A recent Pennsylvania Superior Court case decision, Sutherland v. Monongahela Valley Hospital, 2004 PA Super 245 (July 12, 2004), holds that the doctrine of negligent credentialing in Pennsylvania does not apply to physician practices, but the conclusion may provide a false sense of security.

Negligent credentialing is a relatively recent tort doctrine holding healthcare institutions liable to patients for the malpractice of physicians practicing on the medical staff of the institution. Although the hospital or healthcare institution may or may not be liable under a theory of agency, the negligent credentialing doctrine of liability is a separate doctrine and makes the hospital independently liable for the credentialing decision. There have been cases decided in various jurisdictions on this issue. The leading case in Pennsylvania is Thompson v. Nason Hospital, 527 PA 330 (Pa. 1991), which held that a hospital has the following duties:

• A duty to use reasonable care in the maintenance of safe and adequate facilities and equipment;
• A duty to select and retain only competent physicians;
• A duty to oversee all persons who practice medicine within its walls as to patient care; and
• A duty to formulate, adopt and enforce adequate roles and polices to ensure quality care for the patients.

Sutherland declines to extend that theory of liability through physician practices, stating:

Sutherland may provide only cold comfort to physicians. Under Pennsylvania law, physicians are liable for their own malpractice under several legal principles:

• Physicians are always liable for their own acts of malpractice, including the supervision of non-physician providers;
• Physicians will be vicariously liable for the malpractice of other physicians in medical practices organized as partner- ships or sole proprietorships, even if the physician himself was not involved in the case, under various theories of agency and vicarious liability, but physicians will not be liable for the malpractice of others if they practice in professional corporations or restricted professional companies (RPCs), which are the limited liability company version of a professional practice; and
• Professional corporations and RPCs as entities will be vicariously liable for the malpractice of their agents, i.e., the physicians and other healthcare practitioners practicing under the auspices of the practice.

Negligent credentialing is a distinct theory of liability, because the negligent credentialing act itself, i.e. the act of allowing a physician to practice or the granting of clinical privileges when the entity knows or should have known that the physician was not competent to perform the permitted procedures, creates the liability of the practice entity, not the agency relationship. Prior to the establishment of the theory of negligent credentialing, hospitals were routinely absolved from liability for the physicians practicing at the hospitals, because the physicians were deemed to be independent contractors, thereby negating the agency connection between the hospital and the physician.

The Sutherland decision does not absolve professional corporations and other practice entities from liability for the physician’s malpractice under any theory of agency or vicarious liability. The practice entity will remain liable under those theories. The Sutherland decision simply states that the Superior Court of Pennsylvania did not extend the theory of negligent credentialing to professional corporations.

We caution physicians not to use this decision as the basis for neglecting their duties to assure that physicians practicing within their practice are competent. We doubt that the Sutherland case would be decided similarly or affirmed under facts in which other physicians in the practice were aware of a particular physician’s professional problems and shortcomings, but permitted the physician to remain within their practice regardless. The basis of the distinction between hospitals and physician practices in the Sutherland case is the theory of corporate liability and the hospital’s assumption of the responsibility for arranging and coordinating care. It is doubtful that this distinction would "hold water" in any large or multi-specialty medical practice and, once that distinction is breached, there will be no basis for treating large physician practices differently from small physician practices. It will not take much for a court, faced with genuine personal damages and actual knowledge by physicians of a problem which they failed to address, to dispatch the Norman Rockwell idea of physician practices and conclude that the theory of corporate liability should apply to them as well as hospitals.

Healthcare practices in Pennsylvania should not maintain from misguided reliance that the Sutherland case will insulate them from the malpractice of their colleagues.

To properly market a patent, the patent holder should commercialize a product or process in commercial quantities to meet the applicable market demands in a timely manner at profitable and competitive pricing, either on its own or through strategic partnerships or carefully developed licensing to third parties.

You can market your product by manufacturing the product or installing the process in-house or by licensing or assigning, in whole or in part, the patent rights to third parties. The steps in determining how to market your patent depend upon the answers to the following questions:

1.) Who are the main players in the industry related to the patent? Have all appropriate applications and industries for your patented product or process been identified and evaluated? What is your worldwide market and market potential for the patented process, product or method? Who are the competitors? What market share will you reasonably be able to obtain and at what costs, revenues and profits? How, where and with whom will your product or process be marketed and sold? You must develop a foolproof marketing plan and budget which is achievable in a timely manner.

