COMPLETE SERVICE BUREAU v. SAN DIEGO COUNTY MEDICAL SOC (1953)

This is an appeal from a judgment denying equitable relief in a case involving charges of improper and unlawful acts in connection with a medical practice.

There is no dispute as to the material facts. In 1939, Mr. Parmer and two friends, none of whom was licensed to practice medicine, organized Complete Service Bureau (hereinafter called CSB) under the general nonprofit corporation law now found in section 9200 of the Corporations Code. The articles of incorporation stated that its main purposes were to establish and maintain ‘a fund obtained by means of periodic payment by its members and to be used to defray the cost to such members of medical services, hospital care,’ etc; to supply or procure for members and their families medical, hospital and other services at the lowest cost and ‘on a periodic payment plan’; to act as trustee in carrying out these purposes and to handle funds and property subject to such trust; and to furnish to its members medical and hospital services ‘without profit to any agency.’

After organizing the corporation, the three incorporators met as the trustees of CSB, at which meeting one of the friends resigned and Parmer's secretary was elected in his place. Two days later these three, as trustees, adopted by-laws and ratified the lease of a building and grounds which gave CSB an option to purchase the property. Two of the trustees then entered into a contract with Parmer employing him as manager of CSB for 20 years, his rights being made assignable and inheritable in the event of his death. This contract provided that Parmer was to have as compensation 25% of the monthly dues paid by members of CSB, and 25% of all gross revenue received by SCB from any source; that Parmer need not devote his full time but might engage in any occupation he chose; that he might employ such assistants as he saw fit, to be paid by CSB; that if the contract was terminated for any reason Parmer might enter into business in competition with CSB and have the use of its books and records in that competition; and that Parmer was granted an option to purchase at any time any or all of the real and personal property owned by CSB at its original cost less depreciation. In December, 1940, CSB exercised its option and purchased the leased premises for $31,000.

An arrangement was made with a doctor and his partner to do the medical work at the leased building, and an extensive program was put on to secure subscribers or members through solicitors paid on a commission basis and through newspaper and other advertising which continued up to the time of the trial. This advertising matter emphasized the fact that CSB was selling medical services and not merely a system of medical financing, and did not state the names of the doctors who were to perform the services. These advertisements contained, among other things, such statements as the following: ‘Your money goes for Medical Care and other Health Services exclusively.’ ‘Surprise! a 24-hour Medical-Surgical Hospital Service For Only $2.50 a month.’ ‘You can never have a big medical or surgical bill,’ if you subscribe to CSB. ‘Your Insurance Money will provide your family twice as much service when you are a member of CSB.’ ‘You will be surprised how much medical, surgical and hospital care you can buy for $2.50 a month.’ ‘Individuals may enroll—no group required.’ ‘Your insurance provides dollars, CSB provides service.’ ‘Main purpose of CSB is to keep health up and costs down.’ ‘No age or health limitation to join—you may either be sick or pregnant.’ ‘Medical, surgical and hospital services when you need them.’ ‘Complete Service Bureau provides the following services: general medicine, surgery, obstetrics, gynecology, pediatrics, eye, ear, nose and throat, glasses, X-ray, (etc.)’

Certain changes were made in late 1946. Parmer, his accountant and his head doctor organized a stock corporation, herein called GP, the par value of the stock being $10 per share. Parmer then exercised his option to purchase the land and buildings owned by CSB at a price of $31,000, payable in GP stock. He then agreed to sell the land and buildings to GP for $102,500, payable in its stock, and his head doctor agreed to sell to GP all of the medical equipment previously used in the building, taking GP stock in payment. This deal was completed by CSB deeding the real property direct to GP, and by GP issuing 3317 shares of its stock to CSB, 2833 shares to the head doctor, and 7150 shares to Parmer. (Some extra shares of GP stock were issued to CSB in payment for some fixtures also transferred.) Thereupon Parmer, as president of GP, in effect entered into an oral lease with himself as president of CSB, by the terms of which all the real and personal property acquired by GP through these transactions were leased to CSB on a month to month basis for a rental not exceeding 10% of the gross income of CSB. These transactions were carried through by Parmer, his secretary and his accountant as trustees of CSB and Parmer, his head doctor and his accountant as directors of GP. As a part of this ‘reorganization’ Parmer agreed to reduce his percentage from 25% to 10% of the dues paid by the members, and to waive his right to receive 25% of CSB's revenues from other sources.

