NO IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT ALLSTATE INSURANCE CO., ET AL.

Transcription

1 NO IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT ALLSTATE INSURANCE CO., ET AL. ALLSTATE INSURANCE CO.; ALLSTATE INDEMNITY CO.; ALL- STATE PROPERTY & CASUALTY INSURANCE CO.; BOSTON OLD COLONY INSURANCE CO.; and GLENS FALLS INSURANCE CO. Plaintiffs Plaintiffs-Appellees V. RECEIVABLE FINANCE COMPANY LLC, ET AL. Defendants ACCIDENT & INJURY PAIN CENTERS INC., doing business as Accident & Injury Chiropractic; RECEIVABLE FINANCE COMPANY L.L.C.; ROBERT SMITH; LONE STAR RADIOLOGY MANAGEMENT L.L.C.; WHITE ROCK OPEN AIR MRI L.L.C., doing business as White Rock Open MRI; NORTH TEXAS OPEN AIR MRI L.L.C., doing business as North Texas Open MRI, doing business as Harris County MRI, doing business as Bexar County MRI; REHAB 2112 L.L.C.; METROPLEX PAIN CENTER INC., doing business as Lone Star Radiology; LACIDEM MANAGEMENT; STEVEN SMITH; TINA CHESHIRE; JAMES LAUGHLIN, D.O.; DEE L. MAR- TINEZ, M.D.; THOMAS RHUDY, D.C.; LOUIS SAUCEDO, D.C.; KEN- NETH LUSTIK, DC; MARK RAYSHELL, D.C.; LARRY PARENT, D.C.; CHRISTOPHER HOLOWISKI, D.C.; CAREY FABACHER, D.C.; PATRI- CIA JOHNSON, D.C.; GHOLAMRESA ASSADOLAHI, D.C.; KYLE CAMPBELL, D.C.; CHAD BLACKMON, D.C.; RAMESH SANGHANI, D.C.; MARLON D. PADILLA, M.D., P.A.; and MARLON PADILLA, M.D.Defendants-Appellants On Appeal from the United States District Court for the Northern District of Texas BRIEF OF APPELLANT ACCIDENT & INJURY PAIN CENTERS, INC. P. MICHAEL JUNG Strasburger & Price, LLP 4400 Bank of America Plaza 901 Main Street Dallas, Texas (214) ATTORNEY FOR APPELLANT ACCI- DENT & INJURY PAIN CENTERS, INC.

2 CERTIFICATE OF INTERESTED PERSONS The docket number is The style of this case is Allstate Insurance Co., et al. v. Receivable Finance Company, L.L.C., et al. The undersigned counsel of record certifies that the following listed persons have an interest in the outcome of this case. These representations are made in order that the judges of this court may evaluate possible disqualification or recusal. Accident & Injury Pain Centers, Inc., d/b/a Accident & Injury Chiropractic Appellant Accident & Injury Pain Centers, Inc., as successor by merger to Metroplex Pain Center, Inc. Appellant Receivable Finance Company, LLC Appellant Lone Star Radiology Management, LLC Appellant White Rock Open Air MRI, LLC Appellant North Texas Open Air MRI, LLC Appellant Rehab 2112, LLC Appellant Lacidem Management, LP Appellant -i-

3 Robert Smith Appellant Steven Smith Appellant Tina Cheshire Appellant Thomas Rhudy Appellant Louis Saucedo Appellant Kenneth Lustik Appellant Mark Rayshell Appellant Larry Parent Appellant Christopher Holowiski Appellant Carey Fabacher Appellant Patricia Johnson Appellant Gholamreza Assadolahi Appellant Kyle Campbell Appellant -ii-

4 Chad Blackmon Appellant Ramesh Sanghani Appellant James Laughlin Appellant Marlon Padilla Appellant Marlon Padilla, MD, PA Appellant Dee Martinez Appellant Allstate Insurance Company Appellee Allstate Indemnity Company Appellee Allstate Property & Casualty Company Appellee Boston Old Colony Insurance Company Appellee Glens Falls Insurance Company Appellee -iii-

