SCOTx: Disagreement Between the Parties—or their Lawyers—Does Not Equal Ambiguity

2 minute read

U.S. Polyco, Inc. v. Texas Central Business Lines Corp.

Supreme Court of Texas, No. 22-0901 (November 3, 2023)
Per Curiam Opinion (linked here)

U.S. Polyco and Texas Central disputed the meaning of their land-improvement contract. The Supreme Court of Texas took that as an opportunity to reinforce its repeated admonitions that (1) a court’s “‘primary objective’ when construing private legal instruments … ‘is to ascertain and give effect to the parties’ intent as expressed in the instrument,’” and (2) “[i]n the usual case, the instrument alone will be deemed to express the intention of the parties.” These “principles of contract interpretation,” it emphasized, “are well established and of fundamental importance.”

Here, the parties disagreed about whether certain items were encompassed by the defined term, “TCP Infrastructure Improvements.” The pertinent contractual provision listed some specific items to be included within that definition, but it concluded with, “and other items in or adjacent to the Designated Areas as are agreed upon by [the parties] in writing.” The question, of course, was whether the qualifier—“as are agreed upon by [the parties] in writing”—applied to all items in the series or only to the last entry.
Both the trial court and the court of appeals considered dueling canons of construction to unravel the parties’ dispute: “the series-qualifier canon and the last-antecedent canon.” Because of the absence of a comma before the phrase “as are agreed upon by [the parties] in writing,” both courts concluded the “last antecedent canon” controlled—an analysis and conclusion with which the Supreme Court agreed. But, while the trial court then found the contract to be unambiguous and enforced its interpretation as a matter of law, the appeals court held that, “[t]he record demonstrates that the parties strongly disagree about the intent of [the contractual provision] and its application,” and it therefore “conclude[d] that [the contract] is ambiguous and cannot be construed as a matter of law.”
Without hearing oral argument, the Supreme Court granted the Petition for Review and reversed the court of appeals. “[L]ike all other considerations beyond the contract’s language and structure,” it said, “parties’ ‘disagreement’ about their intent is irrelevant to whether that text is ambiguous.” “If lawyerly disagreement about text meant that a legal instrument’s disputed meaning must be resolved as a matter of fact,” the Court warned, “it would be a poor advocate who could not obtain a jury trial to interpret the text.” Instead, “[c]oncluding that a legal instrument is insolubly ambiguous must always come after a court has exhausted all the traditional tools of interpretation and still cannot reach a definitive conclusion about the meaning conveyed by the text.”

OIG Publishes a New Guidance Resource and a Report

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OIG released our General Compliance Program Guidance (GCPG). The GCPG is a reference guide for the health care compliance community and other health care stakeholders. The GCPG provides information about relevant Federal laws, compliance program infrastructure, OIG resources, and other items useful for understanding health care compliance. The GCPG is voluntary guidance that discusses general compliance risks and compliance programs. The GCPG is not binding on any individual or entity. Download the guide in whole or access individual sections.

Corporate Transparency Act: Beneficial Ownership Information Reports Required Beginning 2024

4 minute read


The Financial Crimes Enforcement Network (“FinCEN”), a division of the US Treasury Department, issued its final rules (the “Reporting Rules”) under the Corporate Transparency Act (“CTA”), establishing reporting requirements of the beneficial ownership and control of companies formed or registered to do business in the United States and defined as “reporting companies” under the CTA. The CTA became effective in 2021 as part of the Anti Money Laundering Act of 2020, and the Reporting Rules’ stated purpose is “to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.”

