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McLaren Regional Medical Center v. CompleteRX, Ltd.

United States District Court, E.D. Michigan, Southern Division

July 18, 2017

MCLAREN REGIONAL MEDICAL CENTER, Plaintiff,
v.
COMPLETERX, LTD., Defendant.

          OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR PARTIAL DISMISSAL

          DAVID M. LAWSON United States District Judge.

         Plaintiff McLaren Regional Medical Center outsourced its pharmacy services at its hospital located in Flint, Michigan to defendant CompleteRX, Ltd., a Texas company. The parties entered into a detailed management agreement in which they agreed that CompleteRX would manage the on-site pharmacy at the plaintiff's hospital and McLaren would pay certain charges and reimburse the defendant for certain costs. McLaren believed that CompleteRX overcharged for its services and then balked when McLaren asked to audit the books. CompleteRX then filed what might be characterized as a preemptive lawsuit against McLaren in a Texas state court. McLaren then filed a multi-count complaint in this Court. CompleteRX countered with a motion for partial dismissal and a motion to stay this case pending the outcome of the Texas litigation.

         The Court heard oral argument on both motions on April 26, 2017 and denied the motion to stay from the bench. Because neither party filed a copy of the management agreement, the Court ordered them to file supplemental briefs that included that document. Those additional briefs now have been filed. The main thrust of McLaren's disagreement with CompleteRX is that it breached the contract by charging too much (and also by suing in Texas in violation of the forum selection clause). The amended complaint also plausibly pleads a conversion claim. However, the counts of the amended complaint based on breach of an implied covenant of good faith, breach of fiduciary duty, and fraud must be dismissed.

         I.

         The management agreement was signed on April 1, 2012 and amended at least once. Under sections 2.11 and 10.21 of the agreement, CompleteRX acknowledged that its performance under the agreement would require it to have access to confidential information about the hospital and its patients, and CompleteRX agreed to keep all of that information confidential, not to disclose it except as required upon proper authorization, to use the information only for the purpose of performing its duties under the agreement, and, upon a demand by the hospital, to return or destroy any copies of such information held by it.

         Under section 2.7 of the agreement, CompleteRX agreed to purchase all drugs prescribed or to be furnished to patients of the hospital from McLaren's “GPO vendors and programs, ” so that the hospital “would receive GPO credit and all GPO rebates for drug purchases.” The hospital agreed to reimburse CompleteRX for the purchase price of all “Specialty Drugs, ” which were listed in section 1.5 of the agreement, plus fees according to a schedule set forth in Exhibit A of the agreement. CompleteRX was supposed to bill McLaren semi-monthly for any such fees. Proof of the amounts and types of such drugs dispensed was initially to be shown by “utilization reports, ” prepared by McLaren, but under an amendment to the agreement, it was later to be proved by drug wholesaler invoices and purchase reports.

         For procuring and dispensing all other drugs not listed as “Specialty Drugs, ” and for all other products such as medical devices, the parties agreed that CompleteRX would be paid according to a “Pre-Agreed Cost Formula” set forth in Exhibit A to the agreement. That formula involved quantities of patients, “patient days, ” and “adjusted patient days, ” and called for payment based on a rate per adjusted patient day multiplied by the number of adjusted patient days in the billing period.

         Section 10.9 of the agreement provided that it “only [may] be amended by the mutual written consent of the parties.” Am. Compl. ¶ 12. The agreement was altered three times by written amendments executed by the parties, but each of those amendments provided that all terms of the agreement not expressly modified remained in force. Id. ¶ 13. It does not appear that any of the amended terms are in dispute here.

         Under sections 10.4 and 10.5 of the agreement, CompleteRX was obligated to permit McLaren to review and audit its records of drug purchases and billings to verify that they were done according to the agreement. In March 2016, McLaren conducted an audit with the assistance of an outside accounting contractor that revealed “substantial overcharges” spanning from April 2012 through mid-2016. Among other things, the audit revealed that CompleteRX had inflated charges by (1) charging for drugs dispensed as “Specialty Drugs” that were not listed in section 1.5 of the agreement; (2) charging for medical devices provided as “Specialty Drugs” that were not covered by section 1.5; and (3) changing the billing date for drugs that were “Specialty Drugs” to charge for them when they were purchased, rather than when they were dispensed to patients.

         McLaren also alleges that some drugs or medical devices were sold or transferred from the hospital's pharmacy to other medical facilities. According to McLaren, CompleteRX should have recorded any payments received from those sales or transfers as a credit against amounts to be billed to McLaren, but no such credits were applied.