5 P. Michael Jung; and Strasburger & Price, LLP Appellate Counsel for Appellant Accident & Injury Pain Centers, Inc. * Michael E. Mears; and Andrews & Kurth LLP Trial Counsel for Defendants Accident & Injury Pain Centers, Inc., and Receivable Finance Company, L.L.C. Charles Frazier; R. Michael Northrup; and Cowles & Thompson, P.C. Appellate Counsel for Entity, Chiropractic, and Corporate Officer/Employee Appellants Lindy D. Jones; and Jones Allen & Fuquay, L.L.P. Trial Counsel for Chiropractic Defendants Christopher M. Weil; and Weil & Petrocchi, P.C. Trial Counsel for Defendants Robert Smith, et al. James D. Shields; and Shields Britton & Fraser, P.C. Trial Counsel for Defendants Stephen Smith, et al. Mark D. Downey; and Epstein, Becker & Green, P.C. Appellate Counsel for Appellants Padilla and Marlon Padilla, MD, PA Rick K. Disney; and Cotton Schmidt, L.L.P. Trial and Appellate Counsel for Appellant Laughlin Richard E. Young; and Glast Phillips & Murray, P.C. Appellate Counsel for Appellant Martinez, and Trial Counsel for Defendants Martinez, Padilla, and Marlon Padilla, MD, PA * Mr. Jung represents Accident & Injury Pain Centers, Inc., in its general corporate capacity only. Mr. Frazier represents Accident & Injury Pain Centers, Inc., in its capacity as successor by merger to Metroplex Pain Center, Inc. -iv-

6 David Kassabian; Bret W. Weatherford; and Kassabian, Doyle & Weatherford, P.C. Trial and Appellate Counsel for Appellees Roger D. Higgins, James L. Sowder, and Thompson, Coe, Cousins & Irons, LLP Post-Trial Counsel for Appellees P. MICHAEL JUNG Attorney of Record for Appellant Accident & Injury Pain Centers, Inc. -v-

7 STATEMENT REGARDING ORAL ARGUMENT Oral argument is warranted in this case due to its magnitude and complexity. The judgment exceeds $6,000,000. The case involves a three-week jury trial; thirty-four witnesses testified and tens of thousands of pages of exhibits were introduced. Each of the twenty-seven appellants has separate evidentiary sufficiency challenges, based on the differing record evidence as to each appellant. Six separate briefs will be filed on behalf of various groups of appellants by five different sets of counsel. Oral argument will assist the Court in sorting out the contentions of the various parties and the state of the record as it relates to each of those contentions. (We respectfully suggest that, due to the number of separate groups of appellants, the case be scheduled for 30 minutes of argument per side.) -vi-

8 TABLE OF CONTENTS Page Certificate of Interested Persons... i Statement Regarding Oral Argument... vi Table of Contents... vii Table of Authorities... ix Statement of Jurisdiction... 1 Statement of the Issues... 2 Statement of the Case... 3 Statement of Facts... 5 Summary of the Argument Standards of Review Argument I. THE JURY S FRAUD FINDING IS UNSUPPORTED BY THE EVIDENCE A. Allstate Failed to Prove Actual, Justifiable, and Detrimental Reliance Allstate Failed to Prove That It Actually Relied on A&I s Alleged Misrepresentations Allstate Failed to Prove That It Justifiably Relied on A&I s Alleged Misrepresentations Allstate Failed to Prove That Any Reliance Caused It to Suffer Injury vii-

9 B. There Is No Evidence of Any Actionable Misrepresentation II. THE JUDGMENT FOR ACTUAL DAMAGES BASED ON DISGORGEMENT OF A&I S REVENUE WAS IMPROPER A. Disgorgement of Revenue Is Not an Available Remedy for Common-Law Fraud B. The Disgorgement Damages Were Not Limited to Revenue Obtained by A&I as a Result of Fraud The Disgorgement Damages Improperly Included Payments for Medically Necessary Services The Disgorgement Damages Improperly Included Amounts Paid by Allstate Not in Reliance on Any A&I Misrepresentation The Disgorgement Damages Improperly Included Payments Made Pursuant to Judgments The Disgorgement Damages Improperly Included Revenue Received by Entities Other Than A&I III. THE JURY QUESTION REGARDING FRAUD SHOULD HAVE INCLUDED A REQUIREMENT OF JUSTIFIABLE RELIANCE Conclusion Certificate of Service Certificate of Compliance viii-

