Somnia, Inc. v. Change Healthcare Technology Enabled Services, LLC

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SOMNIA, INC., Plaintiff, MEMORANDUM OPINION -against- AND ORDER CHANGE HEALTHCARE TECHNOLOGY 19-CV-08983 (PMH) ENABLED SERVICES, LLC, as successor-in- interest to PST SERVICES, INC., et al., Defendants.

PHILIP M. HALPERN, United States District Judge: Plaintiff Somnia, Inc. (“Plaintiff”) initiated this breach of contract action against Defendants Change Healthcare Technology Enabled Services, LLC, as successor-in-interest to PST Services, Inc. (“CHT”) and PST Services, Inc. (“PST” and collectively, “Defendants”) in the New York State Supreme Court, Westchester County, on March 15, 2019. (Doc. 1, “Not. of Rem.”). Defendants removed the action to this Court on September 26, 2019. (Id.). Plaintiff, with leave of Court, filed its First Amended Complaint thereafter on April 20, 2020. (Doc. 33, “FAC”).1 The First Amended Complaint presses two claims for relief: (1) breach of contract (id. ¶¶ 184- 210); and (2) fraud (id. ¶¶ 211-21).

Defendants served their motion to partially dismiss the First Amended Complaint under Federal Rules of Civil Procedure 12(b)(6) and 9(b) on July 10, 2020. (Doc. 42; Doc. 43, “Def.

Br.”). Plaintiff served its opposition on August 10, 2020 (Doc. 44, “Opp. Br.”), and the motion was briefed fully with service of Defendants’ reply on August 17, 2020 (Doc. 45, “Reply Br.”).

For the reasons set forth below, Defendants’ motion to dismiss is GRANTED in part.

BACKGROUND I. Plaintiff’s Business Plaintiff, “a nationwide provider of expert and tailored anesthesia services” (FAC ¶ 1), has existed in its current form since at least September 2002 (id. ¶ 24). Among the various services Plaintiff offers its clients is quality management (“QM”), which includes, inter alia, “reporting on the quality, timeliness, and effectiveness of anesthesia care provided by its affiliated providers to government payers (Medicare, Medicaid), commercial payers (e.g., Cigna, Aetna, UnitedHealthcare), the client Facilities, and various accreditation and oversight agencies.” (Id. ¶ 4). QM, in turn, relies on revenue cycle management (“RCM”) (id. ¶¶ 2, 4), which is defined generally as “the administration of transactions . . . from . . . medical encounters . . . .” (id. ¶ 3).

After almost twenty years of handling the services itself (id. ¶ 30), Plaintiff found that “provi[ding] . . . RCM, QM[,] and related operational services for clients was . . . time-consuming and costly” (id. ¶ 32), and “decided to outsource” them (id. ¶ 33). Plaintiff ultimately “issued a nationwide request for proposals from expert anesthesia RCM firms who could handle the volume and complexities associated with anesthesia billing throughout the United States.” (Id. ¶ 35). This search led Plaintiff to PST.2 (Id. ¶ 37).

II. Pre-Contract Negotiations Plaintiff alleges that as PST courted Plaintiff, it made a variety of misrepresentations. (See generally id. ¶¶ 38-78). PST’s misrepresentations concerned, inter alia, whether it had ever been sued (id. ¶¶ 40(a), 42), its technical capabilities and the software employed (e.g., id. ¶¶ 38-39, 43(a), 44, 50, 52, 54, 57-58, 60-65, 74-75), whether it had a “perfect track record” (id. ¶¶ 43(c), Although Plaintiff named CHT (PST’s successor-in-interest) as a Defendant, for ease of reference, understanding, and continuity, because Plaintiff contracted with PST, the Court refers to that entity herein.

44), its personnel (e.g., id. ¶¶ 47-48, 51), its expertise (e.g., id. ¶¶ 38-39, 47, 49), its employee turnover (id. ¶¶ 48, 51), whether Plaintiff would have to secure funding for the transition of services (e.g., id. ¶¶ 43(b), 53, 55), and whether the transition would increase collection rates (e.g., id. ¶¶ 43(a), 44). Accepting these representations, Plaintiff disbanded its “RCM offices and [terminated] the more than 140 people it employed there, and transitioned away QM personnel, due to the redundancy in operations.” (Id. ¶ 78; see also id. ¶ 125). This decision rendered Plaintiff completely reliant on PST for RCM and QM services. (Id. ¶ 78).

