Summer 2005

In This Issue

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Message from the General Counsel

I take as my inspiration for this newsletter’s message one of the most quotable personalities of the 20th century. Yes, Yogi Berra.

Yogi once said, “You can observe a lot just by watching.” Within the next two weeks, I will complete my schedule of visits to all 15 institutions that make up The University of Texas System. Personally, I have found the visits extremely rewarding—getting to know the people and personalities that bring excellence to higher education in Texas. I have observed the dedication at our campuses and have come back to Austin each time invigorated to do my small part to help in that mission. By observing daily life on each of our campuses, I am now better equipped to understand ways in which we at OGC can enhance interaction with the campuses. The fruits of these observations will be refinements in processes and procedures at OGC. We have already rolled out a few of these changes and we will continue to announce them to our clients as we move forward. We welcome your continued input as we try to make every interaction between OGC and the campuses a value-added endeavor.

Yogi also said, “If you don’t know where you’re going, you’ll wind up somewhere else.” When asked to repeat that he said, “You’ve got to be very careful if you don’t know where you’re going because you might not get there.” If I may be so bold, I think what Yogi meant was you better figure out what you’re going to do before you set out to do it. That’s why I’m emphasizing the training that OGC can provide to our clients on a regular basis. With 26 attorneys specializing in different areas of the law and interacting with all 15 institutions and System Administration, we daily collect a great reservoir of knowledge. We are remiss in our duties if we use that knowledge only for the specific matter at hand and neglect to dispense it broadly throughout the System. We are in the course of developing new training and have available attorneys who can train in almost any area. For example, this fall Dana Hollingsworth is rolling out a new contract training module. We will continue to push this training out to our clients, but if you have specific ideas on areas where you think training would be beneficial in helping you prevent problems before they arise, please let me know.

Well, I will close for now before I have to use a final Yogi quote – “I didn’t really say everything I said.”

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5th Circuit Opinion Impacts Campus Rules on the Anonymous Distribution of Literature

by Leo Barnes (General Law Section)

On May 27, 2005, the 5th Circuit Court of Appeals issued its opinion in Justice For All v. Faulkner, 410 F.3d 760 (5th Cir. 2005) holding that UT Austin's complete ban on the anonymous distribution of literature was unconstitutional. On appeal, the court considered two rules, Regents’ Rules and Regulations, Rule 40503 (old format - Part One, Chapter VI, Section 12) and UT Austin’s Institutional Rule Section 13-404 carefully limiting the scope of its opinion to student expression with regard to the distribution of literature--i.e., the physical handing out of leaflets and other materials.

While First Amendment protection had been traditionally extended to anonymous speech, the court recognized that the important concern of preserving a university campus for its intended purpose may mean some loss of anonymity by students. Nevertheless, in a classic balancing test, the court concluded that the total loss of anonymity as required under the challenged rules went too far. Preserving the campus forum did not require that every recipient of a leaflet know the student distributor’s identity or group affiliation. Instead, only “certain University officials need to know whether a given leafleter is or is not affiliated with the University, such that, if he is not, he (and his leaflets) can be removed.”

Allowing for alternative polices, the court stated that “regardless of the precise method or methods employed, however, the University must offer student leafleters some choice as to the means of identification that does not involve disclosing names or organizational affiliation to all who receive the message.”

In response to this ruling, the Board of Regents rescinded Rule 40503 of the Regents’ Rules and Regulations at its August meeting.

The Bottom Line: In light of the Justice For All v. Faulkner opinion and the rescission of Regents' Rules and Regulations, Rule 40503, System institutions must revise institutional rules prohibiting students from the anonymous distribution of literature.

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Removal of a Suit to Federal Court May Waive State's Immunity

by Leo Barnes (General Law Section)

On May 19, 2005, the U.S. Fifth Circuit Court of Appeals issued an opinion in Meyers v. State of Texas holding that a state waives its immunity from suit by removing a case from state court to federal district court. Meyers v. State of Texas, 410 F.3d 236 (5th Cir. 2005). In Meyers, the plaintiff’s filed an American with Disabilities Act (ADA) class action in state court against the State of Texas. The suit centered on the state’s scheme for providing persons with disabilities accessible parking spaces.