10 TABLE OF AUTHORITIES Cases 1001 McKinney Ltd. v. Credit Suisse First Boston Mortgage Capital, S.W.3d, 2005 Tex. App. LEXIS 9742 (Tex. App. Houston [14 th Dist.] Nov. 23, 2005, reh. pend.)...48 Barrett v. Ferrell, 550 S.W.2d 138 (Tex. Civ. App. Tyler 1977, writ ref d n.r.e.)...39 Bartlett v. Schmidt, 33 S.W.3d 35 (Tex. App. Corpus Christi 2000, pet. denied)...29 Beijing Metals & Minerals Import/Export Corp. v. American Business Center, Inc., 993 F.2d 1178 (5 th Cir. 1993)...31 Boeing Co. v. Shipman, 411 F.2d 365 (5 th Cir. 1969) (en banc)...23 Brittan Communications International Corp. v. Southwestern Bell Telephone Co., 313 F.3d 899 (5 th Cir. 2002), cert. denied, 538 U.S (2003)... 24, 30 Broadcast Satellite International, Inc. v. National Digital Television Center, Inc., 323 F.3d 339 (5 th Cir. 2003)...50 Buchanan v. Burnett, 102 Tex. 492, 119 S.W (1909)...34 Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999)...41 City of Corpus Christi v. S. S. Smith & Sons Masonry, Inc., 736 S.W.2d 247 (Tex. App. Corpus Christi 1987, writ denied)...39 Cobb v. Dallas Fort Worth Medical Center Grand Prairie, 48 S.W.3d 820 (Tex. App. Waco 2001, no pet.) ix-

11 Coffel v. Stryker Corp., 284 F.3d 625 (5 th Cir. 2002)...38 Dresser-Rand Co. v. Virtual Automation, Inc., 361 F.3d 831 (5 th Cir. 2004)... 23, 38 Employers Casualty Co. v. Block, 744 S.W.2d 940 (Tex. 1988)...46 Ernst & Young, L.L.P. v. Pacific Mutual Life Insurance Co., 51 S.W.3d 573 (Tex. 2001)... 24, 49, 50 Florida Department of Insurance v. Chase Bank National Association, 274 F.3d 924 (5 th Cir. 2001), cert. denied, 535 U.S (2002)...25 Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, Inc., 960 F.2d 41 (Tex. 1998)...38 Fortune Production Co. v. Conoco, Inc., 52 S.W.3d 671 (Tex. 2000)...40 Gardemal v. Westin Hotel Co., 186 F.3d 588 (5 th Cir. 1999)...47 George Grubbs Enterprises, Inc. v. Bien, 881 S.W.2d 843 (Tex. App. Fort Worth 1994), rev d, 900 S.W.2d 337 (Tex. 1995)...47 Gibraltar Savings v. LDBrinkman Corp., 860 F.2d 1275 (5 th Cir. 1988), cert. denied, 490 U.S (1989)...31 Guadalupe-Blanco River Authority v. City of San Antonio, 145 Tex. 611, 200 S.W.2d 989 (1947)...40 Haralson v. E. F. Hutton Group, Inc., 919 F.2d 1014 (5 th Cir. 1990)... 30, 31, 50 Harville v. Anchor-Wate Co., 663 F.2d 598 (5 th Cir. 1981)...50 Hiltgen v. Sumrall, 47 F.3d 695 (5 th Cir. 1995) x-

