The SEC staff concluded its clarification by stating:
If any of these conditions is not satisfied, for example, in situations where Schwab does not control the offering process and cannot confirm that a given offering's lead manager has satisfied one or more of the foregoing conditions, it is the Division's view that Schwab cannot transmit an electronic roadshow in reliance on our November 15, 1999, no-action position.
VII. Conclusion
Notwithstanding, these clarifying comments, the SEC staff has taken a step in the right direction. Today, with the power of the Internet and the ranks of sophisticated investors growing, greater access to road shows will only enhance the capital formation process. After all, it is all about investor education.
Apparent authorityconfusion abounds
By Professor Charles W. Murdock, Loyola University School of Law
Apparent authority is a doctrine which has generated much confusion in the litigated cases. See Murdock, 7 Illinois Practice--Business Organizations §§2.72.9. Part of the reason for the confusion is that the two elements of apparent authority, the holding out by the principal and the reasonable belief by the third party, are questions of fact--and reasonable persons can differ over factual matters. Two recent Illinois cases have taken differing approaches and reached different conclusions with respect to the application of the doctrine of apparent authority in the tort context.
In 1993, the Illinois Supreme Court, in Gilbert v. Sycamore Municipal Hospital, 622 N.E.2d 788 (1993), resolved a split among the appellate courts and held that, while the doctrine of apparent authority is more commonly applied in contract cases, it is applicable in tort cases, Id. at 795. The case dealt with the issue of whether a hospital can be liable for the actions of a physician who is an independent contractor but who is providing services within the hospital. The court noted three policy reasons supporting liability of the hospital: (i) hospitals hold themselves out to the public as providing good care; (ii) emergency rooms and other services staffed by independent contractor physicians bring financial benefits to the hospital; and (iii) the public generally does not know the legal status of the person who is providing service to it. However, the court stressed that "[i]f a patient knows, or should have known, that the treating physician is an independent contractor, then the hospital will not be liable." Id at 794. In the Gilbert case, when plaintiff was bought to the emergency room, he had asked for a particular physician but was treated by another physician who was not his personal physician and who had never before met the patient.
In applying the doctrine of the Gilbert case, the court, in Kane v. Doctors Hospital, 706 N. E.2d 71 (Ill. App. 4 Dist. 1999), reviewed a situation in which Kane's personal physician sent him to Doctors Hospital for CT Scan. The hospital argued that, because Kane's personal physician chose the hospital, Kane did not choose the hospital and therefore could not have relied upon any representation from the hospital that the radiologist was an employee of the hospital. The Fourth District held that "[n]othing in Gilbert, however, suggests the plaintiff must make an independent determination of whether to rely on a particular hospital for treatment. As the court held in Monti v. Silver Cross Hospital, 637 N.E.2d 427, 430 (1994), a patient may rely on others to choose a particular medical facility for treatment." Id. at 76.
However, a year later, a First District, in Butkiewicz v. Loyola University Medical Center, 724 N.E.2d 1037 (Ill. App 1 Dist. 2000), considered a similar factual situation and came to a contrary conclusion. Mr. Butkiewicz had pains in his stomach and chest and called his personal physician who ordered him to go to the emergency room at Christ Hospital where the physician was on staff. Thereafter, the patient was admitted to the coronary care unit under the care of his personal physician who then ordered x-rays of the patient's chest. The radiologist who interpreted the x-rays found there was no problem with the patients lungs and sent the report to the personal physician. Two years later, the patient was diagnosed with terminal lung cancer.
The radiologist was, in fact, employed by a private group medical practice which had contracted with the hospital to provide radiology services and was thus an independent contractor. The First District conceded that the patient could not have known that the radiologist was not a hospital employee. However, the court determined that, "[p]laintiff has failed to show that Mr. Butkiewicz actually relied on any representations of the hospital or in going to Christ Hospital. It is uncontradicted that Mr. Butkiewicz went to Christ Hospital because [his personal physician] told him to go there." Id. at 1040-1041. Relying upon James v. Ingalls Memorial Hospital, 701 N.E.2d 207 (1998), the First District in Butkiewicz held that the plaintiff did not meet his burden in establishing the reliance element of a parent agency because the patient went to Christ Hospital because of his personal physician's recommendation. The court stated: "He did not go there seeking care from the hospital itself. He went because that is where his doctor had staff privileges and told him to go. Mr. Butkiewicz was not relying on the hospital's representations about the excellence of its care and the quality of its physicians; he was relying on Dr. Basu [his personal physician]." 724 N.E.2d at 1041.
The James case is questionable authority in this area because the patient there did sign a consent and release form which specifically identified the fact that the physicians were independent contractors and not employees of the hospital. Moreover, the alleged negligence of the hospital was not in transferring the patient to a specialized hospital but, in fact, this transfer was attempted and the specialized hospital rejected the transfer. However, the James court did address the issue that the plaintiff, in her deposition, testified that she would have gone to the hospital even if she had known that the doctors in the emergency room were independent contractors. She also testified that she would not have gone to another hospital if she did have that knowledge because she had a public aid medical card which the defendant hospital would accept.
