HEALTH INDUSTRY ONLINE - Defining the Parameters of Sovereign Immunity Waiver - Two Courts Apply Reata to Suits Involving Hospital Districts and Physicians

Within the last month, two different Texas courts of appeals have considered breach of contract lawsuits between hospital districts and physicians. These are the first health law related decisions dealing with sovereign immunity applying the Texas Supreme Court's recent 2006 decision in Reata Construction Co. v. City of Dallas.¹ In each case, a hospital district sued the physicians for breaching their recruitment agreements. These cases demonstrate two things: (a) Texas sovereign immunity law still limits physicians in the amount of damages they can recover from hospital districts; but (b) physicians are able to raise numerous and varied counterclaims to defend themselves from a hospital district's claims against them for damages.

In Sweeny Community Hospital v. Mendez² and Muenster Hospital District v. Carter³, the underlying disputes arose when physicians ceased performing under their respective physician recruitment agreements without reimbursing the hospital districts for previously-received payments and allowances. In each case, the hospital districts maintained breach of contract claims against the physicians, and the physicians, in turn, maintained breach of contract claims and retaliatory discharge claims against the hospital districts under Chapter 161 of the Texas Health and Safety Code against the hospital districts.⁴ The physicians in Sweeney also alleged defamation, fraud and tortious interference counterclaims.

The hospital districts in both cases sought dismissal of the physicians' claims because the hospital districts enjoyed sovereign immunity and had not waived their immunity simply by demanding reimbursement under their respective physician recruitment agreements. Citing the Reata decision, the courts refused to dismiss the physicians' claims.

Under Reata, a governmental entity that files suit against a private entity does not have immunity as to the private entity's claims that are "germane to, connected with, and properly defensive to the [governmental entity's] claims, to the extent [the private entity's] claims offset those asserted by the [governmental entity]." This standard is broader than the traditional standard for compulsory counterclaims, which would require the private entity's claim to arise out of the same transaction or occurrence that supports the governmental entity's claim. (Both hospital districts tried to argue the general compulsory counterclaim standard and failed).

According to the Muenster court, the physicians' retaliatory discharge claims were "clearly" germane to, connected with or properly defensive to the hospital districts breach of contract claims because, if the physicians were actually discharged, they would have been excused from performing under the parties' agreement. The Sweeny court went even further, finding that the physician's tortious interference and defamation counterclaims also met the Reata standard - even though these claims relied on alleged conduct by the hospital district outside of the contractual period at issue - because the alleged activity could affect the dealings between the parties arising from their contractual relationship (i.e. - if the physician proved that he properly performed under the contract, the hospital's statements that the physician failed to perform would be false and defamatory). Both courts reaffirmed Reata's directive that, under this theory of immunity waiver, the physicians would only be allowed to recover damages for their counterclaims in an amount that would offset any damages awarded to the hospital districts for their breach of contract claims.

The lesson to be gleaned from these decisions is that the Reata standard for waiver of sovereign immunity allows the entity that has been sued - in these cases, a physician - a broader scope of counterclaims in which to defend itself and potentially reduce a hospital district's recovery of damages. Indeed, the tortious interference and defamation claims allowed by the Sweeny court all occurred after the physician and the hospital district had ceased working together and, in fact, the physician could have alleged and proven these claims regardless of the existence of a prior contractual relationship between the parties. Thus, hospital districts should be aware that, if they want to sue a private entity for breach of contract, their own post-contract conduct may become actionable as a counterclaim. Conversely, physicians or other entities suing or defending lawsuits against hospital districts should be aware that they may not be limited to claims arising from the same transaction upon which the hospital district bases its own claims for affirmative relief.

¹197 S.W.3d 371, 374 (Tex. June 30, 2006).
²__ S.W.3d __, 2007 WL 274188 (Tex.App.—Houston [1st Dist.] Feb. 1, 2007, n.w.h.).
³__ S.W.3d __, 2007 WL 174413 (Tex.App.—Fort Worth Jan. 25, 2007, n.w.h.).
⁴In Muenster, the hospital district had merely sent a letter to the physicians demanding reimbursement. The physicians initiated the lawsuit after receiving the demand letter. By filing a breach of contract counterclaim to the physicians’ claims, the hospital waived its immunity.