Consistent with long practice in such cases, Texas removed the case to federal court. The federal district court, however, remanded the case to state court based on a lack of federal jurisdiction. Returning to state court, Texas filed a motion to dismiss which was denied. An appeal of this denial was pending before the state court of appeals when based on ruling in another federal case, the case was again removed to federal district court. This time the federal district court granted Texas’ motion and dismissed the case on immunity grounds. Plaintiff’s appealed the dismissal. Reversing the lower court, the 5th Circuit determined that the state’s removal of the case to federal court constituted a voluntary and knowing waiver of the state’s immunity from suit.

Relying heavily on Lapides v. Bd. of Regents, 535 U.S.613, 122 S.Ct. 1640 (2002) as well as other high court decisions addressing state immunity, the Meyers' court reasoned that the principal of waiver of immunity by removal should apply generally to any suit which a state removes to federal court. The court noted that allowing states to take the inconsistent position of invoking federal jurisdiction and then claiming immunity from it in the same case would give states an unfair litigation advantage.

Obviously, this case has serious implications for UT System when it or one of its institutions is sued in state court based on a federal claim. Curiously though, the Meyers' panel did not hold that the state was without any immunity under the facts of the case. A state’s sovereign immunity is generally conceived of as having two components, immunity from suit and immunity from liability. In Meyers, the court concluded that while immunity from suit had been waived, it did not foreclose the district court’s consideration on remand of a claim that Texas’ immunity from liability had been preserved. The Attorney General’s Office has filed a motion for rehearing en banc.

The Bottom Line: The full impact of a state agency removing a case to federal court is currently uncertain. Due to the possible loss of immunity, state agency litigants should review removal with litigation counsel to determine if removal is advantageous and how best to assert sovereign immunity.

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The Erosion of the Sovereign Immunity Defense in Bankruptcy Proceedings

by Traci Cotton (Claims & Bankruptcy Section)

Generally, UT System institutions can be sued in any bankruptcy court in any state through what is termed an “adversarial proceeding.” The majority of these suits seek the discharge of student loan debt owed to the institution or the return of certain payments received by the institution just prior to the filing of the bankruptcy. Until recently, 11th Amendment immunity has provided a convenient defense to these suits.

Student loans are extremely difficult to discharge in bankruptcy. The student debtor must file an adversarial proceeding against the lending institution and then show undue hardship to prevail. Over the last several years, we have successfully argued that sovereign immunity prevented suit against our institutions in federal court, and these cases were dismissed before trial on the merits. However, the opinion in Tennessee Student Assistance Corporation v. Hood, decided by the U.S. Supreme Court in 2004, brought this practice to a screeching halt. The court held that immunity did not protect the states in this situation, and the states could be required to appear and defend against these undue hardship proceedings in federal court.

Preferential transfers generally occur when an institution receives a payment from the bankrupt within 90 days of the filing of the bankruptcy. The bankruptcy trustee or the debtor may file an adversarial proceeding against the institution seeking return of these payments to the bankruptcy estate for more equitable distribution among all creditors. Again, in the past, we had successfully defended these actions on the grounds of sovereign immunity, and dismissals were obtained. The defense is currently at risk, as the U.S. Supreme Court, in Central Virginia Community College , et al. v Bernard Katz, has agreed to review the validity of the immunity defense in these preferential transfer actions.

As the immunity defense is eroded, the institutions and OGC staff must prepare to litigate the merits of these types of cases. The institutions may also incur additional costs associated with travel and the retention of local counsel. But all is not lost. The recognized standard for determining dischargeability of student loans is quite difficult for the debtor to meet, and alternate defenses are available in preferential transfer matters.

The Bottom Line: Refer any summons you receive in a bankruptcy case or notice that a judgment has been entered against your institution in an adversarial proceeding to the Claims & Bankruptcy Section as soon as possible.