Both the James court and the Butkiewicz court misapplied the reliance aspect of apparent authority. The important distinction is not which physician recommends the hospital but rather which physician performs the allegedly incompetent services. For example, in Butkiewicz, the patient clearly chose Dr. Basu as his personal physician, on a basis that had nothing to do with the hospital. If the radiologist's report had correctly identified the likelihood of lung cancer and had Dr. Basu disregard that finding, then Dr. Basu would have been liable for his own negligence and the hospital should have no responsibility.
On the other hand, had an actual employee of the hospital, for example, a nurse, in bringing Mr. Butkiewicz to the radiology department for a CT scan, inadvertently tipped Mr. Butkiewicz off the wheel chair and down a flight of steps where he died from a concussion, there would be no question that the hospital would be liable--notwithstanding the fact that Dr. Basu recommended that the patient be admitted to the particular hospital.
Likewise, when faulty professional services are rendered by a radiologist whom the hospital has apparently held out as an employee, the fact that Dr. Basu recommended the hospital should be irrelevant. What the patient expects is that real or apparent employees of this hospital, or any hospital for that matter, perform services in a competent manner. This includes the performance of services by registered nurses giving injections, practical nurses in transferring patients from one room to another, cooks in preparing food, and pharmacist in preparing and labeling the proper medications. It also include the competent rendering of services by personnel in the emergency room or radiology department.
Going back to the three policy reasons the Illinois Supreme Court, in Gilbert, gave for extending apparent authority liability to hospitals, two of the three are totally unrelated to the issue of who recommends a hospital. The fact that emergency room and radiology operations are profitable to the hospital has nothing to do with who recommends the hospital or why the patient goes there. Similarly, the public's lack of awareness of the nature of the legal relationships among the hospital and the people who staff various departments is unrelated to the issue of why the patient chooses the hospital. The only policy consideration recognized by the Supreme Court that is at all related to the patient's choice of hospital is that hospitals broadly advertise the nature and quality of services they render. But even this generally has nothing to do with which emergency room a patient enters. Typically you go to the closest hospital. And once you are admitted to a hospital, normally radiology services will be performed in that hospital, not some other hospital. What the advertising in general does is to create an impression in the mind of the public that hospitals render quality care.
Thus, in determining whether plaintiff has reasonably relied upon the impression that an independent contractor physician is an employee of the hospital, reliance should not be determined by an inquiry as to why a patient chose the hospital. Rather the focus should be on who rendered the incompetent service. If the person who rendered the service was the personal physician of the patient who was freely chosen by the patient with no involvement of the hospital, any "holding out" by the hospital is, non-existent in this regard and accordingly there is no basis for the hospital's liability. However, irrespective of why the person chose the hospital, if someone who is apparently a hospital employee performs the incompetent service, and particularly if such person is designated by the hospital to perform the service in question, then it is the hospital that creates the impression that the professional is its employee and, so long as the patient does not have grounds to know that this is not true, the patient's reliance is reasonable.
What the patient is in fact relying upon is that the person who renders the service is doing so on the property of the hospital; moreover, actual hospital employees generally are directing the patients to the professional in question. In the emergency room situation, it is the hospital's clerk that is taking the patients records and it is the hospital's nurse that is assisting the professional physician. In the radiology situation, it is the hospital's employees who are transferring the patient to the radiology department and, generally, it is hospital employees and nurses who greet the patient in the radiology waiting room and ready him or her for the diagnostics services. This is where the focus of reliance should be -- not on who recommends the hospital
Parenthetically, the Butkiewicz court cited Gilbert for a three-prong test in determining whether apparent authority exist:
(1) the hospital, or its agent, acted in a manner that would lead a reasonable person to conclude that the individual who was alleged to be negligent was an employee or agent of the hospital; (2) where the acts of the agent create the appearance of authority, the plaintiff must also prove that the hospital had knowledge of and acquiesced in them; and (3) the plaintiff acted in reliance upon the conduct of the hospital or its agent, consistent with ordinary care and prudence. Gilbert, 622 N.E. 2nd at 795.
While courts often refer to a three-prong test for apparent authority, in actuality it is a two-prong test: there must be appearances for which the principal is responsible and the plaintiff must reasonably rely upon such appearances. The first two factors in Gilbert actually comprise one test -- that the principal create the appearances or "holding out." This is because the first factor speaks of the principal or the agent acting in a manner which would create an impression in the mind of the plaintiff or third party. However, apparent authority cannot be established by actions of the agent alone. Thus, the second part of the test requires that, when the acts of the agent create the appearance of authority, the principal must have knowledge of such actions and acquiesce in them.