         The hospital also alleges that, during the term of the agreement, responsibility for dispensing certain drugs and devices was transferred from the pharmacy to other departments in the hospital, but CompleteRX “continued to charge the full ‘Pre-Agreed Cost Formula'” for those items, “instead of adjusting the consideration payable, ” with the result that it was paid for doing or supplying things that it no longer handled. Finally, the hospital also contends that CompleteRX billed it for certain “Department Charges” that were not contemplated or allowed under any provision of the agreement.

         The hospital asserts that, after the 2016 audit, CompleteRX “admitted overcharging McLaren [by] $169, 128.17” in a letter dated May 11, 2016. However, CompleteRX attempted to create a setoff against the overcharges by conjuring undercharges in certain invoices from April 2012 through December 2014. CompleteRX was able to generate a payable offset that exceeded its admitted overcharges disclosed by the audit. To support its position that the hospital had underpaid, CompleteRX allegedly “recategorized” drugs that it previously had billed under the “Pre-Agreed Cost Formula” and claimed that they should have been billed as “Specialty Drugs, ” according to the cost-plus schedule under Exhibit A. CompleteRX applied the recategorization both to old billings and to new invoices going forward after the audit. However, the hospital now believes that CompleteRX actually billed it twice for many of those drugs, once under the old, “Pre-Agreed Cost Formula, ” and again after the drugs were “recategorized” as “Specialty Drugs.” As part of its recategorization program, the hospital alleges that CompleteRX misrepresented which drugs were Specialty Drugs, submitted “false invoices, ” and gave McLaren one list enumerating such drugs in March 2016, and another, different list in June 2016, to support its “underbilling” claim.

         The hospital also alleges that CompleteRX failed to turn over or offer for inspection all of its books and records relating to the pharmacy, falsely claiming that it could not provide access to the records for the auditing contractor because the records contained “confidential information, ” even though the information withheld largely or completely was derived from information provided to CompleteRX by the hospital itself. In particular, the hospital alleges that in an August 24, 2016 letter, CompleteRX stated that it no longer would communicate with the outside auditor about its pharmacy operation, despite having earlier consented to the involvement of the auditor in the records review.

         The hospital also alleges that on September 8, 2016, CompleteRX breached the agreement's forum selection clause, which designated “Michigan as the forum for all disputes arising under this agreement, ” by filing a lawsuit against the hospital in a Texas state court, raising claims for breach of contract and various torts.

         CompleteRX asserts, in its motion to stay the case, that McLaren terminated the management agreement on July 31, 2016. However, it represents that the parties subsequently entered into a “post-termination interim agreement” under which CompleteRX agreed to fill in and continue providing drug purchasing and dispensing services until a new pharmacy management contractor could be secured by the hospital.

         CompleteRX filed its Texas lawsuit on September 8, 2016, after McLaren refused to pay in full certain invoices submitted under the original management agreement and the interim agreement. It named McLaren and its auditing contractor, Fides Healthcare, LLC., as defendants. CompleteRX alleged breach of the original and interim agreements, and it also raised claims for tortious interference, defamation, and “business disparagement, ” based upon allegedly false statements made by McLaren and its auditor to other hospitals about the purported “substantial overcharges” disclosed by the audit. On September 29, 2016, McLaren filed a motion to dismiss. The Texas state court granted the motion in part and dismissed the breach of contract claim without prejudice, based on the forum selection clause in the management agreement. However, it retained the other tort law claims. After its breach of contract claim was dismissed in the state court case, CompleteRX re-filed it as a counter-claim here.

         On November 9, 2016, the plaintiff filed its complaint against defendant CompleteRX, Ltd. in the Genesee County, Michigan circuit court. CompleteRX removed the case to this Court and filed a motion to dismiss. The plaintiff followed with a first amended complaint, the defendant subsequently filed a renewed motion to dismiss and an answer to the first amended complaint, with counter-claim. The amended complaint contains the following claims: breach of contract (count I); breach of an implied covenant of good faith (count II); breach of fiduciary duty (count III); conversion (count IV); and fraud (count V). The defendant has moved to dismiss counts II through V.

         II.

         The defendant's motion is based on Federal Rule of Civil Procedure 12(b)(6). The standards are well known to the parties: the purpose of the motion is to allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief if all the factual allegations in the complaint are taken as true. Rippy ex rel. Rippy v. Hattaway, 270 F.3d 416, 419 (6th Cir. 2001) (citing Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993)). The complaint is viewed in the light most favorable to the plaintiff, the allegations in the complaint are accepted as true, and all reasonable inferences are drawn in favor of the plaintiff. Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008). To survive the motion, the plaintiffs “must plead ‘enough factual matter' that, when taken as true, ‘state[s] a claim to relief that is plausible on its face.' Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 570 (2007). Plausibility ...


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