III. The Master Services Agreement and Deterioration of the Parties’ Relationship The parties executed a contract, the Master Service Agreement (“MSA”), on December 23, 2013. (Id. ¶ 79; see also MSA Pt. 1 at 1).3 Under the MSA, PST agreed to perform a variety of services, including, inter alia: (1) enrolling and recredentialing providers (MSA Pt. 1 at 17); (2) managing payer contracts and, on request, negotiating contracts and performing “deep dive” analyses (id. at 18-19); (3) providing quality control services (id. at 21); (4) “implement[ing] and maintain[ing] a billing regulatory compliance program,” which encompassed using specific programs “to identify billing and remittance patterns that deviate from the norm” (id. at 24); (5) providing staff trained and certified to provide services, along with an assigned client manager (id. at 7, 10); (6) performing RCM services (id. at 13-16); and (7) providing staff trained to handle the transition from in-house operations (id. at 5-6; MSA Pt. 2 at 1). Plaintiff maintains that PST breached each of these, and other, terms. (See FAC ¶ 197).

Although the MSA began on March 1, 2014 and called for an initial term of five years (MSA Pt. 1 at 10), the parties terminated their relationship on July 1, 2018. (FAC ¶ 140). According to Plaintiff, the four years during which the MSA governed the parties’ relationship were marred with PST’s deficient performance and attempts to undermine Plaintiff’s business relationships. (See id. ¶¶ 92-139). In fact, Plaintiff contends that on at least one occasion, one of PST’s agents contacted one of Plaintiff’s clients and advocated PST’s “ability to directly provide anesthesia billing and related services.” (Id. ¶ 139; see also id. ¶ 204). As a result of PST’s breaches, Plaintiff maintains it suffered myriad damages, specifically: (1) lost revenues and profits in connection with collection rates (id. ¶¶ 143-50); (2) lost reputation and good will (id. ¶¶ 151-58); (3) lost revenue associated with payer contract mismanagement (id. ¶¶ 159-62); (4) unnecessary fees, interest, and expenses which decreased Plaintiff’s valuation by approximately thirty to fifty million dollars (id. ¶¶ 163-68); (5) loss of capital to invest in client relationships (id. ¶¶ 169-71); (6) terminations and downsizing (id. ¶ 172); (7) lost financial incentives from government medial programs (id. ¶¶ 173- 77); (8) time spent rectifying PST’s errors (id. ¶ 178); (9) its inability to mitigate damages (id. ¶¶ 179-81); and (10) reducing Plaintiff’s ability to offer services to the public (id. ¶¶ 182-83).

When the parties separated, Plaintiff’s valuation had fallen from a pre-relationship estimation of $55,000,000 to approximately $20,000,000. (Id. ¶ 164). Plaintiff maintains that it “reserved its rights to pursue any available claims against PST” (FAC ¶ 141; see also id. ¶ 15), and, through this action, seeks to pursue those rights.

STANDARD OF REVIEW A Rule 12(b)(6) motion enables a court to dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible on its face “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). “The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (citing Twombly, 550 U.S. at 556). The factual allegations pled “must be enough to raise a right to relief above the speculative level . . . .” Twombly, 550 U.S. at 555.

“When there are well-ple[d] factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Iqbal, 556 U.S. at 679.

Thus, the Court must “take all well-ple[d] factual allegations as true, and all reasonable inferences are drawn and viewed in a light most favorable to the plaintiff[].” Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996). The presumption of truth, however, “‘is inapplicable to legal conclusions,’ and ‘[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.’” Harris v. Mills, 572 F.3d 66, 72 (2d Cir. 2009) (quoting Iqbal, 556 U.S. at 678 (alteration in original)). Therefore, a plaintiff must provide “more than labels and conclusions” to show entitlement to relief. Twombly, 550 U.S. at 555.

