issues with the drafter, he does so in legal terms, while he normally communicates issues to his client in business terms.

One of 3 things must result from the above: Either (i) the drafter agrees with the commenter about both the issue and the text change; (ii) the drafter agrees an issue exists and with the concept of the proposed resolution, but disagrees on the text change; or (iii) the drafter disagrees on the issue and the proposed text change. In case (i) things are obviously fine, and the process continues without interruption. In case (ii), competent attorneys will always be able to craft some mutually agreeable drafting fix, and get to case (i). In case (iii) however, if good faith discussion doesn’t produce case (i) quickly, prolonged haggling by the attorneys becomes wasteful. Your attorney (whether he is the drafter, or the commenter), should recognize the stalemate in this situation, table that discussion with opposing counsel, and add the issue to a list of issues to be referred to you. Further conversation between lawyers is probably useless, and your counsel should know this.

 When all documents being drafted have been covered in the process described above, sit down with your counsel and review the full list of open issues. A skill absolutely vital for competent transaction counsel is the ability to translate each issue for you from legal to business terms with perfect clarity. From this conversation, decide what is and what isn’t worth negotiating. Issues falling into the former category are now identified as business issues. These you must resolve with your business counterpart in the transaction, failing which of course the closing process must halt. The point however is that lawyers must never be the ones to hold on to a stalemated issue.

(o) Be ready to Step In if other Professionals Over-Negotiate. If progress seems too slow in negotiating the legal documents, you may discover that opposing counsel is producing too many case (ii)s and case (iii)s in the process described above, which means he or she is either asking for or disagreeing with changes which aren’t really significant to their client. If that occurs, you should be prepared to complain politely but clearly to your counterpart.

I mention this with some hesitation, because it can easily be counter-productive, and you must tread carefully. It’s hard for you to know what is and isn’t truly significant for the other side. Also, be wary if it’s your lawyer who says the other is over-negotiating; perceptions like that are common but sometimes not fair. As you will appreciate, wrongly saying the other side’s attorney is behaving badly violates the courtesy and politeness rule above.

(p)  Avoid Too Many Turns of Documents. This is most important in negotiating the umbrella agreement, but applies to other documents too. During the document negotiation phase of the closing process, there is a temptation to urge the drafting lawyer to hurry making redrafts of the umbrella agreement, in an effort to speed the closing process. The problem here is that each time the drafting attorney redrafts a document, the commenting counsel has to read it and perform the discernment process described in (l) above. This is the most exacting work a transaction lawyer ever performs, and as mentioned in the Introduction, is the single most expensive part of the legal process. The drafting lawyer should not use the redrafting process to tell the commenting lawyer which requested changes the drafter’s side disagrees with. Instead, any decline of requested changes should be communicated verbally, and redrafting should wait until all known issues in the document are resolved at least in principle. This means that redrafting must wait until the business people finish the negotiation described in (l). In rare cases, redrafting may proceed although business people are stalemated on an issue, and the relevant text is bracketed in the redraft when this happens. But the only surprises a commenting lawyer should ever find in an intermediate draft is how the drafter chooses to phrase some concept that has been agreed on. Otherwise both the redrafting work and the review and comment work tend to be wasted, and previously-flagged issues get flagged again and re-negotiated. This slows the closing process and wastes legal fees.

(q) Look out for Legal Opinion Letters. Smoke Them Out Early. Lawyers loathe giving written opinions, and perceive them as professionally risky, although very few lawyers are successfully sued over them. Clients seldom appreciate the time they necessarily require, and the resulting bills. Every law firm has rigid internal procedures to follow in signing opinions, and they usually involve partners who aren’t making money from the client in question learning the facts and law involved and approving the opinion. This is a disagreeable experience for all concerned.

Opinion letters are therefore occasions for delay and conflict in legal closings. The best practice is for each party to advise the other as early as possible (around the time the 1st draft of the umbrella agreement is produced) what opinions they will need, with requested text, and what qualifications the signing attorney must have (usually, of what state’s bar must he be a member). Get the texts of opinions your side must provide to the relevant lawyer promptly, and find out if he or she is prepared to give them. Some deviation from requested texts always occurs, but a competent attorney will be able to tell you what if any parts require significant changes. The goal here is for any negotiations over opinions to go on in parallel with the drafting of the documents, which allows time for issues to be resolved. Don’t let these negotiations start near the projected closing date, which is exactly what will happen if opinions are not addressed early.

