Corporate Healthcare Financing, Inc. v. Bci Holdings Co.

• Decision Date: 10 August 2006
• Docket Number: Civil No. CCB-05-3391.
• Citation: 444 F.Supp.2d 423
• Parties: CORPORATE HEALTHCARE FINANCING, INC. v. BCI HOLDINGS CO.
• Court: U.S. District Court — District of Maryland

444 F.Supp.2d 423

CORPORATE HEALTHCARE FINANCING, INC. v. BCI HOLDINGS CO.

Civil No. CCB-05-3391.

United States District Court, D. Maryland.

August 10, 2006.

Ward B. Coe, III, Whiteford Taylor and Preston LLP, Baltimore, MD, for Corporate Healthcare Financing, Inc. and Performax, Inc.

Dwight W. Stone, II, Whiteford Taylor and Preston LLP, Baltimore, MD, for Performax, Inc.

Richard L. Bazelon, A. Richard Feldman, Michael A. Shapiro, Bazelon Less and Feldman PC, Philadelphia, PA, Thomas Christopher Dame, Kevin P. Sullivan, Gallagher Evelius and Jones LLP, Baltimore, MD, for BCI Holdings Co. and Brokerage Concepts, Inc.

MEMORANDUM

BLAKE, District Judge.

The plaintiffs, Performax, Inc. ("Performax") and Corporate Healthcare Financing, Inc. ("CHF"), filed this suit against defendants BCI Holdings Co. and Brokerage Concepts, Inc. (collectively, "BCI"), alleging that BCI has violated, and will continue to violate, a restrictive covenant in a 1999 contract between BCI and CHF, for which they seek injunctive, declaratory and monetary relief. As part of its answer, BCI asserted nine counterclaims against the plaintiffs, including two counts alleging violations of the Racketeering Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq., and seven common law counts. The plaintiffs have filed a motion to dismiss three counterclaims: Count Seven ("Civil RICO"), Count Eight ("RICO Conspiracy"), and Count Nine ("Breach of Contract/Breach of Duty of Good Faith and Fair Dealing"). The issues have been fully briefed and no hearing is necessary. See Local Rule 105.6. For the following reasons, the motion will be granted as to all three counterclaims.

I. Background

This memorandum will discuss only the facts of this case relevant to BCI's counterclaims, and will assume familiarity with the court's previous ruling, which granted a preliminary injunction in favor of the plaintiffs. See Mem. & Order of Jul. 13, 2006 (docket entry nos. 75 & 76).

Performax serves as a third-party administrator ("TPA") for hundreds of companies that self-insure their health plans. While it handles the billing and eligibility functions, Performax subcontracts the claims administration component to three companies, including BCI and North American Health Plans, Inc. ("NAHP").¹ Subcontractors such as BCI and NAHP realize savings for the client plans through three methods: (1) negotiating reductions on large claims, (2) the use of "passive" PPO networks,² and (3) subrogation recoveries. The subcontractors generally bill Performax through administrative fees calculated on a per-employee-per-month basis. Performax then bills the clients directly, adding its own charges to those incurred by the subcontractors.

Performax and BCI entered into a written contract in 2000, which covered the transition of billing and eligibility functions for certain customers from BCI to Performax but did not provide for a minimum or target volume of business going forward.³ (Am. Countercls. ¶ 1 & Ex. 1)⁴ BCI claims there also was an oral contract as part of its arrangement with Performax, whereby Performax insisted that BCI create an employee unit dedicated to Performax clients and in turn agreed "to provide a continuing flow of new cases to BCI, sufficient to keep the dedicated unit employed" (¶ 49). For the first several years of their relationship, Performax "divided new cases between BCI and [NAHP] in equal numbers" (¶ 50). Then, starting in 2003, Performax began sending fewer new clients to BCI, giving "the great majority" to NAHP instead (¶ 53).

At the center of BCI's RICO claims is its allegation that when NAHP achieves savings for a Performax client, through any of the three aforementioned methods, Performax allows NAHP to keep 25% of the money as a "commission" without the client's knowledge or consent (¶¶ 54, 68).⁵ BCI contends this practice amounts to taking the plans' assets fraudulently. NAHP accounts for these commissions in its bills to Performax, which then sends the clients bills and reports that only indicate the net savings, without specifying the portion kept by NAHP (¶¶ 75, 138-142). For example, if NAHP negotiated a $10,000 claim payment down to $6,000, it would keep $1,000, and Performax would indicate to the client merely that its obligation had been reduced to $7,000. BCI claims that NAHP has reduced its regular charges to Performax thanks to this arrangement, which amounts to kickbacks in BCI's view (¶¶ 53, 56, 66).⁶ In return, Performax sends more clients and/or larger cases to NAHP than to BCI.