In addition, the Federal Rules of Civil Procedure require a heightened level of specificity when pleading claims sounding in fraud. Specifically, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake,” Fed. R. Civ. P. 9(b), “the who, what, when, where, and how: the first paragraph of any newspaper story.” Backus v. U3 Advisors, Inc., No. 16-CV-8990, 2017 WL 3600430, at *9 (S.D.N.Y. Aug. 18, 2017) (quoting Am. Federated Title Corp. v. GFI Mgmt. Servs., Inc., 39 F. Supp. 3d 516, 520 (S.D.N.Y. 2014)).

ANALYSIS I. First Claim for Relief: Breach of Contract “Under New York law[4], a breach of contract claim requires (1) the existence of an agreement, (2) adequate performance of the contract by the plaintiff, (3) breach of the contract by the defendant, and (4) damages.” Ohr Somayach/Joseph Tanenbaum Educ. Ctr. v. Farleigh Int’l Ltd., --- F. Supp. 3d ---, 2020 WL 5211062, at *8 (S.D.N.Y. Sept. 1, 2020) (quoting Sackin v. TransPerfect Glob., Inc., 278 F. Supp. 3d 739, 750 (S.D.N.Y. 2017)). With respect to this claim for relief, Defendants argue that: (1) any claim for breach of the implied covenant of good faith and fair dealing must “be dismissed as duplicative of [Plaintiff’s] breach of contract cause of action” (Def. Br. at 15); and (2) Plaintiff failed to link any breach to any specific damages (id. at 18-20). The Court addresses these arguments seriatim.5

A. Breach of the Implied Covenant of Good Faith and Fair Dealing “Implicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance.” Schiff v. ZM Equity Partners, LLC, No. 19-CV-4735, 2020 WL 5077712, at *7 (S.D.N.Y. Aug. 27, 2020) (quoting Dalton v. Educ. Testing Serv., 663 N.E.2d 289, 291 (N.Y. 1995)). This covenant “is not designed to enlarge or create new substantive rights between the parties,” Ferguson v. Lion Holding, Inc., 478 F. Supp. 2d 455, 479 (S.D.N.Y. 2007), but “embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” Nat’l Gear & Piston, Inc. v. Cummins Power Sys., LLC, 861 F. Supp. 2d 344, 364 (S.D.N.Y. 2012) (quoting Fishoff v. Coty Inc., 634 F.3d 647, 653 (2d Cir. 2011)). The covenant “can only impose an obligation consistent with other mutually agreed upon terms in the contract,” and may “survive[] a motion to dismiss where the implied promise protects either the contract’s central purpose or a party’s right under a specific contractual provision.” Schiff, 2020 WL 5077712, at *7 (alteration in original, internal citations and quotation marks omitted). Practically, a breach of the implied covenant of good faith and fair dealing requires the pleader to identify an obligation which supports the written terms of the agreement itself but is not in haec verba contained therein. A breach of the implied covenant is not a claim for relief separate from one for breach of contract; rather, it is, itself, a breach of contract. Trahan v. Lazar, 457 F. Supp. 3d 323, 358 (S.D.N.Y. 2020) (quoting Fishoff, 634 F.3d at 653); see also Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162, 205 (S.D.N.Y. 2011).

Plaintiff pled that PST breached the implied covenant of good faith and fair dealing by: (1) hiding its noncompliance with the MSA (FAC ¶¶ 199-200); (2) failing to fulfill its obligations under the MSA (id. ¶¶ 201, 203); (3) billing for claims that could not be collected (id. ¶ 202); and (4) poaching clients (id. ¶¶ 198, 204). The first three categories complain merely about PST’s compliance with the MSA and cannot support a claim for breach of the implied covenant; “[a] cause of action to recover damages for breach of the implied covenant . . . ‘cannot be maintained’ where ‘the alleged breach is intrinsically tied to the damages allegedly resulting from a breach of the contract.’” Zam & Zam Super Mkt., LLC v. Ignite Payments, LLC, 736 F. App’x 274, 278 (2d Cir. 2018) (quoting Deer Park Enters., LLC v. Ail Sys., Inc., 870 N.Y.S.2d 89, 90 (App. Div. 2008)); see also Corazzini v. Litton Loan Servicing LLP, No. 09-CV-199, 2010 WL 1132683, at *7 (N.D.N.Y. Mar. 23, 2010) (dismissing claim for breach of the implied covenant where the claim “only repeat[ed] the allegations that comprise Plaintiff’s breach of contract claim, and those allegations consist of Defendants’ non-compliance with a term of their contract”).