12 Hunnicutt v. Wright, 986 F.2d 119 (5 th Cir. 1993)...23 In re Mercer, 246 F.3d 391 (5 th Cir. 2001) (en banc)...31 Jockusch, Davison & Co. v. O. T. Lyon & Son, 100 Tex. 594, 102 S.W. 396 (1907)...40 Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193 (Tex. 2000)...41 Koral Industries v. Security-Connecticut Life Insurance Co., 802 S.W.2d 650 (Tex. 1990)...49 Lewis v. Bank of America NA, 343 F.3d 540 (5 th Cir. 2003)... 25, 31, 32, 50 Link Co. v. Fujitsu Ltd., 232 F. Supp. 2d 182 (S.D.N.Y. 2002)...39 Lone Star Machinery Corp. v. Frankel, 564 S.W.2d 135 (Tex. Civ. App. Beaumont 1978, no writ)...29 Love v. King, 784 F.2d 708 (5 th Cir. 1986)...43 M. L. Mayfield Petroleum Corp. v. Kelly, 450 S.W.2d 104 (Tex. Civ. App. Tyler 1970, writ ref d n.r.e.)...29 Marcus v. Kinabrew, 438 S.W.2d 431 (Tex. Civ. App. Tyler 1969, no writ)...29 Massachusetts Bonding & Insurance Co. v. Orkin Exterminating Co., 416 S.W.2d 396 (Tex. 1967)...46 Munn v. Algee, 924 F.2d 568 (5 th Cir. 1991)...23 North American Van Lines, Inc. v. Emmons, 50 S.W.3d 103 (Tex. App. Beaumont 2001, pet. denied) xi-

13 Pineda v. United Parcel Service, Inc., 360 F.3d 483 (5 th Cir. 2004)...22 Quest Exploration & Development Co. v. Transco Energy Co., 24 F.3d 738 (5 th Cir. 1994)... 25, 30 Ratner v. Sioux Natural Gas Corp., 770 F.2d 512 (5 th Cir. 1985)...25 Sanchez v. Liggett & Myers, Inc., 187 F.3d 486 (5 th Cir. 1999)...25 SEC v. AbsoluteFuture.com, 393 F.3d 94 (2 nd Cir. 2004) (per curiam)...41 SEC v. Blatt, 583 F.2d 1325 (5 th Cir. 1978)...41 Solis v. Rio Grande City Independent School, 734 F.2d 243 (5 th Cir. 1984)...50 Stine v. Marathon Oil Co., 976 F.2d 254 (5 th Cir. 1992)...24 TCA Building Co. v. Entech, Inc., 86 S.W.3d 667 (Tex. App. Austin 2002, no pet.)...50 Texas First National Bank v. Ng, 167 S.W.3d 842 (Tex. App. Houston [14 th Dist.] 2005, writ granted w.r.m.)...49 Tilton v. Marshall, 925 S.W.2d 672 (Tex. 1996) (plurality opinion)...38 Trenholm v. Ratcliff, 646 S.W.2d 927 (Tex. 1983)...34 United States v. Rutgard, 116 F.3d 1270 (9 th Cir. 1997)...37 United States v. Texarkana Trawlers, 846 F.2d 297 (5 th Cir.), cert. denied, 488 U.S. 943 (1988) xii-

14 University of Colorado Foundation, Inc. v. American Cyanamid Co., 216 F. Supp. 2d 1188 (D. Colo. 2002), aff d, 342 F.3d 1298, 1311 (Fed. Cir. 2003)...39 Weisgram v. Marley Co., 528 U.S. 440 (2000)...22 Whitehead v. Food Max, Inc., 163 F.3d 265 (5 th Cir. 1998)...23 Williams v. United States, 458 U.S. 279 (1982)...37 Wil-Roye Investment Co. v. Washington Mutual Bank, FA, 142 S.W.3d 393 (Tex. App. El Paso 2004, no pet.)...50 Worldcom, Inc. v. Boyne, 68 Fed. Appx. 447, 2003 U.S. App. LEXIS (4 th Cir. 2003)...27 Young v. Leach, No CV, 2004 Tex. App. LEXIS 7960 (Tex. App. Houston [14 th Dist.] Aug. 31, 2004, pet. denied) (mem. op.)...28 Statutes 10 Guam Civ. Code 2903(h) Del. Code 9119(a) Ill. Comp. Stat. 105/ U.S.C U.S.C Okla. Stat. 6592(7) U.S.C. 1395y(a)(1)...37 Cal. Wel. & Inst. Code xiii-