Other changes were made after the 1946 reorganization. The contracts issued to the public were then issued in the name of CSB rather than in the name of the head doctor or his group, as had been done prior to that time. The doctors became employees of CSB, being paid a certain part of the fees collected by CSB for various services performed by the doctor in accordance with a unit system. For one class of service the doctors received 50% of the fees charged and collected by CSB, and for most of the services they received various parts of the fees, apparently averaging somewhere near 50%.

After 1946, the subscribers were given agreements reciting that CSB agreed to provide medical, surgical and hospital services according to the provisions set forth in the agreement; that the dues shall be $2.50 per month; that the subscriber is entitled up to 30 days of hospitalization for each illness or injury, and is entitled to ambulance service up to $10 for each illness or injury; and that the subscriber is entitled to various medical services in accordance with the schedule of fees listed. This schedule of fees runs from $1.50 for an office visit, up to $95 for minor or major surgery. The patients were billed by CSB for the services performed by the doctors employed, and the fees were collected by CSB. The solicitation and advertising continued as before, and the doctors were not named in the advertising matter. Originally the subscribers or members had no voting rights but subsequently voting rights were given to part of the members called ‘charter’ members. An annual meeting of members was held every year but the minutes do not disclose the presence of any members other than the officers, and up to the meeting of 1951 the officers of CSB could not recall that any other members had been present. For years notice of the annual meeting was given by posting a notice in Parmer's office, in recent years it has been given by posting a notice on a bulletin board in a room occupied by the telephone operator and, effective March 26, 1951, provision was made for mailing a notice to all subscribers who had been such for seven consecutive years. At the time of the trial Parmer was president of both CSB and GP, his contract gave him control of the business of CSB; his direct income from the corporation was dependent on the amount of ‘dues' collected and not upon the value of his services; he need render only such services as he saw fit and could not be discharged without violating the contract; he was in a position to take any surplus income which CSB might have by adjusting the rent upward; and he also had a contract giving him the option to buy CSB's stock in GP at its cost to CSB. Under the guise of rental GP, of which Parmer was majority stockholder, received over $108,000 in the two and a half years preceding the trial, which would have been impossible except for the proportion of medical fees collected from subscribers but retained by CSB.

This action was brought by CSB and three doctors employed by it against the County Medical Society and some 30 of its members, seeking damages and an injunction restraining the defendants from interfering with plaintiffs' business or discriminating against them. The defendants answered and filed a cross-complaint bringing in GP and Parmer as additional cross-defendants. They sought to enjoin the cross-defendants from carrying on the acts and practices above set forth, including a number of alleged misrepresentations in their advertising and in their contract with the subscribers, many of whom were not members of CSB. Plaintiffs dismissed, with prejudice, all of the equitable issues raised by their complaint and the cause went to trial on the equitable issues raised by the cross-complaint and the answers thereto, leaving the damage issue to be tried later.