The latter category, stealing Plaintiff’s clients and undermining relationships, constitutes a breach of the implied covenant of good faith and fair dealing on the facts alleged. Plaintiff suggests that the MSA’s central purpose, its raison d’être, was to outsource administrative functions from Plaintiff to PST. (FAC ¶ 33; see also MSA Pt. 1 at 1 (“WHEREAS, [Plaintiff] desires . . . billing and accounts receivable management, consulting and transition services . . . .”)). More pointedly, the MSA existed because Plaintiff wanted PST’s assistance in running one aspect of its nationwide, multimillion-dollar business. (See, e.g., FAC ¶¶ 1, 13, 35, 47, 72, 104, 106, 119, 121, 142, 147, 153, 163-68). In light of that purpose, Plaintiff’s allegation that PST actively undermined client relationships and sought to steal clients as Plaintiff suffered—ostensibly as a result of PST’s noncompliance with the MSA—represents a breach of the implied covenant of good faith and fair dealing separate from the MSA’s express provisions. See Atlas Elevator Corp. v. United Elevator Grp., Inc., 910 N.Y.S.2d 476, 478 (App. Div. 2010) (plaintiff stated claim for breach of the implied covenant where defendants, who had acquired a confidential customer list during negotiations before the “unconsummated” deal, “develop[ed] maintenance and service contracts with the plaintiff’s customers by use of the plaintiff’s customer list”).

Accordingly, Defendants’ motion to dismiss Plaintiff’s claim for breach of contract, to the extent it seeks redress for a breach of the implied covenant of good faith and fair dealing concerning stealing Plaintiff’s clients and undermining Plaintiff’s customer relationships, is denied. The remainder of Plaintiff’s breach of the implied covenant of good faith and fair dealing theories are dismissed.

B. Sufficiency of Breaches and Damages Defendants argue initially that Plaintiff failed to plead with the requisite specificity how PST breached “specific provisions in the MSA” or “how those alleged breaches led to [Plaintiff’s] purported damages.” (Def. Br. at 18). Yet, Defendants narrow this argument by conceding that Plaintiff identified at least “seven contractual provisions that were breached” but arguing that six of those breaches are not actionable because Plaintiff “fail[ed] to allege specific damages” associated with those breaches aside from its general claim for damages no less than $100,000,000. (Id. at 19; see also FAC ¶ 210). In short, “[w]hile speculative, this allegation is sufficient for [Plaintiff] to state a breach of contract claim.” Arista Coffee Inc. v. Casale, No. 18-CV-6237, 2020 WL 1891882, at *7 (E.D.N.Y. Apr. 16, 2020) (allegation that defendant’s “various breaches” resulted in “damages in an amount not yet determined or ascertainable” stated a breach of contract claim under New York law). As such, the motion to dismiss the breach of contract claim for failure to plead causation between breaches and specific damages is denied.

II. Second Claim for Relief: Fraud in the Inducement There are two species of claims for fraud in New York: “[f]raud by affirmative misrepresentation, or actual fraud, and fraud by omission, or fraudulent concealment . . . .” Wiedis v. Dreambuilder Invs., LLC, 268 F. Supp. 3d 457, 466 n.3 (S.D.N.Y. 2017) (first alteration in original, internal quotation marks omitted). To state the former claim for relief, which Plaintiff pursues here, it must allege: “(1) a material misrepresentation . . . of fact[;] (2) made by defendant with knowledge of its falsity[;] (3) and intent to defraud; (4) reasonable reliance on the part of the plaintiff; and (5) resulting damage to the plaintiff.” Tuosto v. Philip Morris USA Inc., 672 F. Supp. 2d 350, 359 (S.D.N.Y. 2009) (quoting Crigger v. Fahnestock & Co., Inc., 443 F.3d 230, 235 (2d Cir. 2006)). Defendants contend, inter alia, that this claim for relief must be dismissed because it is duplicative of the breach of contract claim. (Def. Br. at 9-11). The Court agrees.