15 Fla. Stat (19)...35 Fla. Stat (1)(d)...35 Ga. Code 33-20A Haw. Rev. Stat. 432E-1.4(b)...35 Idaho Code (5)...35 Ind. Code Kan. Stat Mont. Code (16)...36 N.C. Gen. Stat (a)(12)...36 N.D. Cent. Code (17)...36 N.J. Stat. 2A:53A N.J. Stat. 39:6A-2(m)...36 Nev. Rev. Stat. 695G Tex. Civ. Prac. & Rem. Code (1)...35 Va. Code Rules of Court 4 th Cir. R. 36(c)...27 Fed. R. Civ. P Fed. R. Civ. P. 50(b)... 1 Fed. R. Civ. P Tex. R. App. P. 47.2(a) xiv-

16 Tex. R. App. P Tex. R. App. P Secondary Sources Committee on Pattern Jury Charges, State Bar of Texas, Texas Pattern Jury Charges cmt. (2003)...49 John Heywood, Proverbes (1546)...39 National Center for Policy Analysis, Daily Policy Digest (Aug. 3, 2001) (available at -xv-

17 STATEMENT OF JURISDICTION The district court had jurisdiction of this suit under 28 U.S.C. 1332, inasmuch as the plaintiffs were Illinois, Massachusetts, and Delaware corporations with their principal place of business in Illinois, the defendants were all Texas citizens, and the amount in controversy exceeded $75,000, exclusive of interest and costs. (4 ROA ). 2 This Court has jurisdiction under 28 U.S.C. 1291, because this is an appeal from a final judgment that disposes of all parties claims. A judgment was entered on October 29, (31 ROA 7703). Various motions under Fed. R. Civ. P. 50(b) and 59 were timely filed on various dates between October 4 and November 12, (31 ROA 7575, 7582, 7589, 7596, 7601, 7630, 7636; 32 ROA 7788, 7991, 7996; 33 ROA 8001, 8033). These motions were denied by order entered February 4, 2005 (34 ROA 8376; SROA 127; 1 2SROA 127; RE Tab 10), on which date an amended final judgment was also entered (34 ROA 8386; SROA 2 Record abbreviations in this brief will be as follows: x ROA y SROA y x 2SROA y x Tr. y PXa DXb (RE Tab c) Volume x of the Record on Appeal, at page y Supplemental Record on Appeal, at page y Volume x of the Second Supplemental Record on Appeal, at page y Volume x of the trial transcript (i.e., volume x+1 of the 2SROA) at page y Plaintiffs Exhibit a Defendants Exhibit b Record Excerpts, Tab c

18 170; 1 2SROA 170; RE Tab 9). Various notices of appeal were timely filed between February 4 and March 4, (34 ROA 8392, 8396, 8497; 35 ROA 118, 120, 222; RE Tabs 2-7). STATEMENT OF THE ISSUES 1. Did Allstate prove reliance on A&I s alleged implied representations that its services were medically necessary? In particular, did Allstate prove a. that it actually relied on such representations; b. that any such reliance was justified; and c. that any such reliance caused it to suffer injury? 2. Did Allstate prove any actionable misrepresentation? In particular: a. Did Allstate prove that A&I gave knowingly false opinions regarding medical necessity? b. Under Texas law, in submitting a bill for health care services, does a health care provider make an implied representation that its services were medically necessary? 3. Is disgorgement of the defendant s revenue a recognized remedy for common-law fraud? 4. Did the disgorgement damages include revenue not obtained by A&I from fraud? In particular, did the damages improperly include: -2-

19 a. payments not shown to have been for medically unnecessary services; b. payments not shown to have been made in reliance on any misrepresentation; c. payments made pursuant to judgments; or d. revenue received by entities other than A&I? 5. Did the trial court reversibly err in refusing to instruct the jury that Allstate s reliance on A&I s alleged misrepresentations must have been justifiable? STATEMENT OF THE CASE This is a suit for common-law fraud, conspiracy, unjust enrichment, and various forms of declaratory relief, brought by plaintiffs-appellees Allstate Insurance Company, et al. (collectively Allstate ), 3 against a wide range of defendants, all associated in some way or another with Accident & Injury Pain Centers, Inc. ( A&I ), a Texas-based group of chiropractic clinics. Allstate accused the defendants of fraudulent billings for chiropractic, medical, and diagnostic services, and alleged that their business structure violated the Texas Occupations Code and the 3 The plaintiffs in this case, all of which are affiliates of Allstate Insurance Company, were grouped at trial into the Allstate group (Allstate Insurance Company, Allstate Indemnity Company, and Allstate Property & Casualty Insurance Company) and the Encompass group (The Glens Falls Insurance Company and Boston Old Colony Insurance Company). (See 11 Tr ). -3-