The court found the general facts in accordance with the above summary and found, in brief, that the cross-defendants were not illegally practicing medicine or violating any law, and that no injury has been sustained by the cross-complainants. It was also found that the advertising of CSB was not illegal, false or misleading; that no one of the cross-defendant physicians has ever engaged in splitting fees with unlicensed persons or aided anyone in the unlawful practice of medicine; that none of the cross-defendant physicians has committed any act which licensed physicians are forbidden to do nor any act in violation of the ethics of the American Medical Association; that the cross-complainants, through their sponsorship of the California Physicians Service, are engaging in substantially the same policies and practices as those engaged in by the cross-defendants of which complaint is made; and that the cross-defendants have not been proceeded against by the State Board of Medical Examiners or by the attorney general. The evidence being undisputed, most of these findings amount to conclusions of law. Leis v. City and County of San Francisco, 213 Cal. 256, 2 P.2d 26. In an opinion filed, the court explained his reasons for some of these conclusions. He there stated that section 593a of the Civil Code, now 9201 of the Corporations Code, provided an alternative method of organizing a nonprofit corporation for the purpose of rendering personal service, but did not repeal section 9200 or in any way affect or restrict a corporation organized under section 593a which did not qualify under the new section but continued to operate under section 9200; that the court was not called upon to decide whether Parmer's contract was excessive or unconscionable since CSB and the attorney general are not complaining; that any proof that CSB is a one-man profit corporation must be held to be immaterial since ‘the nature of a corporation depends upon the provisions of its charter and not upon what, in fact, the corporation is actually engaged in doing’; that the corporation is not the alter ego of Parmer but merely acts through him as an agent, and the terms of Parmer's management contract is nobody's business except CSB's; that the advertising is done by CSB and therefore is not the advertising of the physicians working for CSB; that CSB is like CPS because both are organized under the same law, and CPS is advertising in the same manner; that while the phrase ‘prepaid medical plan’ is used by CSB in its advertising, and a fully prepaid medical plan is not furnished, the members would not be deceived thereby; and that since CSB is a nonprofit cooperative the commercialization which is naturally incident to the corporate practice of medicine is eliminated, and the danger of dividing the physicians' loyalty is here obviated by the fact that the patients are the real employers of the doctors.

Judgment was entered accordingly and the cross-complainants have appealed. Pending the appeal Parmer died and his wife, as administratrix of his estate, has been substituted in his stead.

The appellants contend that Parmer was unlawfully engaged in the practice of medicine through his domination and control of CSB, and that the entire setup was a sham designed to enable him to do this; that CSB is unlawfully engaged in the practice of medicine by advertising and soliciting for patients in a commercial manner, by allowing a layman to control and dominate a large medical practice, and by splitting fees with a stock corporation which is also controlled by the same layman; that the public is solicited to purchase the medical services of a panel of doctors in one office; that CSB has not complied with 9201 of the Corporations Code and is violating 2008 of the Business and Professions Code which forbids a corporation to practice medicine except where no charge for professional service is made; that it is violating 2380 and 2380.5 of that code which regulate advertising; and that it is violating 2399 of that code which forbids the employment of cappers, steerers and ‘other persons' in procuring patients for a doctor.

The respondents contend that whether there was any violation of the rules of practice specified in the Business and Professions Code, or any illegal practice of medicine or splitting of fees, are questions of fact upon which the findings of the court are conclusive; that CSB is not the alter ego of Parmer, and is not practicing medicine, but is merely organizing prospective patients, retaining doctors and paying all expenses out of funds collected from the members; that CSB is a nonprofit corporation organized under a statute, now 9200 of the Corporations Code, which expressly authorized it to ‘render services' to its members; that CSB is not restricted to the advertising permitted to doctors but is governed only by the standard of commercial advertising applicable to a cooperative group; that the voting members of CSB could oust Parmer from its management at any time if they were willing to risk both a suit for damages and the punishment he could impose as the controlling landlord; that the distinction between commercial enterprises and nonprofit cooperatives was recognized in California Physicians' Service v. Garrison, 28 Cal.2d 790, 172 P.2d 4, 167 A.L.R. 306; that the Washington case of Group Health Cooperative of Puget Sound v. King County Medical Soc., 39 Wash.2d 586, 237 P. 737, strongly supports the principles applied here by the trial court; that this case was started by organized patients in self-defense against a long course of persecution on the part of the ‘medical trust’; and that if ‘doctor control’ is allowed to stifle ‘patient control’ the inevitable result will be the dreaded ‘state medicine.’