The basis of Plaintiff’s fraud claim is that PST induced Plaintiff into the MSA through various misrepresentations. Explicitly, Plaintiff asserts that “PST knew that it did not have the same infrastructure, resources, personnel, tools, software, or other capabilities and expertise of McKesson [its parent] (or ready access thereto) to deliver on its promises” and that “PST . . . lied about its then present capabilities, resources, and experiences.” (FAC ¶¶ 214-15). “Where a fraud claim is based on inducement to enter a contract, the fraud claim is duplicative [of a claim for breach of contract] unless the plaintiff ‘(i) demonstrate[s] a legal duty separate from the duty to perform under the contract; or (ii) demonstrate[s] a fraudulent misrepresentation collateral or extraneous to the contract; or (iii) seek[s] special damages.’” Mariano v. CVI Invs. Inc., 809 F.

App’x 23, 26 (2d Cir. 2020) (quoting Bridgestone/Firestone, Inc. v. Recovery Credit Servs., 98 F.3d 13, 19 (2d Cir. 1996) (first alteration added)). Plaintiff does not identify the existence of a duty outside the contract or connect any special damages6 to the alleged misrepresentations (see FAC ¶¶ 211-21); the focus, then, concerns whether Plaintiff pled a “misrepresentation collateral or extraneous to the contract.” It has not done so.

Plaintiff complains that PST knew it did not have the resources of McKesson and that it misrepresented its infrastructure as it courted Plaintiff. (FAC ¶¶ 214-15). These issues were addressed in the one-hundred-ninety-six-page RFPR which was “attached . . . and . . . incorporated . . . by reference” into the MSA. (MST Pt. 1 at 9). The RFPR contains representations regarding, inter alia: PST’s relationship to McKesson, organizational structure, expertise and experience being offered to Plaintiff, locations of offices, staffing and support, existence of lawsuits or fines, and software, programs, and processes utilized. (See, e.g., RFPR at 1-3, 5-11, 13-19, 27-37, 42- 43, 45-46, 53-56, 60-67, 75-82, 84-87, 92-95, 103-104, 107-12, 119-22, 128, 144-49, 152-53).

Accordingly, Plaintiff has pled issues contained within the MSA, not misrepresentations extraneous or collateral thereto. See Khodeir v. Sayyed, 323 F.R.D. 193, 203 (S.D.N.Y. 2017) (noting that the counterclaim for fraud did not concern a collateral promise because it concerned a clause “contained in the contract itself”); Telesco v. Neuman, No. 14-CV 3480, 2015 WL 2330166, at *3 (S.D.N.Y. Mar. 11, 2015) (dismissing fraud claim as duplicative “[b]ecause nothing” in the

App’x ---, 2021 WL 222129 (2d Cir. Jan. 22, 2021).

Consequently, Plaintiff’s claim for fraud in the inducement is dismissed because it is duplicative of Plaintiffs breach of contract claim.’

CONCLUSION Based upon the foregoing, the motion to dismiss is GRANTED in part. The second claim for relief, fraud in the inducement, is DISMISSED. The first claim for relief, breach of contract, as modified herein concerning the covenant of good faith and fair dealing, shall proceed to discovery. Defendants are directed to file an Answer to the First Amended Complaint within fourteen (14) days of the date of this Memorandum Opinion and Order. The Court will issue an Initial Pretrial Conference Order and set a conference date in short order.

The Clerk of the Court is respectfully directed to terminate the motion sequence pending at Doc. 42.

SO ORDERED: Dated: White Plains, New York February 16, 2021 United States District Judge Given the Court’s conclusion that the fraud claim is duplicative of the breach of contract claim, it need not and does not reach Defendants’ alternative theories in support of dismissal. (See Def. Br. at 10-15).