Whether you are seeking a strategic relationship with a competitor or are intending to give up, sell and/or license all or part of your patent rights, deciding how much information to disclose and at what point in the negotiations to disclose such information are delicate issues. Generally, if you are a patent owner, all of the information in the patent is already public knowledge. The issue then becomes how much development, proprietary information and improvements have been achieved subsequent to obtaining the patent. In any event, you should always enter into a mutual nondisclosure agreement and always involve competent, experienced and ethical marketing professionals and attorneys in the patent marketing process.

The new rules broadly define a NQDCP as any plan or arrangement that provides for the deferral of compensation other than certain qualified employer plans. NQDCPs include elective salary deferral plans, bonus deferral plans, supplemental executive retirement plans (SERPs), stock appreciation rights (SARs) and severance pay plans. In fact, any contract or agreement which provides for the deferral of compensation, including individual employment agreements, change in control agreements or termination agreements, may be considered a NQDCP for purposes of the new rules. The new rules apply to NQDCPs which cover employees, as well as NQDCPs which cover directors, independent contractors and consultants.

In the event that a NQDCP fails to meet the requirements of the new rules, all compensation deferred under that plan in that taxable year, and all compensation deferred under that plan in all preceding taxable years, will be included in the gross income of the participant. In addition, the amount that must be included in gross income is subject to (1) a penalty equal to 20 percent of such amount and (2) interest calculated at the IRS underpayment rate plus one percent.

In general, the new rules involve three areas: the timing of the distribution of deferred compensation, the timing of an election to defer compensation, and the funding of deferred compensation.

Under the new rules, distribution of deferred compensation may be made only in the following circumstances:

1. Separation from service;
2. Disability;
3. Death;
4. At a date or under a schedule specified at the time of deferral;
5. Change in control of the corporation; or
6. The occurrence of an unforeseeable emergency.

It is no longer permissible to accelerate the distribution of deferred compensation. For example, NQDCPs may no longer permit participants to receive immediate payment of deferred compensation in exchange for the forfeiture of a certain percentage of the benefit (i.e., a "haircut" provision).

Generally, the new rules require that deferral elections must be made no later than the close of the taxable year preceding the taxable year in which the deferred compensation is earned. For the initial year of eligibility, deferral elections must be made within 30 days of the initial eligibility date. For "performance based" compensation (such as bonuses), deferral elections must be made no later than six months before the end of a 12 month performance period. The new rules also place substantial restrictions on re-deferral elections and any change in form of payment.

Although the essence of a NQDCP is the fact that it is "unfunded," and therefore, any assets set aside to make distributions remain subject to the claims of general creditors, some employers nevertheless devised methods to create funding arrangements to safeguard such assets. Under the new rules, any funds set aside in a trust (such as a rabbi trust) or any other funding vehicle held outside of the United States, are immediately taxable to the participant. Employers also often created funding arrangements pursuant to which assets were restricted to payment of deferred compensation upon a change in the financial health of the employer. Again, under the new rules, such funds are immediately taxable to the participant.

The new rules apply to amounts deferred on or after January 1, 2005. Amounts deferred in taxable years prior to that date will be subject to the new rules if the plan under which the deferral is made is materially modified after October 3, 2004. Amounts deferred prior to January 1, 2005, under a plan that is not materially modified after October 3, 2004, will not be subject to the new rules.

It is important for employers to take steps immediately to make certain that their NQDCPs have and retain the desired tax consequences. The following actions should be taken:

1. Review all NQDCP documents and any other arrangements providing for deferred compensation (including employment agreements) that may be affected by the new rules.
2. Identify and amend any provisions of such NQDCPs and arrangements that must be modified to ensure compliance with the new rules, or consider the adoption of new NQDCPs that comply with the new rules.
3. Inform participants and any other employees who could be affected by any required changes.
4. Coordinate with any outside parties such as plan administrators.
5. Review the employer’s overall compensation policies to determine if any changes would be beneficial.