20 Texas Administrative Code. (4 ROA ). The defendants denied these allegations, and challenged Allstate s standing to assert them. (4 ROA ; 7 ROA ROA 2080). The case was tried to a jury. At the close of Allstate s case, the district court granted judgment for the defendants as a matter of law on all measures of damage other than disgorgement. (12 Tr. 4-5; RE Tab 11). At the close of all the evidence, the court granted judgment for the defendants as a matter of law on Allstate s claim for unjust enrichment, and on all statutory and regulatory claims. (14 Tr , 251, , ; RE Tab 12). Despite reservations about the viability of Allstate s case in light of the defendants motions for judgment m.o.l. (14 Tr. 226), the trial court submitted the case to the jury on theories of fraud (against A&I) and conspiracy to commit fraud (against the other defendants). (31 ROA ; SROA ; 1 2SROA ; RE Tab 8 at 8-13). The jury found for Allstate (id.), assessing disgorgement damages of $2,845,000 and exemplary damages aggregating $3,058,300. (31 ROA 7561, ; SROA 155, ; 1 2SROA 155, ; RE Tab 8 at 18, 24-26). The district court rendered judgment on the verdict, awarding a total (including prejudgment interest) of $6,325,373. (31 ROA ). The defendants filed numerous renewed motions for judgment m.o.l., for new trial, and to modify the judgment. (31 ROA ; 32 ROA , ; 33 ROA , -4-

21 ). The court denied these motions, except that it modified its judgment by reducing the prejudgment interest awarded (34 ROA ; SROA ; 1 2SROA ; RE Tab 10 at 8-9) and rendered an amended judgment totaling $6,195,205 (34 ROA ; SROA ; 1 2SROA ; RE Tab 9). The defendants have appealed. (34 ROA , ; 35 ROA , ; RE Tabs 2-7). STATEMENT OF FACTS A&I 4 is a group of chiropractic clinics specializing in the treatment of patients who have suffered trauma in automobile accidents or on-the-job injuries. (9 Tr. 8-9, ). Patients learn of A&I through referrals from attorneys, past and current A&I patients, friends of A&I, and advertising by A&I. (9 Tr. 142). They typically have no health insurance, are unable to pay cash for health care services, and have few alternatives within the conventional health care delivery system. (9 Tr. 137, 152). A&I is able to treat patients who could not otherwise afford its services 4 For convenience and simplicity, we will henceforth use the term A&I to refer, except where the context indicates otherwise, collectively to A&I and its affiliated chiropractors, employees, and diagnostic entities. This usage is, however, without prejudice to the significant and important distinctions made by other appellants regarding their separateness from A&I and the limited nature of their individual conduct. -5-

22 through reliance on letters of protection from personal injury attorneys. (8 Tr. 36; 9 Tr. 222). These letters assure a health care provider such as A&I that, if and when the patient s attorney is able to achieve a settlement or other resolution of the patient s personal injury claim, the funds will be used to pay for medical expenses incurred by the patient. (5 Tr. 151; 8 Tr. 53; 9 Tr. 153; see PX145-46). Typically, however, the patients claims are not resolved for many months after their injuries, and hence A&I must wait a long time to be paid for its services. (9 Tr. 137). Moreover, when settlement funds prove inadequate (as is often the case), A&I must discount its bills. (9 Tr. 59, , , ; 10 Tr ). And in cases where no settlement or judgment is recovered, the patient remains liable to A&I for its charges, but there is little prospect of collection. (9 Tr. 256). For these reasons, most physicians will not accept letters of protection as a guarantee of payment. (11 Tr. 98). One way A&I is able to deliver high-quality health care to a largely poor and underserved patient population is by being as efficient as possible. (6 Tr. 230; 9 Tr ; see 11 Tr. 77). Health care providers time is focused on patient care, while employees on the business side handle administrative duties. (9 Tr ). Standardized forms and document templates are used to minimize provider time devoted to documentation. (See 11 Tr. 77). Medical records and bills are promptly furnished to patients attorneys, and consistent collection procedures are employed. -6-