The Reporting Rules will specifically impact the private investment world as well as many owners and managers of other small businesses in the US. This is because the Reporting Rules require entities to file reports with FinCEN containing certain information about the individuals with beneficial ownership and/or substantial control of those entities. The required ownership and control information will be familiar to anyone who has disclosed beneficial ownership information to a bank or lender to obtain financing. But beginning next year, the Reporting Rules will require certain entities to self-report beneficial ownership and substantial control information directly to FinCEN as a standing requirement to do business in the United States. The Reporting Rules are not optional, and they impose significant penalties for non-compliance (monetarily and imprisonment).
While the purpose of the CTA is not to compile a publicly available corporate ownership or control database, it may seem that it effectively eliminates the privacy and anonymity features individuals desire by forming a limited liability company, a limited partnership, or other corporate entity. The information required to be reported, however, is not subject to disclosure in response to requests under the Freedom of Information Act or similar laws. FinCEN is only permitted to disclose such information to certain agencies and only for limited purposes, including, for example, to financial institutions to assist in anti-money laundering activities, and to national security, intelligence, and law enforcement agencies.
Entities to Which the Reporting Rules Apply
The Reporting Rules apply to “reporting companies,” defined as foreign or domestic entities either formed in or registered to do business in the United States through the filing of a document with a secretary of state or similar authority, and include limited liability companies, limited partnerships, corporations, etc.
The CTA has exempted several types of entities from the definition of a “reporting company,” noting that many of the exempted entity types are already subject to substantial federal and/or state regulation. With respect to small businesses, relevant exemptions include:
(1) “large operating companies,” which are companies with more than 20 employees, $5M in revenue, and a physical presence in the US; and 
(2) “inactive entities,” which are companies not engaged in active business and formed before January 1, 2020, have no assets, are not owned by a foreign person, and that have not received or sent money over $1,000 or had an ownership change in the past year.
Information that Must Be Reported
Reporting companies must file a report that includes certain information about itself and each of its “Beneficial Owners” and “Company Applicants.” Beneficial Owners are generally individuals who own or control 25% or more of the entity’s ownership interests (directly or indirectly), or who exercise “substantial control” over the entity (e.g., manager of a limited liability company, general partner of a limited partnership, etc.). A Company Applicant is the individual who registers or files the formation documents for the reporting company. In addition to a manager or owner of a reporting company, a Company Applicant would also include individuals like lawyers that form or register the reporting company.
The reporting must file information including the following: full legal name; any trade name or “doing business as” name; principal place of business address; jurisdiction of formation; and taxpayer identification number.
Reporting companies must also provide the following for each Beneficial Owner and Company Applicant: legal name; date of birth; residential street address (Beneficial Owner and/or Company Applicant) or the business address (Company Applicant); and a passport or driver’s license number and a copy of the document.
Filing Deadlines
The Reporting Rules require new reporting companies (formed or registered in the US on or after January 1, 2024) to file their report with FinCEN within 30 days of formation or registration within the US. Existing reporting companies (registered in the US before January 1, 2024) must file their initial report by January 1, 2025. Existing reporting companies do not need to include information on the Company Applicant. Importantly, reporting companies have 30 days to file an update when the reporting company’s information or any of its Beneficial Owner’s information has changed.
Penalties
Failure to comply with the Reporting Rules and update or file initial reports can result in civil penalties of $500 per day of noncompliance and criminal penalties of up to $10,000 and 2 years imprisonment.
Impact and Going Forward
As detailed above, unless an exemption applies, the Reporting Rules will affect many US small business owners who may not even be aware of the CTA and Reporting Rules, yet will be subject to the associated obligations and potential liability. This is not a complete summary of the CTA and Reporting Rules and only highlights some of the central points. Earlier this year, FinCEN published beneficial ownership information reporting guidance, as well as FAQs on the Reporting Rules that include a Small Entity Compliance Guide. Even with such guidance, it still may be difficult for affected entities to correctly determine whether they are a “reporting company” or fall within an exemption. Managers and directors of entities are encouraged to begin planning now on how to best comply with the CTA if they haven’t already started.

Defending Executive Compensation in Nonprofit Health Care Systems

3 minute read

From American Health Law Association, by Albert Lin, Husch Blackwell LLP, and Connor Campbell, Weaver and Tidwell LLP:

This article reviews the rules surrounding the IRS principles of executive compensation with a focus on health care organizations and discusses best practices that the governing boards of such organizations should look for in exercising their fiduciary obligations to minimize issues with tax-exempt status.

State-Specific Requirements Impacting Executive Compensation

State-Specific Nonprofit Corporation Statutes and Applicable Requirements

  • Nonprofit health care organizations should maintain awareness of state-specific nonprofit requirements. These nonprofit requirements encompass both corporate governance requirements and tax-specific requirements based on income, property, and sales taxes that may not always correlate with federal tax concepts.
  • Texas has a common, specific type of nonprofit health organization that is specifically licensed by the Texas Medical Board as a legal entity that can practice medicine.
  • State statutes will usually have provisions directly impacting the payment of compensation.
  • As applied to executive compensation, an argument that a payment is a prohibited “distribution” is usually a key risk factor. The IRS rules prohibit a distribution of net earnings; state statutes may have slightly different language.
  • It is important to have awareness of whether state community benefit goals are met.

