Healthcare I.Q., LLC v. Chao

• Decision Date: 06 May 2014
• Citation: 986 N.Y.S.2d 42,2014 N.Y. Slip Op. 03216,118 A.D.3d 98
• Parties: HEALTHCARE I.Q., LLC, Plaintiff–Respondent, v. Dr. TSAI CHUNG CHAO, MD, doing business as Naturo–Medical Health Care, P.C., Defendant–Appellant.
• Court: New York Supreme Court — Appellate Division

118 A.D.3d 98

986 N.Y.S.2d 42

2014 N.Y. Slip Op. 03216

HEALTHCARE I.Q., LLC, Plaintiff–Respondent,

v.Dr. TSAI CHUNG CHAO, MD, doing business as Naturo–Medical Health Care, P.C., Defendant–Appellant.

Supreme Court, Appellate Division, First Department, New York.

May 6, 2014.

Moritt Hock & Hamroff LLP, Garden City (Robert M. Tils of counsel), and Loanzon LLP, New York (Tristan C. Loanzon of counsel), for appellant.

Manuel & Associates, LLP, New York (Charles B. Manuel Jr., Daniel Goldstein and Robert Rosenberg of counsel), for respondent.

ANGELA M. MAZZARELLI, J.P., JOHN W. SWEENY, JR., LELAND G. DeGRASSE, SALLIE MANZANET–DANIELS, JUDITH J. GISCHE, JJ.

GISCHE, J.

This breach of contract action arises from a Practice Management and Licensing Agreement between the parties dated February 6, 2007 (agreement). Plaintiff Healthcare I.Q. (HCIQ), a health care services company, agreed to provide Dr. Tsai Chung Chao, M.D. and his medical practice (collectively Dr. Chao) with coding, billing, collection and other services aimed at improving the efficiency of Dr. Chao's office operations. The agreement, which provides for the licensing of HCIQ's office management program software to Dr. Chao, and was initially for a 36 month term commencing February 1, 2007, includes a “HIPAA Business Association Addendum” providing that all the information entrusted to HCIQ is regulated by the Federal Health Insurance Portability and Privacy Act of 1996 (45 CFR 164.501). It further provides that upon termination of the agreement, the “Business Associate [HCIQ] shall return or destroy all Protected Health Information received from Covered Entity [Dr. Chao], or created or received by the Business Associate on behalf of Covered Entity.” The agreement's “Termination” identifies Dr. Chao's “ unauthorized use” of the program as a qualifying, terminating event.

All of the records generated, prepared and maintained by Dr. Chao and his staff, including patients' confidential records and files, were scanned and uploaded into the program on an ongoing basis and were used by HCIQ in coding, tabulating, reviewing and analyzing Dr. Chao's billables, reimbursements, and billing procedures. Under the agreement, HCIQ was responsible for “the Practice Staff, management and supervision of the medical billing, coding, collection of reimbursable insurance dollars, adherence to documentation guidelines, compliance issues, business issues, and for overall management of the medical facility.” The program, which was to be installed on Dr. Chao's computers, is proprietary to HCIQ and is not available to the general community. HCIQ charged Dr. Chao a basic retainer fee of $14,000 per month for its program and services. Although Dr. Chao was also subject to a per use fee when accessing the records and files scanned or uploaded to the program, there was a $15,000 cap on the monthly retainer fee. The cap remained effective for the “term of this Agreement ...”

In addition to the termination provisions, the agreement contained a “License” clause restricting Dr. Chao's use of the program in the following manner:

“HCIQ grants the Practice a limited, non-exclusive, non-transferable, non-assignable license to incorporate the Program(s) provided by HCIQ into licensee's desktop or network information system, as the case may be, for the term of this Agreement, subject to any early termination of this Agreement. Thereafter, this Agreement shall be automatically renewed for additional eighteen (18) month periods unless either party by written notice notifies the other at least ninety days before the end of any eighteen (18) month renewal period that it intends to terminate the services provided for hereunder, and such notification shall be effective one hundred and eighty (180) days thereafter.”