23 (9 Tr. 156; see 11 Tr. 77). Each patient at an A&I clinic is interviewed by a chiropractor to determine the patient s medical history, the circumstances of the injury, and the patient s subjective complaints. (9 Tr , ; 14 Tr ). The chiropractor then physically examines the patient, performing numerous orthopedic, neurologic, and chiropractic tests. (9 Tr. 24, 147; 14 Tr ). X-rays, CT scans, and other diagnostic tests are ordered if necessary. (9 Tr , 147; 14 Tr ). The diagnostic tests include magnetic resonance imaging ( MRI ) scans, which have revolutionized the practice of chiropractic in recent years because they permit the visualization of soft tissue injuries. (9 Tr. 140; 14 Tr. 18). A second read of X-rays by a radiology specialist is appropriate where the patient has a history of trauma and positive orthopedic testing. (14 Tr. 55). Although all chiropractors receive some training in reading x-rays, studies have shown that the accuracy rate for medical and chiropractic radiology specialists is significantly higher, and the standard of care has evolved in recent years to require such a referral in appropriate cases. (11 Tr ; 14 Tr ). A&I patients are often referred to medical doctors for a second evaluation. One reason for such a referral is to consider medication, since chiropractors are not permitted to write prescriptions in Texas. (7 Tr , ; 10 Tr ; 14 Tr ). Use of appropriate medication, such as muscle relaxants, anti- -7-

24 inflammatory drugs, and pain medication, can aid the chiropractic treatment process and speed the healing of tissues. (7 Tr. 223). Medical referrals are also used to obtain a second opinion regarding diagnosis and treatment, often from a practitioner with greater specialization. (14 Tr. 19). A&I chiropractors employ various modalities of chiropractic therapy. These include spinal manipulation, cryotherapy, electromuscular stimulation, and intersegmental traction. (6 Tr. 122, 141; 11 Tr ; 13 Tr ; 14 Tr ; DX753). Although there are common patterns of treatment because many trauma patients have experienced similar injuries, each patient s care is tailored to the patient s unique condition and symptoms. (8 Tr. 177; 11 Tr ; 13 Tr. 177; 14 Tr. 158; DX751; DX753). A&I uses several different forms of documentation in patient files. Chiropractors sign exam sheets reflecting the initial patient examination, daily treatment notes, and treatment plans. (5 Tr ; 6 Tr , ). Chiropractors choose their own task and diagnostic codes, and their contracts with A&I safeguard their right to do so. (5 Tr. 116; 6 Tr. 19, , 172, 229; 11 Tr. 186, 198). Drafts of final narrative reports are generated by the corporate office based on a template filled out by the chiropractor (6 Tr. 138, 172; 7 Tr ), but the chiropractor has the opportunity to review, edit, and electronically sign the report before it is issued (5 Tr ; 6 Tr , 229; 7 Tr. 203, 274, 279; 13 Tr. 144). The -8-

25 medical file, including the final narrative, is typically sent to the patient s attorney and is forwarded by the attorney to the opposing insurance carrier. (7 Tr. 208, 227, 264; 9 Tr. 156). A&I has an active ongoing internal compliance process. Manuals set forth A&I s expectations regarding procedure, documentation, and chiropractic decisionmaking. (13 Tr ; PX110-11; DX63; DX66). A compliance board has been set up to uphold the standards and procedures. (6 Tr. 195; 13 Tr. 174). Annual compliance seminars are conducted. (8 Tr. 76). An internal auditor, who is a chiropractor, reviews 60 to 120 files per year for each of A&I s clinics, verifying that medical necessity has been established for all referral services, that proper documentation is maintained, that diagnostic tests are not overutilized or underutilized, and that task codes and diagnostic codes are properly assigned. (9 Tr. 183, ; 11 Tr ; 13 Tr. 236, 238). Identified deficiencies are discussed with the affected chiropractor and with the chief of staff. (9 Tr. 211). Virtually every A&I chiropractor called at trial testified that he or she had never performed or ordered services that were not in the chiropractor s opinion medically necessary. (5 Tr , ; 6 Tr. 51, 86, 137, 152, 173; 7 Tr. 277; 9 Tr. 19; 11 Tr. 147, , 176, 186, ; 13 Tr. 149; 14 Tr. 148; see 9 Tr. 211). The chiropractors also affirmed that all their diagnostic and treatment decisions were based on their independent professional judgment. (6 Tr , 43-45, -9-