(r) Arbitration. Arbitration clauses pass in and out of fashion, and are touted as cheaper alternatives to court litigation. Most of the cost savings in arbitration come from the reduced or absent discovery, which in court litigation is the most expensive part of 90% of all cases. In my experience arbitration produces a less predictable result, meaning verdicts which don’t naturally flow from the facts occur more often. I also believe the abbreviated process gives the arbitrators less confidence in their own conclusions than a judge usually has in a court case, creating a reluctance to select clear winners and losers. (It should be appreciated that our laws tend to force courts to determine clear winners and losers). So arbitrators more frequently just “split the baby”; and obviously this favors a contract breaching party. Based on this, my advice to clients is to decline arbitration clauses if they expect to be the party trying to enforce the hard contract terms in a business dispute.

II. Conclusion:

Legal transactions require owner’s management to be efficient like any other part of a business operation. Selection of and reliance on an able transaction lawyer who works well with you is vital to an efficient closing process. Likewise, hewing to some simple rules and procedures that are proven over time can save time, legal fees, and wear and tear on the parties.

David ParkerDavid Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1 (800) 475-1906.

Guide to Efficient Business Transactions: Part II

(June 24, 2012): How a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize cost and risk and maximize efficiency – Part II of III.  Click here for Part I. Check back soon for the third installments.

I. Precepts and Procedures.

(a) Choose an Attorney With Whom You are Comfortable. Obviously your transaction counsel must have a thorough working knowledge of the legal subject matter of your transaction, and sound work habits, so no discussion is needed  on that. Instead, I mention that you should employ only attorneys you yourself are personally comfortable with.

Efficient Business TransactionsYour comfort should be driven by your perception of the attorney’s loyalty, the sense he or she is looking out not just for the legal interests of the client entity, but for your personal interests in the context of your organization. In my experience, it is hard to protect the first without looking after the second. It should be driven by an ease of communication between you, which should explain itself. It should involve knowing you share a common understanding about  priorities in your business & his or her law practice. This is difficult to describe clearly, and can take time to develop, but comes down to trust that, in looking at any set of facts, each will know instinctively what is important to the other.

The working relationship between a business person and his or her transaction lawyer should amount to a comfortable bond. This relationship aspect is at least as important as technical skills, and without both it will be hard for either of you to work efficiently.

(b) Address Cultural Differences before you Start a Deal. This Guide is pitched to transactions where both principals are people involved in commerce in English-speaking countries. Personally I have observed a common business culture to exist in the United States, Canada, England, India and Australia, such that business people from such countries can usually interact effectively with each other. I expect the same is true in all Common-law countries. Outside those areas, however, real cultural differences exist in business practices, in addition to any language barrier. It is outside the scope of this Guide to advise about specific cultural differences. Suffice it to say that before negotiating even the first term, a prudent person contemplating a transnational deal where cultural norms vary widely needs to secure not only attorneys knowledgeable about laws in all relevant jurisdictions, but also business-level advice for  the transaction from someone experienced in the foreign culture.

(c) Start with a Letter of Intent. Go from the General to the Particular.  On occasion I have had transaction clients say, “To save money and time, we are skipping the LOI and going straight to definitive documents.” Nothing is more counter-productive. Spend the time needed to draft and sign a letter of intent before anything else. Once deal terms are nailed down in principal, it is vastly easier to reach agreement on particulars. More detail is better than less. In my view it is less important whether the LOI is binding or non-binding, as long as both parties sign it. There is real value in both parties signing an LOI, even if it isn’t legally binding. In my experience a party may walk away from a deal with a non-binding LOI, but if they do proceed with it, they find it hard to go back on the terms in the letter.

(d) Establish a Closing Timetable, but Be Reasonable. Generally one or both parties to a transaction have hard business reasons why it must be concluded by a particular date, but even if this isn’t the case, your Letter of Intent should set the expected date for closing, and possibly for intermediate steps like completion of due diligence. Overly long closing processes create outsized legal bills, but so do unrealistically short ones. An experienced transaction lawyer will know what is reasonable. Expect all dates to slip, of course, so allow some margin of time. Once document drafting and negotiation starts, it should continue until completed and the documents are signed. When lawyers halt their drafting work for over about one week, time is inevitably required to get them back up to speed.

(e) Engage All Professionals Early; Get All Their Fingerprints on the Deal. At or before the LOI stage, identify what legal and other professionals will be needed to close the transaction, and engage all of them up front, not just your transaction counsel. For instance, most M&A transactions call for advice from a tax accountant or lawyer, whom you should consult before agreeing to any transaction structure. If the transaction will involve retirement fund issues, for example, engage ERISA counsel early on. Other specialist disciplines must be handled similarly. At early stages of the transaction, each specialist needs to do only enough work to advise you on the decisions required at that point. This need not be an invitation to heavy billing. Competent specialists will know how to monitor early transaction stages with minimal expenditure of time, while alerting you to issues which affect your LOI or other early process; and they should give you clear assurances on this point before their engagement. If the transaction fails early-on, these bills should not be burdensome. The aim here is to avoid having to re-do steps in the transaction process because of issues you knew about all along but failed to address early enough. The biggest inefficiency you can avoid is the drafting and negotiation of the same document multiple times.