State Common Law Fiduciary Duties

  • In exercising their fiduciary duty and reviewing and approving compensation, directors should be mindful of their Duty of Care, Duty of Loyalty, and Duty of Obedience.

Federal Tax Law Requirements Impacting Executive Compensation

Private Benefit and Private Inurement

  • Federal tax concepts of private benefit and private inurement should always be on the minds of those establishing executive compensation for nonprofit organizations.
  • Private benefit refers to situations in which the overall resources of a charitable organization may benefit a general private interest rather than the public.
  • Private inurement prohibition is absolute and occurs when net earnings of a charitable organization are redirected to persons who are essentially in control or exercise control of the charitable organization (“insiders”).

Section 4958 Intermediate Sanctions

  • The intermediate sanctions penalize two key players: any disqualified person and any organization manager.
  • The defense to private inurement and the intermediate sanction regime the rebuttable presumption of “reasonable compensation.” This essentially shifts the burden of proof to the IRS in any contest over whether compensation was excessive.

21% Excise Tax on Compensation in Excess of $1M for Nonprofit Covered Employees

  • There is a 21% excise tax on the amount of compensation over $1 million as well as excess “parachute payments” paid to any “covered employees”.
  • There is also an exception for physicians and other providers, as amounts paid for medical services are disregarded for purposes of the $1 million excise tax threshold.

Recommended Best Practices on Executive Compensation for Nonprofit Health Care Boards

Monitor Legal Developments Contemporaneously Document Facts and Circumstances Supporting Both Reasonableness of Compensation and Community Need

  • The analysis conducted by the compensation committee should be written up in the form of minutes or internal memoranda.
  • An independent third-party compensation study can be critical in providing evidence in support of meeting the burden of proof and assist in moving performance factors to criteria more focused on community benefit.
  • Compensation assessments should elaborate on non-qualitative factors, emphasizing the argument that tax-exempt hospitals need to provide more and more community benefit.

Physician Executive-Specific Factors

  • There should be a ceiling or reasonable maximum that the physician can earn.
  • An increasing level of compensation, coupled with decreasing charity care statistics, may trigger scrutiny.
  • Incentive bonuses should include measures such as quality of care and patient satisfaction.
  • Be prepared to show that the arrangement accomplishes a charitable purpose and is not intended to induce referrals or incentivize the “cherry-picking” of patients in an effort to maximize revenues.
  • The arrangement should not be a substitute for a joint venture. JVs need to be structured separately and comply with the separate set of rules and administrative rulings on physician joint ventures with tax-exempt organizations.
  • The compensation should reward physicians for services performed and not activities beyond the physician’s control.

Recruitment Incentives

Advisory Opinion 23-7 OIG Issues Favorable Opinion Regarding Proposal to Pay Bonuses to Its Employed Physicians Based on Net Profits

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From Health Law Diagnosis, by Nathaniel Arden & Michael Lisitano:

  • On October 13, 2023, the Office of Inspector General (OIG) published Advisory Opinion 23-07, in which the OIG issued a favorable opinion regarding a physician group employer’s proposal to pay bonuses to its employed physicians based on net profits derived from certain procedures performed by the physicians at ambulatory surgery centers.
  • Under the proposed arrangement, the Group would pay its physician employees a bonus in addition to the physicians’ base compensation. The bonus would be equal to 30% of the Group’s net profits derived from two ambulatory surgical centers’ facility fee collections attributable to that physician’s procedures.
  • The two ambulatory surgical centers in question would be operated as “divisions” of the Group and not as separate legal entities.
  • The OIG determined that the proposed bonus arrangement is protected by the bona fide employee statutory exception and regulatory safe harbor of the Anti-Kickback Statute and would therefore, not generate prohibited remuneration.
  • The OIG differentiated similar arrangements where the ACS is owned by a separate entity. In those cases, the bona fide employee exception and safe harbor would likely not apply.
  • OIG’s analysis in the Advisory Opinion demonstrates that when properly structured to comply with statutory exceptions and regulatory safe harbors, certain bonus compensation arrangements of this sort may be permissible.