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Merck v. Integra--A Broad Construction of the Drug Research Exemption

by BethLynn Maxwell (Intellectual Property Section)

On June 13, 2005, the U.S. Supreme Court issued a much-anticipated decision that allows drug researchers to use compounds or inventions patented by others in research that is reasonably related to creating data that may be submitted to the Food and Drug Administration (FDA) in support of an Investigational New Drug (IND) or New Drug Application (NDA). Merck KGaA v. Integra Lifesciences I Ltd., U.S. No. 03-1237, June 13, 2005.

The general rule is that one may not make, use, sell or offer to sell any patented invention during the term of the patent without permission from the patent owner. In 1984, Congress established an exception to this general rule that allowed drug researchers to make, use, sell, offer to sell, and import patented compounds, owned by someone else, if done solely for the purpose of creating information or data that may be submitted to the FDA (35 U.S.C. 271 (e)(1)).

Integra Lifesciences owns several patents on useful peptide sequences. Merck KGaA (not affiliated with the pharmaceutical giant Merck & Co., Inc.) sponsored research at Scripps Institute using Integra Lifesciences’ peptides without permission and Integra Lifesciences sued Merck KGaA for patent infringement. Merck KGaA maintained that the use of the Integra Lifesciences’ peptides in experiments was exempt from patent infringement under 271 (e)(1). The District Court rejected Merck KGaA’s defense and awarded Integra Lifesciences $14 million in damages. On appeal, the Federal Circuit ruled that the 271(e)(1) exemption only applied to clinical testing to generate data to be supplied to the FDA and therefore Merck KGaA’s preclinical research did not fall under the 271(e)(1) exemption.

The Supreme Court overturned the Federal Circuit’s decision and held that the 271 (e)(1) exception extends to all uses – both clinical and preclinical – of the patented invention that are “reasonably related” to gathering any information that may be used for FDA submission. The exception protects: (a) use of patented compounds in preclinical studies so long as the tested compound could plausibly be the subject of an FDA submission; (b) use of patented compounds in experiments that are not ultimately submitted to the FDA, so long as it is plausible that the data generated from the experiments might have been included in an IND or NDA filing with the FDA; and (c) in vitro (test tube) and in vivo (animal) preclinical testing of patented compounds that might produce the type of information relevant to an FDA submission.

The court explicitly declined to address whether 271(e)(1) exempts from infringement the use of “research tools” in the development of information used in an FDA submission. Research tools are compounds and methods used to identify candidate drugs, but are distinct from the actual compound under investigation.

The Bottom Line: Will courts further extend the 271(e)(1) exemption to include "research tools" since most research tools used in drug research may be used to generate information that might be included in an FDA submission?

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Tortious Peer Review: The Next Wave of Medical Negligence Claims?

by Jan Ferguson (Health Law Section)

They say that necessity is the mother of invention. Tort reform has necessitated that plaintiffs' attorneys find new ways to maintain the lifestyles to which they have become accustomed. Forty percent of $366,000,000 is $146,400,000. $366 million is what a jury in a federal district court in Dallas, Texas awarded to Dr. Lawrence Poliner after his privileges were suspended by Presbyterian Hospital of Dallas (PHD) pursuant to peer review action. The plaintiff, a cardiologist alleged that the hospital and members of its peer review committee committed the following torts against him when the hospital suspended his privileges: failure to comply with its bylaws, defamation (business disparagement), interference with contractual relations, and intentional infliction of emotional distress. While the amount of the jury’s award will likely not stand up on appeal (it appears the jury did a fair amount of double counting), it has certainly gotten peoples’ attention.

Procedural Rights under the Bylaws
PHD filed a motion for summary judgment asserting that Texas law does not recognize a cause of action for suspension of hospital privileges. In denying the motion for summary judgment, the court drew a distinction between medical staff bylaws and hospital bylaws. The court ruled that procedural rights prescribed under hospital bylaws may constitute contractual rights between the physician and the adopting hospital.