Dr. Chao paid the monthly retainer throughout the initial 36 month term of the agreement from February 2007 to January 2010. He also made a $15,000 payment to HCIQ in February 2010. According to HCIQ, Dr. Chao and its principal informally discussed whether Dr. Chao would be renewing the agreement for an additional term and Dr. Chao said that he would renew it, a statement which Dr. Chao denies. It is undisputed that HCIQ did not provide Dr. Chao with any written notice that the agreement would be automatically renewed for another 18 month term, nor did Dr. Chao notify HCIQ in writing that he did not intend to renew the agreement at that time.

After February 2010, Dr. Chao and his staff continued to use the program to access patient records, although he stopped making payments to HCIQ. According to Dr. Chao, he had no choice but to use the program to access patient records and other files which had been scanned and uploaded. Dr. Chao and his staff last used the program in June 2010, at which time HCIQ commenced this action.

Although neither party provided written notice regarding the renewal or non-renewal of the agreement after the initial term ended, each side takes the position that it was under no obligation to do so. Dr. Chao relies on the requirements in General Obligations Law § 5–903 and HCIQ relies on the automatic renewal provision of the agreement. The only written notice regarding the agreement was made by Dr. Chao in October 18, 2012, at which time he notified HCIQ that he was terminating the agreement effective March 2010, “consistent with my verbal termination of the agreement in early 2010.” He sent the notice only after this action was commenced. HCIQ maintains that Dr. Chao never terminated the agreement, which automatically renewed twice for two consecutive 18 month terms, and that Dr. Chao owes $525,000.

The parties' dispute centers on whether the agreement is a contract for “service ... to or for ... personal property” ¹ under General Obligations Law § 5–903(2), which would render its automatic renewal provision (evergreen clause) unenforceable unless HCIQ provided timely prior written notice calling Dr. Chao's attention to it. If § 5–903(2) does not apply to the parties' agreement then Dr. Chao had the affirmative obligation to cancel before the automatic renewal period.

Dr. Chao did not assert General Obligations Law § 5–903 as an affirmative defense in his original answer, but previously moved for summary judgment on this basis. The court denied his motion because it was based on an unpled defense and was, therefore, waived. It did not decide the merits of the argument. Dr. Chao filed a notice of appeal from the motion court's earlier decision, but did not perfect it. Thereafter, HCIQ moved for leave to amend its complaint to increase the ad damnum clause and its motion was granted, resulting in the filing and serving of an amended complaint. Dr. Chao served an answer to the amended complaint, this time asserting General Obligations Law § 5–903 as an affirmative defense and subsequently moved for summary judgment on this basis. The motion court denied the motion and sanctioned Dr. Chao for bringing a successive summary judgment motion on the same legal ground he had raised in the first motion.

We find that the second summary judgment motion, brought after the pleadings were amended on a substantive issue not previously decided by the court, was procedurally proper. “Once plaintiff served the amended complaint, the original complaint was superseded, and the amended complaint became the only complaint in the action. The action was then required to proceed as though the original pleading had never been served” ( Plaza PH2001 LLC v. Plaza Residential Owner LP, 98 A.D.3d 89, 99, 947 N.Y.S.2d 498 [1st Dept.2012] [internal quotation marks and citation omitted] ). Thus, defendant's appeal from the prior order denying summary judgment became moot ( see Baker v. 16 Sutton Place Apt. Corp., 2 A.D.3d 119, 120, 768 N.Y.S.2d 198 [1st Dept.2003] ), and “sufficient cause ... exist[ed]” for his motion for summary judgment dismissing the amended complaint ( Varsity Tr. v. Board of Educ. of City of N.Y., 300 A.D.2d 38, 39, 752 N.Y.S.2d 603 [1st Dept.2002] [internal quotation marks omitted] ). We therefore vacate the award of sanctions against Dr. Chao.

General Obligations Law § 5–903 does not define “personal property,” although it broadly defines “person” as “an individual, firm, company, partnership or corporation” and also states that its restrictions apply unless “the person receiving the service” is served with advanced notice calling its attention to the renewal clause in the contract (General Obligations Law § 5–903[2] ). The statute does not require that the person own the “personal property” being serviced, and section 5–903 has been analyzed by courts in a variety of circumstances to determine its applicability. Personal property has been interpreted to include intellectual property as well as tangible personal property ( Ovitz v. Bloomberg...