On July, 23, 2018 a three-judge panel in the Ninth Circuit issued a decision in Obidi v. Wal-Mart Stores, Inc. (Case No. 17-55539), holding that a class-action suit against Wal-Mart and FirstSight Vision Services, Inc., a vision-only health care plan, can proceed on the theory that the defendants violated various California consumer protection laws by advertising “Independent Doctors of Optometry” that were, in fact, controlled by Wal-Mart and FirstSight. Though the decision is a narrow one (addressing only whether the plaintiffs have standing to sue), its reasoning could be relevant for how retail clinics and other corporate entities structure their relationships with physicians and other licensees to comply with state corporate practice of medicine (“CPOM”) rules.

Background of the Case

Wal-Mart stores across the country include on-site “Vision Centers” that offer basic eye exams, contacts, and prescription glasses. In California, Wal-Mart is registered as an optician and leases space in its stores to FirstSight, a licensed vision health plan. FirstSight, in turn, subleases this space to individual optometrists who charge patients directly. Wal-Mart and FirstSight advertised that the Vision Centers were staffed by “Independent Doctors of Optometry.” A former patient filed a putative class-action suit alleging Wal-Mart and FirstSight violated California’s Unfair Competition Law because (a) the defendants falsely advertised that the optometrists were “independent” and (b) the business arrangement between Wal-Mart and FirstSight was an unlawful relationship between an optometrist and an eyeglass retailer.

The plaintiff alleged that she would not have purchased an eye exam if she had known that the optometrist was not “independent.” The Ninth Circuit considered the key question to be whether the plaintiff had “adequately alleged that her optometrist lacked independence.” The court answered in the affirmative, relying on various provisions in the leasing arrangement that, as a whole, indicated that “Wal-Mart and FirstSight were able to exercise undue influence over all their resident optometrists.” Evidence of such “undue” influence included Wal-Mart “setting rent as a percentage of revenue, prescribing minimum operating hours, and permitting the lessor to terminate leases at will.” The court also noted that there was anecdotal evidence that optometrists at other Wal-Mart locations were constrained in the rates they could charge and the therapies they could recommend.

However, the Ninth Circuit affirmed the dismissal of the claims based on violations of California laws that prohibited, among other things, retailers from directly or indirectly employing or maintaining an optometrist in stores that sell eyewear. The court reasoned that the plaintiff “fail[ed] to establish how her injury was fairly traceable to the purported statutory violations.”

Implications for Corporate Practice of Medicine

It is important to emphasize that the decision in Wal-Mart only addressed the threshold issue of whether the plaintiff had standing to sue. However, the Ninth Circuit’s reasoning could resonate beyond California consumer protection laws. Many states have CPOM rules that, with certain exceptions, prohibit a business corporation from employing physicians, dentists, or other licensed professionals. This bar on employment frequently pushes corporate entities such as Wal-Mart into complex leasing or practice management arrangements with licensees (“Management Arrangements”) that give the arrangements many of the features of employment (e.g., control of practice revenue and profits, termination rights) without entering into a prohibited employment relationship.

State CPOM doctrines vary, but whether a Management Arrangement complies with CPOM rules will frequently turn on the same issue the Ninth Circuit addressed in Wal-Mart: whether the licensee in question lacks independence to exercise clinical judgment. It is significant that the Ninth Circuit’s assessment of “independence” turned on aspects of Wal-Mart’s Management Arrangement that did not directly bear on the licensees’ clinical practices—specifically, Wal-Mart’s (i) control over operating hours and pricing, (ii) revenue sharing with optometrists, and (iii) ability to terminate the relationship at will.

Control over such “non-clinical” aspects of a practice is common in Management Arrangements, but is not universally considered relevant to the question of whether a physician is exercising independent clinical judgment for the purposes of CPOM compliance. Even if Wal-Mart goes no further, it is a reminder that courts can take a broad view of what “independence” means in the context of a licensee engaging in his or her profession.