(f) The Other Party Should Engage his Professionals in Synch with You. Get their Fingerprints on the Deal Too. Especially in cases where there is no binding agreement until definitive documents are signed, you will be at a disadvantage if the other party to your transaction postpones hiring his professionals while you move ahead with yours. What often happens in such a case is the other side’s attorney or other professional steps into the transaction after you have spent money getting documents drafted, and reveals issues which make the terms as drafted impossible for his client. You are forced to repeat significant drafting and other steps. If the other party insists on delaying the introduction of his professionals, it is generally a sign he is uncommitted to your deal, so be warned.

(g) One Lawyer as Quarterback for All Attorneys When legal specialists are needed in a deal, they should report their advice and counsel directly to you, but their work should be scheduled and coordinated through your transaction counsel. They should keep him apprised of their progress and particularly any problems or delays they encounter; and in most cases your transaction counsel, who has full understanding of all aspects of your deal, will be able to help you evaluate a specialist’s advice, and make needed decisions based on it. 

(h) Use Courtesy and Politeness Whenever Possible. Make sure Your Team Does Likewise. While not all practitioners agree on this point, I find that a party is best served by consistent politeness and courtesy with their counterparts except in the most extreme circumstances, and cloaking their adversarial emotions as much as possible. While it can be argued that each party will use every advantage available to forward their own monetary interests in any transaction, whether or not they feel personal animus against the other, my experience is otherwise. A transaction is never entirely a zero sum game, and pleasant dealings with the opposite party usually pay off. Transaction professionals (especially younger ones) may need reminding on this point.

(i) Match yourself with a Bargaining Partner on or near your Level of Seniority.  Avoid Negotiating with a non Decision-maker. If you are the principal on your side of a transaction, and you bargain with someone lacking authority to make decisions on the other side, the conversation becomes a downward ratchet for you. You can make a concession which grants the other side a victory, finally and irrevocably, but the other side can’t. The best you can get from him or her is “I’ll go back to my Principal and see if they agree.” The absent principal isn’t psychologically involved in the concessions you are making, and seldom agrees to his side’s concession.

(j) Don’t Meet Alone with the other Side’s Professionals. By the same token, avoid placing yourself in a position to be lectured to by the other side’s attorney or other professionals, without your professionals being present. When this occurs the opposing professionals tend to describe the facts under discussion, and also the law, in ways subtly or not so subtly less favorable to you than they truly are. If your professionals are present, they will promptly object, or the other side won’t try this in the first place. Don’t let the other side play with your head in this way.

II. Final Comments:

Check back soon for Part III, and be sure to check out the rest of David Parker’s articles here.

David ParkerDavid Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1 (800) 475-1906.

Guide to Efficient Business Transactions: Part I

(June 18, 2012):  How a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize cost and risk and maximize efficiency? Let’s ;look at a few these issues below.A

I. Goal of this Guide; Goals of Your Business Transactions.

Making Business Transactions Happen

This Guide is written for those handling important business transactions, who will need to engage and direct one or more attorneys and other professionals in the process. It will also be useful for a junior person in a business who expects to have responsibilities in legal transactions. The goal of course in any legal transaction is to get the deal closed at minimum cost, not just in money and time, but also in psychic energy, goodwill and risk.

The desire to save money and time are obvious; but a business person needs to focus his or her mental energy (a very finite resource) on many tasks and problems, and so should also manage business transactions to avoid over-sized drains on themselves.

Additionally, businesses depend on the goodwill of many constituents. In a transaction, they need principally the goodwill of the other transaction party. But they need the goodwill also of any banker or finance source, landlord and government regulator too. Customers’ and employees’ goodwill are always critical. Business transactions have potential to alienate any or all of these key players in your business life, and need to be handled with a view to avoiding unnecessary stress and inconvenience on them.

Attorneys and other business transaction professionals charge by the hour, so managing your deal so it can close in less time is the obvious way to save money. But if attorneys’ work can be done in an orderly sequence employing some simple rules, they will inevitably be more thorough in their work, communicate their advice to you better, strengthen your bargaining position with the other parties, and avoid your having to accept adverse deal terms. The result is that you and your business bear less risk from the transaction, meaning there is a reduced probability that you or your business will lose money after the deal closes.

Management of an orderly and predictable legal process in a closing also reduces the irritation inflicted on others involved. It will head-off conflicts with the other transaction party, with whom in many cases you will be having business dealings for a substantial time to come. It also lets you obtain the cooperation needed from other players with minimum fuss and bother.