Peer Review Immunity
All defendants filed a motion for summary judgment asserting that they were immune from liability based upon The Health Care Quality Improvement Act (HCQIA) and the Texas Peer Review Immunity Statutes. Generally, HCQIA provides that if a peer review action of a professional review committee meets certain standards, then the peer review committee and any person acting as a member of the committee shall not be liable in damages under federal or state law.

In order for immunity to apply under HCQIA, the peer review action must be taken in furtherance of quality of health care, after a reasonable effort has been made to ascertain the facts of the matter, after adequate notice and hearing procedures have been afforded to the affected physician, and in the reasonable belief that the action was warranted by the facts. The court examined the record to determine whether the plaintiff satisfied his burden of producing evidence that would allow a jury to conclude that the peer review committee failed to meet the standards of HCQIA. In its rulings, the court made a distinction between the three physicians who summarily restricted Dr. Poliner’s privileges (Drs. Knochel, Harper and Levin, all cardiologists) and the other members of the peer review committee who subsequently participated in the peer review actions.

Reasonable Belief that the Action Furthered Quality Health Care – The plaintiff argued that at least three members of the peer review committee (Drs. Knochel, Harper and Levin) did not act in the furtherance of health care, but out of malice. The court decided that there was a fact issue as to Drs. Knochel, Harper and Levin, but not the other seven. The distinction, it seems, was the fact that Dr. Knochel, Harper and Levin were cardiologists and more personally invested in Dr. Poliner’s practice and made the decision to summarily restrict Dr. Poliner’s privileges in the catheterization lab prior to actually learning of some of the health care complaints made against Dr. Poliner. The remaining physician defendants were sued in their capacity as members of the peer review committee who later approved the peer review action pursuant to the hospital bylaws.

Reasonable Effort to Obtain the Facts – The plaintiff argued that the reviews conducted by the committee were biased, incomplete and filled with errors. Again, the court denied the motion for summary judgment as to Drs. Knochel, Harper and Levin but granted it as to the remaining peer review committee members.

Adequate Notice and Hearing – The plaintiff argued that he was not given sufficient time to consider the summary restriction or consult an attorney. The court acknowledged that while HCQIA requires adequate notice and hearing, it does not preclude the immediate suspension or restriction of privileges subject to subsequent notice and hearing in cases where inaction may result in imminent danger to patients. The court denied the motion as to Drs. Knochel, Harper and Levin finding a fact issue as to whether the summary restriction of Dr. Poliner’s privileges was based upon an imminent danger to his patients.

Texas Peer Review Immunity Statutes and Malice
Pursuant to the Texas Occupations Code, the following persons are immune from civil liability: persons who, in good faith, report or furnish information to a medical peer review committee and members of a medical peer review committee provided they act without malice and in the reasonable belief that their action is warranted by the facts presented. In order for the plaintiff to defeat this qualified immunity, the plaintiff must provide evidence that the defendants acted with actual malice. The court defined actual malice as “the making of a statement with knowledge that it is false, or with reckless disregard of whether it is true.” The court stated that while evidence of negligent investigation is insufficient to show actual malice, inadequate investigation, coupled with the presence of ulterior motives may be sufficient to raise a fact issue as to actual malice. The court determined that there was evidence that Drs. Knochel, Harper and Levin and the hospital violated their own bylaws and HCQIA in summarily restricting Dr. Poliner’s privileges. Further, the court acknowledged that the plaintiff presented some evidence that some of the defendants harbored animosity against him. Based upon these findings, the court denied the motion for summary judgment as to Drs. Knochel, Harper and Levin and the hospital. The court granted the motion in favor of the remaining defendants.

At trial, the jury found that the defendants were not entitled to the immunities provided by HCQIA and the Texas Peer Review Immunity Statutes. The jury awarded $30 million in actual and $110 million in exemplary damages solely on the finding that the hospital failed to comply with its bylaws.

