Arizona Court of Appeals Division One Panel Holds that Reliance by a Third Party for Apparent Agency Purposes Must be Established by Principal's Conduct, Not Third Party's Beliefs.

Loretta Henry sued Flagstaff Medical Center for the negligence of her surgeon in removing her gall bladder. Mrs. Henry claimed that FMC was vicariously liable for the doctor’s conduct under an apparent agency relationship between the hospital and the doctor. The trial court determined that this was a question of fact for the jury, and the jury found that the doctor was the apparent agent of the hospital. However, the trial court granted FMC a new trial based on erroneous jury instructions, and both parties appealed.

The Court of Appeals held that FMC was entitled to judgment as a matter of law because Mrs. Henry did not satisfy the legal elements of apparent agency. Under Arizona law, apparent agency is established by demonstrating (1) that the principal, through its conduct, represents another to be its agent; (2) the third party relies on these representations; and (3) the third party’s reliance is reasonable. In determining whether Mrs. Henry satisfied the legal elements of apparent agency, the Court of Appeals rejected California’s less demanding test that requires only that a patient establish that she sought treatment at a hospital to establish apparent agency. Two members of the Court also concluded that apparent agency could not be satisfied by the principal’s intentional, inadvertent or negligent acts, relying on Arizona Supreme Court cases that did not include “negligent” language. See, e.g., Miller v. Mason-McDuffie Co. of Southern Calif., 153 Ariz. 585, 739 P.2d 806 (1987). In so concluding, the majority rejected Arizona appellate court decisions suggesting that a principal’s negligent offering of the agent may be considered in determining the existence of an apparent agency relationship. See, e.g,, Reed v. Gershweir, 160 Ariz. 203, 772 P.2d 26 (App. 1989).

Though the Court of Appeals found that FMC’s conduct presented the doctor as its agent based on the forms Mrs. Henry signed that specifically disclaimed employment relationships with physicians other than her surgeon, the Court of Appeals determined that Mrs. Henry did not rely on FMC’s conduct. Instead, Mrs. Henry thought the doctor was the hospital’s agent simply because he was a surgeon at the hospital. The Court reversed and remanded to the trial court with instructions to grant FMC judgment as a matter of law.

Judge Ehrlich authored the Court’s decision, in which Presiding Judge Portley concurred and Judge Barker concurred specially. Judge Barker found the majority’s decision to discuss prong one of the apparent agency test unnecessary in light of the Court’s unanimous decision that Mrs. Henry failed to establish reliance and therefore did not satisfy prong two and pointed out that its discussion of prong one was dicta. Judge Barker noted that resolution of prong one was not straightforward in light of the apparent conflict between the Arizona Supreme Court and Arizona appellate courts.