This is just another way of saying that the principal must be responsible for the appearances which are created. If the only appearances which a third party sees emanate from the purported agent, and the purported principal is unaware of the agents actions, then there is no apparent authority because there is no responsibility of the purported principal for such actions. On the other hand, if the purported agent acts as if he or she were authorized, and the principal acquiescences, then the principal, because of such knowledge and acquiescence, is responsible for the actions of the agent. Factors one and two in the Gilbert test reflect the legal requirement that the appearances upon which the third party relies must be those for which the principal is responsible. The principal can be responsible by creating the appearances directly or the principal can be responsible because of its knowledge that a person purports to be acting as its agent when the principal does nothing to stop such person from making such representations.
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[This article was adopted from Murdock, 7 Illinois Practice -- Business Organizations, §2.9A]
By Donna J. Cunningham, Cunningham & Colleagues, P.C., Barrington
May 2000
1. U.S. Supreme Court I: USSC Launches its own Web site
The U.S. Supreme Court has launched its own website, which contains court decisions, the court schedule and calendar, rules, bar admission forms, weekly orders granting and denying new appeals, and news releases. Much of the information is in PDF format, which requires the use of Adobe's Acrobat Reader. Go to http://www.supremecourtus.gov.
U.S. Supreme Court II: Ouster of former CEO not actionable under RICO
Former CEO, President, Shareholder and Director alleged conspiracy to remove him from office after he reported Respondents' unlawful conduct, and contended such conspiracy was actionable under RICO. But the USSC ruled that the act in furtherance of the alleged civil conspiracy must itself be unlawful under RICO. Beck vs. Prupis, #98-1480 (April 26, 2000)
U.S. Supreme Court III: NY ruling stands: ISP's not liable for defamation. The U.S. Supreme Court has left intact a ruling of the New York Court of Appeals holding that Prodigy, as internet service provider, was not liable for the defamatory content of email transmitted through its services. "The public would not be well served by compelling an [ISP] to examine and screen millions of email communications, on pain of liability for defamation." Lunney vs. Prodigy Services Co., 99-1430. Go to http://www.courts.net and click on New York, CofA opinions, and December, 1999.
2. New Illinois legislation I: Revised Uniform Limited Partnership Act (RULPA). House bills 477 and 478 (Cross, R-Yorkville; Radogno, R-LaGrange) track recent amendments to the Delaware version of RULPA. HB 477 removes the right of a limited partner to withdraw, regardless of the term of the partnership, and beefs up the claim for discounts for federal estate and gift tax purposes. HB 478 limits the effect of the death of a general partner in order to avoid a technical dissolution of the partnership according to IRS. These bills went to the Governor on April 28, 2000.
3. New Illinois legislation II: UCC Article 9 rewrite. An effort by the National Conference of Commissioners on Uniform State Laws resulted in this rewrite of the Secured Transactions Article of the Uniform Commercial Code. Illinois' version was Senate Bill 1231 (Dillard, R-Downers Grove; Durkin, R-Westchester) , which has now passed both chambers of the General Assembly as of April 14, 2000. The GA has 30 days to send the bill to the Governor, who will then have 60 days to act.
4. Moratorium on Net taxes moves forward.
The House Judiciary Committee has approved and sent to the House a bill that would extend for another five years the moratorium on Internet Taxes. It would also eliminate the grandfathered-in exceptions now existing for certain states a to continue to charge internet taxes. The full house is expected to vote on the bill next week http://www.wired.com/news/politics/0,1283,36143,00. html
5. FTC/DOJ issue joint antitrust guidelines affecting B2Bs.
The Federal Trade Commission and the Department of Justice have released their "Antitrust Guidelines for Collaborations Among Competitors." The Guidelines do not specifically mention internet commerce, but analysts agree that the guidelines will affect internet companies, especially Business to Business ventures.
6. Insured's notice to claims-made insurer day before expiration sufficient.
Accountant's notice to current insurer, one day before expiration of policy regarding potential claim for client's financial statements and second public offering sufficient to make all claims arising from that transaction the responsibility of that insurer, and not subsequent insurer. Since only interpretation of notice is contested, and not its content, notice was sufficient, and summary judgment proper. Continental Casualty Co. vs. Coregis Insurance Co., No. 1-98-077 (1st Dist., March 31, 2000).
7. Customer profile form a "solicitation" offer to Purchase Securities, so that agent's lack of registration is a violation of Illinois securities law.
Customer profile form, completed by agent, which showed client's interest in purchasing investment fund shares, constituted a "solicitation of an offer to purchase" under Illinois Securities Law, and therefore, agent was required to be registered as a salesperson under the Illinois Securities Law. Aste vs. Metropolitan Life Insurance Co., No. 1-99-2574, (First Dist., March 28, 2000).
8. From the European Union: EU approves e-commerce legislation, adopts "single market" standard for e-commerce. Addressing the bedrock issues of its rules to deal with e-commerce, the EU has adopted the "single market" standard for e-commerce, and made clear that it's single market rules apply to e-commerce