A very different situation appears in the cases most strongly relied upon in support of the judgment. In California Physicians' Service v. Garrison, supra, a true cooperative was organized and run for the benefit of the members and not for the benefit of its organizers or of a few doctors employed by the corporation. The doctors are not picked and employed by the corporation and any doctor may participate. It has complied with 9201 of the Corporations Code and holds a certificate required by that section. The control of the corporation is not in the hands of laymen, and it in no way builds up the practice of any one doctor or group of doctors. Among other differences, it furnishes prepaid medical care; its advertising is for the purpose of offering such care to the public, and not to secure patients for the doctors in one office; no doctors are employed by the corporation doing the advertising; and all of the fees for professional services are retained by the doctor who does the work. In the Group Health Cooperative v. King County Medical Soc. case the cooperative was not only organized as a nonprofit corporation but was also registered as a ‘health care service contractor’ under a statute of that state. It was organized by leaders in labor unions, consumer cooperatives and other groups. Prepaid medical and hospital service was furnished. When the collection of any fee from the patient was permitted, it was required that the entire fee be paid to the doctor who renders the service in order to prevent any lay person from profiting from such professional service. The court there pointed out that the objectionable features, such as extravagant promises by salesmen, profit to a third party, tendency to make money out of contracts, and control by laymen, which had earlier applied, had been eliminated by compliance with the state statutes.

The desirability of extending medical services to persons in the lower income groups through prepayment plans, and on a share the risk basis has been, and is, fully recognized. The question here is whether existing laws have been complied with and whether the operations of the respondents come within established rules and regulations, and are in accordance with announced public policy. In California Physicians' Service, supra, the court pointed out the CPS does not promise beneficiary members that it will provide medical care but the services are offered personally by the professional members, and said that by the enactment of what is now 9201 of the Corporations Code ‘the state's social policy in regard to the corporate practice of medicine, to the limited extent specified, has been determined and the courts are bound thereby.’ [28 Cal.2d 790, 172 P.2d 11.]

Section 9200 of the Corporations Code permits the formation of a nonprofit corporation for religious, charitable and similar purposes, and also for ‘rendering services.’ But it further provides that such a corporation shall be ‘subject to laws and regulations' applicable to that particular line of activity. One of the laws applicable to the line of activity here involved is now found in section 9201 of that code, originally adopted in 1941, which permits the formation of such a corporation, under that part of the code, for the purpose of defraying the cost of professional services of licentiates under the Business and Professions Code or of rendering any such services. But it further provides that such a corporation may not engage directly or indirectly in carrying out such purposes unless certain definite requirements are met. CSB was organized under the first of these sections but has not complied with the second. It has not carried out the purposes expressed in its articles of incorporation, nor complied with the laws and regulations applicable to its line of activity as required by the statute under which it was organized. The provisions now found in 9201 of the Corporations Code are not an alternative method of organizing such a service corporation, but those provisions also apply to any corporation organized under what is now 9200, with the purpose of paying the cost of professional services of certain licentiates.