The Bottom Line: Tortious peer review is a budding cause of action in Texas. Hospitals should ensure its bylaws are HCQIA compliant and follow them precisely. Peer review activity must be fact-based and free from any suggestion of economic motivation or personal animosity (consider conflicts of interest screening before the peer review begins) and all participants in the peer review process must be trained in the procedural requirements contained in the bylaws and the need for absolute confidentiality of the investigation process.

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New TRS Retirement Eligibility and Benefits Rules

by Cecilia Gonzalez (Business Law Section)

Several bills enacted during the 79th Legislative Regular Session affect TRS retirement eligibility and benefits. This article provides a brief synopsis of the impact of three bills on UT System employees, SB 1691 (also known as the TRS Omnibus Bill), SB 1863, and HB 3169.

The changes affecting retirement eligibility and benefits for current UT System employees that are members of TRS are: (1) the expiration of the 90-day waiting period for membership in TRS; (2) the calculation of final average salary at retirement; and (3) the repeal of Section 823.405, Texas Government Code.

Expiration of the 90-Day Waiting period for Membership in TRS
You may recall that the 78th Legislative Session enacted a 90-day waiting period for membership in the TRS. With few exceptions, UT System employees participate in either TRS or the Optional Retirement Program (ORP). Because participation in ORP is an alternative to participation in TRS, ORP eligible employees were also affected by the 90-day waiting period. This law was not extended by the 79th Legislature; therefore, the 90-day waiting period will expire on September 1, 2005. An employee hired on or after September 1, 2005, will be a new member of TRS on his/her first day of employment and, if hired into an ORP-eligible position, will have 90 days from the date of hire to elect to participate in ORP or remain in TRS. Employees electing ORP may apply for a refund of TRS money by completing TRS Form 29 (Application for Refund). In addition, all employees who have not completed their 90-day waiting period become TRS members and will begin contributing to TRS on September 1, 2005. If the employee was hired into an ORP-eligible position, the election period for participation in ORP also begins on that date. UT System institution benefits and payroll personnel will need to have systems in place to effect these changes.

Calculation of Final Average Salary at Retirement
One of the most significant changes for current TRS members in SB 1691 is the new formula for calculation of final average salary at retirement (FASR). Now FASR is determined by the five highest salaries, whether or not consecutive, unless the TRS member is exempt under the grandfather provision. The grandfather provision exempts a current TRS member who meets any one of the following criteria on or before August 31, 2005: (1) is at least 50 years old; (2) their age and years of service equal at least 70 (“Rule of 70”); or (3) has at least 25 years of service credit. Only service actually credited at TRS on or before August 31, 2005, determines eligibility for grandfathering. If the current TRS member is grandfathered, FASR will continue to be determined by the three highest salaries, whether or not consecutive.

Repeal of Section 823.405, Texas Government Code
Another significant change for UT System employees in TRS is the repeal of Section 823.405, Texas Government Code in SB 1691 and HB 3169. Currently, Section 823.405 allows TRS members with at least seven years of creditable service to purchase up to three more years of equivalent membership service credit. This additional three years of service credit is referred to as “air time” in TRS parlance. A TRS member who has seven or more years of creditable service has until December 31, 2005, to purchase or enter into an installment agreement to purchase the additional service credit. If the installment agreement option is utilized, so long as the agreement is not terminated before all payments are made, the TRS member will not be affected by the repeal of Section 823.405. UT System institution benefits personnel may want to notify eligible employees of this expiring provision as soon as possible.

SB 1691 also adopts various new rules for retirement eligibility for employees who establish TRS membership on or after September 1, 2006. These new rules will not affect current TRS members if TRS membership status is maintained. The changes are not discussed in this article, but you may get additional information on these changes by referring to the TRS Changes Table.

Additional information and clarification of the changes brought about by SB 1691, SB 1863, and HB 3169, among other bills affecting TRS is accessible on the TRS website at

The Bottom Line: TRS Members and administration should be aware of three significant changes to TRS eligibility and benefits rules.

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Resources from this e-Newsletter

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