This Guide sets out a few key considerations, and some simple steps to take (or avoid), in managing the legal closing process of a transaction to achieve these goals. We will also try to demystify the closing process of business transactions as well.

II. Introduction to Business Transactions.

(a) Parts of the Deal Document and their Function. Most business transactions of significant size are governed by a set of transaction or “deal” documents consisting of multiple documents which each perform a narrow function, plus an “umbrella” agreement which governs the entire transaction and ties the other documents together. In an acquisition, for instance, the umbrella document will be the Asset Purchase Agreement, Stock Purchase Agreement or maybe Agreement and Plan of Merger. In a bank loan it is usually a Loan Agreement. Normally 50% or more of the legal costs of a closing are spent on drafting and negotiating this “umbrella” agreement, so most of this Guide should be understood as How to Negotiate, Draft and Consummate Umbrella Agreements Efficiently.

Umbrella agreements necessarily address the same matters, and so tend to be organized in a predictable pattern, including:

Recitals. Umbrella agreements normally begin with recitals or Whereas clauses, which explain the background and circumstances of the business transaction, and say Who we are and how we’ve come to be signing this document. On a 30,000 foot level they should explain what each party hopes to get out of the deal. While the rest of the agreement is written for the parties, recitals are addressed to a stranger coming onto the transaction cold. Any lawyer who has found himself in court trying to explain to a judge and jury why some particular wording in a contract was a vital part of his client’s bargain can attest to the importance of recitals. Nuances and circumstances that are obvious during a business transaction are often very unobvious years later when an agreement gets enforced. Without a clear understanding of these things, however, a trier of fact will inevitably misunderstand the significance of many terms even in a simple deal. Recitals are the normal way to address this.

Definitions. One section contains definitions of words used repeatedly in the agreement. Often a word or term will become a shorthand expression for a complex process or concept, and can therefore control major deal terms. Definitions are always the focus of some negotiations.

Description of the Transaction Itself. The heart of the agreement describes the actual deal, such as exactly what is being bought and sold, or what moneys are being loaned or invested, and exactly what the money-provider is giving for it, and when. Some of this may require listing in attachments or “schedules” to prevent the document from getting too long.

What each Party says to be True. These are the representations and warranties each party makes to the other. Many facts will be un-knowable or difficult to discern to the party to whom they are important. So the other party, if he has a clearer view of the subject, will state what the facts are and agree that the first party can rely on them. The seller, the borrower or the securities issuer in a transaction (whichever is involved), will generally make more of these statements than the money-providing party because of the former’s greater knowledge of the business in question.

What has to Happen First. In most cases certain steps must be taken as preparation before business transactions can close, such as governmental or other third-party consents. Often, both parties have their own list of Conditions Precedent which are written as tasks the other side (or less often, themselves) need to complete before the party is bound to go forward with the deal.

Things the Parties agree to Do or Avoid Before, During & After the Closing. These covenants may address things as diverse as operation of the subject business, tax filings to be made, or handling of an important side-matter.

Risk-transferring. Each party normally agrees to take on himself certain risks that circumstances otherwise place on the other side, meaning “If X bad event occurs, I will  pay for it.”  This Indemnity section is the most technical writing in the document.  In most cases, there are dollar or other limits on how much the indemnifer can be asked to pay, and time limits after which he cannot be asked. Most significantly, this is the teeth to the representations and warranties; and like reps and warranties, this section is more likely to be useful to the money-providing party than to the seller, borrower or securities issuer.

Other Things. The rest of the umbrella agreement is supporting text to the above, such as  descriptions of where and how the closing will be conducted, and agreement on what jurisdiction’s laws and/or courts will govern if there is a dispute.

III. History of Business Transaction Documents:

It is an open secret that business transactions lawyers spend their lives plagiarizing from each other, and few if any transaction documents are ever drafted from scratch. All of us maintain sets of document templates and copies from prior deals, which we mine in our drafting work. The document bank of my own law firm is intricately divided into myriad subjects for easy reference, and runs to over a thousand documents. An experience that all business transactions lawyers share is reading a document drafted by another firm, seeing text that makes one say “Hey, that’s good language”, and then grafting the improved text into one or more of your own model documents.

There is a powerful reason for these practices, and our clients are the beneficiaries of them. You see, 99% of the substantive terms in business transaction documents were initially drafted, whether recently or in some predecessor agreement in the dim mists of history, to address an event that caused a lawyer’s client to lose money. My own documents contain many provisions I added or rephrased over the years after seeing business deals go sour.

Check back soon for Parts II and III.

David ParkerDavid Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1-800-475-1906.

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