CSB has never been authorized by any statute to render the sort of service it claims to have rendered, and many of its activities are forbidden by existing statutes. Its extensive advertising is illegal and misleading and, in actuality if not in form, its operations involved the splitting of fees for professional services. Some steps in this involved scheme appear innocent in themselves, giving a basis for plausible argument as to the right of groups of people to organize in order to protect themselves from some of the effects of serious illness or injury. Some are well designed to obscure what is actually taking place. But when the effect of the various steps are viewed in relation to each other, and as a whole, the result is one which is not permitted under existing laws and rules, and which is against public policy. Instead of this being a voluntary organization of individuals and groups for the purpose of providing medical care and hospitalization for themselves on a risk sharing prepayment basis, which is permitted by our statute, this corporation was organized by a few laymen, one of whom immediately took and always retained what is actually a complete control, and operations were begun and have been carried through under an arrangement with a few doctors in one office in a manner which contravenes the purpose and intent of many statutes designed to regulate and control that line of activity. The net result is that as many as 15 salesmen were employed to ring doorbells and solicit patients for the doctors in one office; and extensive advertising commercial in its nature and often misleading, was carried on for the same purpose. While a small amount of prepaid hospital service was furnished no prepaid medical service was furnished, each patient secured was charged the fee fixed by the corporation for each such service rendered, and the majority of the patients were not made members of the so-called cooperative. Those who were members were given no reasonable notice of meetings until about the time of the trial, and apparently none of them even attended any such meetings. The fees for professional services were not fixed by the doctors but were fixed by the corporation, and the doctor performing the services received only a part of such fees. A large part of the fees paid by the patients, whether ostensible members of the corporation or not, went to another private corporation controlled by the same layman who controlled CSB, under the guise of rent, which even included rent for the use of the medical appliances and equipment used by the doctors. Although Parmer was free to do as much or as little work as he chose, he received 10% of all dues paid by members and subscribers of all kinds, and in addition, through his stock in GP, he received the major portion of an exorbitant rent. There was no valid reason for CSB to pay any rent at all. As soon as it had paid for the building it purchased, it was compelled to sell it to Parmer for less than one-third of its value. It then rented it back, not at its rental value but at a percentage share of the business done. Parmer and Gp then received a rental varying in accordance with the amount of fees for professional services collected by CSB from the patients, and in reality shared in those fees.

In our opinion the controlling findings and conclusions of law, upon which the judgment is based, are not supported by the evidence. If the undisputed facts shown by the evidence do not disclose a failure to comply with existing laws, and do not constitute a plain evasion of those laws and the existing regulations, it appears beyond question that the existing laws designed to regulate and control the practice of medicine, and other professions, should either be repealed or greatly changed.

While not raised by the respondents, the appellants have raised the question as to whether or not they are entitled to injunctive relief to protect their rights as licensed physicians. This right was partially recognized in this state in People ex rel. Chiropractic League of California v. Steele, 4 Cal.App.2d 206, 40 P.2d 959, 41 P.2d 946. The acts complained of might well be held to be ‘unfair competition’, and to be injurious to the profession in general which must comply with existing statutes. The right has been recognized in many out of state cases, only a few of which need be cited. Taylor v. New System Prosthetic Dental Lab., 29 Ohio N.P., N.S., 451; Judd v. City Trust & Savings Bank, 133 Ohio St. 81, 12 N.E.2d 288; Smith v. Illinois Adjustment Finance Co., 326 Ill. App. 654, 63 N.E.2d 264; Childs v. Smeltzer, 315 Pa. 9, 171 A. 883; Johnson v. Purcell, 225 Ia. 1265, 282 N. W. 741; Neill v. Gimbel Bros., Inc., 330 Pa. 213, 199 A. 178; McMurdo v. Getter, 298 Mass. 363, 10 N.E.2d 139; State v. Boren, 36 Wash.2d 522, 219 P.2d 566, 20 A.L.R.2d 798. Moreover, injunctive, under the circumstances here appearing, is provided for in section 2436, which is added to the Business and Professions Code by Chapter 269 of the Statutes of 1953. This being an injunctive proceeding this new statute, being in effect when this decision is rendered, should be applied, Tulare Irrigation District v. Lindsay-Strathmore Irrigation District, 3 Cal.2d 489, 45 P.2d 972; Dr. Miles California Company v. Sontag Chain Stores Company, 8 Cal.2d 178, 64 P.2d 726, and would be important in any further proceedings in the trial court.

At the hearing of this cause a motion by the respondents to dismiss the appeal, on the ground that all questions have become moot because of the death of Parmer, was also submitted. The will of Parmer, in which he provides for the continuance of some of these operations with his wife as the beneficiary, is attached to the motion. Substantial issues still remain and the request for a dismissal of the appeal should not be granted.

The motion to dismiss is denied, and the judgment is reversed.

BARNARD, Presiding Justice.

GRIFFIN and MUSSELL, JJ., concur.