The complaint also asserts that, at some point, Performax was investigated by the Department of Labor for its disclosure practices, and that BCI's President Arnold Katz answered subpoenas related to the investigation (¶ 62). BCI "believes" that Performax was forced to return funds to 20-30 of its clients, but fully admits that it is "not privy to the exact nature of the disclosure violations that DOL has found, if any" (¶ 63).

BCI claims to have learned of NAHP's practice of taking commissions from Jake Canova, the current head of Performax, and from Ron Zeller, a former NAHP president (¶ 66). Zeller also told BCI that NAHP was able to lower its rates to Performax by taking such commissions (Id.). BCI only relates these allegations, however, to NAHP's commissions for passive PPO and negotiated claims reductions (¶ 70); its allegations related to subrogation recoveries are based solely on an NAHP proposal to a non-Performax client, which disclosed that it takes 25% of such recoveries (¶¶ 71, 145). BCI's contention that Performax does not disclose the commissions to clients are based on statements by former and current Performax and NAHP executives explaining that Performax has not had written agreements with many of its clients (¶¶ 64, 156-58). Further, BCI alleges that those client agreements that have existed do not disclose the commissions (¶¶ 65, 159-60).⁷ BCI asserts that the affected client plans would be "outraged" if they knew the true state of affairs (¶ 163).

BCI further claims that, in 2004, Performax and Canova began pressuring BCI to participate in this scheme by taking assets in the same manner as NAHP and reducing its charges to Performax (¶¶ 79-80). In particular, "Canova and Performax began to pressure BCI by turning off the spigot of new cases on which BCI depended, and sending those cases to NAHP instead" (¶ 81). The complaint describes a conversation between Canova and Katz on September 22, 2005, in which Katz protested the declining number of new cases sent to BCI and Canova replied that BCI charged higher rates than NAHP. Katz attributed this fact to NAHP's "unlawful" practices, to which Canova replied: "You could do the same" (¶¶ 84-86). Another similar conversation took place on December 7, 2005 (¶ 87). BCI makes the specific allegations that Performax has terminated two of its cases and transferred them to NAHP, and has threatened to continue this trend (¶ 88a-c).⁸

Performax attached to its motion to dismiss copies of its generic client service agreements ("CSA"), in order to demonstrate that Performax made sufficient disclosures to its clients.⁹ After BCI contested the relevance of these generic forms and the court's ability to consider them on a motion to dismiss, Performax submitted copies of the actual CSAs for 129 clients serviced by NAHP, with identifying information redacted.¹⁰ The Schedule of Services and Fees in these CSAs contains the following language:

PERFORMAX Out of Network Discount Program Fees—To be billed on a contingent fee basis (based on a percentage of savings) as set forth in the General Provisions of this Agreement.

(Pls.' Mot. to Dismiss, Ex. 1 & 2, at iii). The General Provisions contain the following paragraph:

PERFORMAX Out of Network Discount Program. Because the Client and PERFORMAX cannot accurately predict either the percentage of Covered Persons that will utilize out-of-network providers, or the amounts that such providers will charge for their services, the parties agree that PE RFORMAX's Medical Plan Administration Service Rates do not apply to negotiation of discounts of the charges submitted by out-of-network providers. PERFOMAX agrees to use commercially reasonable efforts to negotiate reductions in charges assessed by out-of-network providers on a case-by-case basis. Client agrees to compensate PERFORMAX for obtaining such reductions by Client's payment to PERFORMAX of a contingency fee (based on a percentage of savings) at a commercially reasonable rate. This rate shall be presumed to be 30% of the amount of the reduction unless the effort to obtain the reduction on the Client's behalf is disproportionate to the fee, in which case, PERFORMAX shall increase or decrease the rate in relation to that effort and industry custom and practice. Client further agrees that PERFORMAX may engage on Client's behalf and at Client's expense third parties to assist in obtaining fee reductions from out-of-network providers.

(Id. at Section 2.3.2.) Another paragraph states:

Other Compensation to PERFORMAX. Client agrees and directs PEFORMAX to retain commissions, administrative fees, and other compensation ("Other Compensation") received by PERFORMAX in connection with services provided or arranged for the Plan.

(Id. at Section 2.2.) It is unclear whether the CSAs Performax has with those clients serviced by BCI contain these or similar paragraphs.

Performax does not dispute that NAHP takes at least some commissions from its clients, but asserts that everything has been done lawfully and that its disclosures were adequate. In particular, Performax states that the CSA specifically discloses commissions for passive PPO discounts and negotiated claims reductions, and contends that the more general language of Section 2.2 covers subrogation recoveries. Performax has not, however, addressed the level of disclosure in the bills and reports sent to clients serviced by NAHP.

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