UnitedHealth Defends Lucrative Billing Tactic in Appeals Court

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From Bloomberg Law, by Jacklyn Wille:

  • “Cross-Plan Offsetting” is the practice by an insurer of clawing back benefits it says were overpaid to a provider under one plan by reducing future payments to the provider under a different plan that it administers.
  • This common insurance billing tactic has invited litigation over its legality and opposition from the Labor Department.
  • In one such case, the Eighth Circuit is being asked to decide whether Smith and Ghanim, who are covered by health plans funded by their employers and administered by United, have been harmed in a way that would give them standing to challenge the practice under ERISA.

Ozempic’s Success Treating Other Ailments Is Bad News for Rivals

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From Bloomberg Law, by Madison Muller:

  • Ozempic, and other GLP-1 receptor agonists, are diabetes medications that have become popular for weight loss.
  • Now, there is evidence that they have other more far-reaching benefits too:
    • They may have a protective effect on the heart, liver and kidneys.
    • They may combat substance abuse or even Alzheimer’s disease.
    • Wegovy has been shown to reduce the risk of heart attacks and strokes by 20% in overweight people with a history of heart issues.
  • As a result, these medications may disrupt many different industries.
  • For example, when the manufacturer of Ozempic announced on Oct. 10 that its effectiveness in kidney disease was so conclusive that it was stopping a trial early, it sparked a $3.6 billion selloff in shares of dialysis providers Fresenius Medical Care AG and DaVita Inc.
  • These drugs may also disrupt the health insurance market. Even if approved for new uses, these drugs are very expensivThe list price for Ozempic is about $900 a month, and for Wegovy it’s more than $1,000.

False Claims Act Risks for Cyber Device Manufacturers Arising Under New Requirements Subject to FDA Enforcement Beginning October 1, 2023

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From GibsonDunn, by Winston Chan, Jonathan Phillips, Gustav Eyler, John Partridge, Christopher Rosina, Carlo Felizardo, and Nicole Waddick:

  • The FDA approval process for digital health “cyber devices” requires that premarket submissions contain cybersecurity information, including the company’s plans to address cybersecurity vulnerabilities, processes to provide a reasonable assurance that the devices are cybersecure, a software bill of materials, and other information as the Secretary requires.
  • As of October 1, 2023, the FDA expects companies to comply with these new cybersecurity requirements.
  • False statements related to these disclosures could give rise to false statements and subsequent risk based on the “fraud-on-the-FDA” theory of liability.
  • Companies should take significant care in their statements in premarket submissions regarding their cybersecurity practices and procedures.

Woman’s Death After IV Therapy Leads to License Suspension for Frisco Anesthesiologist

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From D Magazine, by Will Maddox:

  • The Texas Medical Board suspended Frisco anesthesiologist Dr. Michael Gallagher after a mother of four died in July at a med spa for which he was the medical director. 
  • She died after receiving an IV treatment administered by the non-licensed owner of the business. 
  • The med spa did not have protocols or policies for the staff’s IV therapy administration. 
  • There was only an unsigned agreement between Gallagher and the med spa. 
  • There were no licensed medical staff or experienced personnel onsite while IV therapy was being administered. 
  • The treatment the patient received before dying included vitamin B complex, vitamin B12, TPN electrolytes, and ascorbic acid. TPN electrolyte solution requires a prescription and is known to cause complications. 
  • IV therapy is a growing market, but complications can be deadly because it is often administered in medical spas with little medical supervision.

Congress Eyeing Broker Payments Behind Booming Medicare Sales

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From Bloomberg Law, by John Tozzi:

  • About 31 million people – more than half of Medicare enrollees – opt to get their coverage through private plans known as Medicare Advantage.
  • Lawmakers are examining the payments made by health insurers to brokers who sell their Medicare plans, concerned that the payments may be steering seniors to some plans over others.
  • Federal rules limit the commissions Medicare plans can pay brokers, but some companies are may be skirting these rules by offering extra payments that can sometimes double brokers’ compensation, influencing them to push plans that pay the most.
  • A report from the Senate Finance Committee last year described deceptive marketing tactics, “fraudulent sales practices,” and instances of people being enrolled in Medicare Advantage plans without knowing it.
  • The large, publicly traded online brokers report revenue from both commissions and other sources, such as “volume-based bonuses” for meeting sales targets and “marketing development funds” for certain customers.