26 60, 105, ; 7 Tr ; 8 Tr. 196). No A&I chiropractor testified to the contrary. * * * Allstate is the second largest automobile insurer in Texas, and has as many as 16 claims offices in the markets served by A&I. (11 Tr ). Its adjusters are trained in investigation of claims, assessment of the insured s liability, and assessment of property damage, lost wages, and bodily injury. (12 Tr ). They learn, from their training and experience, how to evaluate the medical necessity of the claimant s treatment, including how to evaluate medical records. (12 Tr ). They are aided in this evaluation by a software package, MBRS (medical bill review system), originally developed by Harvard Medical School. (11 Tr ; 12 Tr. 264). Based on a number of inputs derived from the medical records (11 Tr. 248; 12 Tr. 114), MBRS audits medical bills to determine the appropriateness of the services provided and the charges for those services. (11 Tr. 248; 12 Tr , ; DX445). 5 In the vast majority of cases, Allstate receives the claimant s medical records from the claimant s lawyer. (12 Tr. 115). These typically include the initial 5 Another software package, Colossus, helps evaluate the other components of bodily injury claims, such as lost wages, pain and suffering, and future impairment. (11 Tr ; 12 Tr ; 14 Tr. 204). -10-

27 and final narrative reports, the doctor s daily notes, reports of tests performed by the doctor, referral records, and reports from second-opinion or MRI referrals. (12 Tr , 126). If necessary, the adjuster can request additional information from the claimant s lawyer. (12 Tr ). Adjusters are trained to look at the entire package of medical information when evaluating medical necessity. (12 Tr. 150). Allstate does not blindly pay medical expenses. (12 Tr. 281). Instead, as it advises claimants, it review[s] all medical bills to ensure that the charges incurred are reasonable and that the treatment, services, and products rendered are actually necessary. (PX59 at CL013009). Adjusters have a variety of tools with which to investigate, evaluate, and determine what the value is of the claimant s medical treatment. (8 Tr ; 12 Tr. 65; DX406). These include: analysis by the adjuster based on the medical records, the police report of the accident, and other information developed through investigation (8 Tr. 27, 47-48; RE Tab 15); peer review of the medical records (8 Tr ; 12 Tr ; RE Tab 15); independent medical examinations (8 Tr. 29; RE Tab 15); medical literature (8 Tr. 47; RE Tab 15); and software tools such as MBRS. As Allstate s own insurance defense expert phrased it, ultimately, in an automobile accident case, an adjuster and an attorney are in a very good position to come up with an extremely accurate opinion as to whether or not medical services were necessary and the costs associated with those -11-

28 medical services were reasonable. (8 Tr. 47; RE Tab 15). In choosing to settle a claim, an insurer will consider, among other factors, the likelihood of liability, the extent of the probable damages, the costs of defense, the minimizing of inconvenience to the insured, and the risk of an excess judgment. (8 Tr , 31-34, 39 (RE Tab 15); 11 Tr ). In Allstate s mind, one of the key determinants of the settlement value of a bodily injury claim is the extent and location of property damage, as determined by vehicle photographs and repair costs. (12 Tr , 78; see 8 Tr ; 9 Tr ). Some cases are classified as MIST (minor impact, soft tissue injury) based on vehicle photographs and repair costs. (12 Tr ; 13 Tr. 152). The combination of all these factors means that an insurer will often settle a claim even though it believes that the medical expenses were not reasonable or the treatment was not necessary. (8 Tr , 31, 39; RE Tab 15; see 14 Tr , 207). Although Allstate adjusts the property damage portion of a claim separately (13 Tr. 127), the ultimate settlement amount for the bodily injury portion of the claim takes into account all factors bearing on settlement value and includes all elements of damages (12 Tr. 76). Settlement funds are disbursed to the claimant and the claimant s attorney, and are not paid directly to health care providers. (12 Tr. 161, 216). Allstate has long harbored suspicions that A&I s patient treatment does not -12-