Ctr. for Healthcare Educ. & Research, Inc. v. Int'l Cong. for Joint Reconstruction, Inc.

• Decision Date: 30 November 2020
• Docket Number: D076513
• Court: California Court of Appeals Court of Appeals
• Parties: CENTER FOR HEALTHCARE EDUCATION AND RESEARCH, INC., Plaintiff, Cross-defendant and Respondent, v. INTERNATIONAL CONGRESS FOR JOINT RECONSTRUCTION, INC., Defendant, Cross-complainant and Appellant; Mark Sacaris, Cross-defendant and Respondent.

57 Cal.App.5th 1108

272 Cal.Rptr.3d 108

CENTER FOR HEALTHCARE EDUCATION AND RESEARCH, INC., Plaintiff, Cross-defendant and Respondent,

v.INTERNATIONAL CONGRESS FOR JOINT RECONSTRUCTION, INC., Defendant, Cross-complainant and Appellant; Mark Sacaris, Cross-defendant and Respondent.

D076513

Court of Appeal, Fourth District, Division 1, California.

Filed November 30, 2020

Duckor Spradling Metzger & Wynne, Scott L. Metzger and William P. Keith, San Diego, for Defendant, Cross-complainant and Appellant International Congress for Joint Reconstruction, Inc.

Law Offices of Stephen B. Morris and Stephen B. Morris, San Diego, for Plaintiff and Respondent Center for Healthcare Education and Research, Inc., and Cross-defendant and Respondent Mark Sacaris.

McCONNELL, P. J.

In 2009, the president of the International Congress for Joint Reconstruction, Inc. (ICJR) retained Mark Sacaris, part owner of the Center for Healthcare Education and Research, Inc. (CHE), to assist ICJR in producing medical education conferences on the subject of joint-reconstruction surgery. Their agreement was unwritten, and there was no discussion of the rates ICJR would be charged. Sacaris was given full control over ICJR's money accounts as part of the arrangement. He was later made a chief operating officer (COO) and nonvoting director of ICJR.

Sacaris provided all of the services ICJR required through CHE. He unilaterally set rates for these services, adding a markup on labor costs to create a profit for CHE and, indirectly, for himself. He used ICJR's money accounts to pay CHE's invoices without notifying ICJR's board members of the amounts ICJR was being charged. Over time, and also without informing the board of ICJR, he increased the scope of CHE's services to include developing ICJR's websites and broadcasting live surgeries to ICJR conferences (despite CHE employees' lack of necessary experience in these areas), and he arranged for CHE to manage symposia for pharmaceutical companies during ICJR conferences. Sacaris thereby created additional sources of profit for CHE, and indirectly for himself, but he did not disclose his interest in these arrangements to ICJR.

In 2016, the board of ICJR was informed by Sacaris that ICJR had amassed a $2 million debt to CHE. ICJR terminated its relationship with Sacaris and CHE. CHE filed suit to recover amounts it claimed it was owed by ICJR under the agreement. ICJR filed a cross-action against Sacaris and CHE in which it asserted they had secretly profited from their relationship with ICJR. ICJR sought, among other remedies, disgorgement of the profits CHE and Sacaris recovered in breach of their fiduciary duties, namely (1) their undisclosed charges for management services; (2) amounts by which they overcharged for web development services; (3) undisclosed profits from running symposia for pharmaceutical companies; and (4) undisclosed profits from broadcasting live surgeries.

After a bench trial, the court issued a statement of decision in which it found ICJR liable to CHE for breach of contract. Although the court also found that CHE and Sacaris breached their fiduciary duties to ICJR in earning all four categories of the profits ICJR sought to disgorge, the court awarded ICJR recovery only as to categories two and four. The court denied ICJR disgorgement of the first category of profits because it found ICJR had failed to prove it suffered monetary damages from CHE and Sacaris's undisclosed charges for management services. The court denied ICJR disgorgement of the third category of profits because it found ICJR failed to establish that running pharmaceutical symposia was an ICJR corporate opportunity CHE and Sacaris wrongfully usurped.

On appeal, ICJR contends the trial court erred in determining that ICJR could not recover disgorgement of CHE and Sacaris's profits from their undisclosed charges for management services without proof their breach of fiduciary duties caused ICJR to suffer monetary damages. ICJR also challenges the court's determination that the symposia were not an ICJR corporate opportunity.

We agree ICJR was not required to show it suffered monetary harm to establish a right to disgorgement of CHE and Sacaris's profits from their undisclosed charges for event management services, and that the trial court erred when it held otherwise. Because ICJR met its burden to establish a reasonable approximation of the amount by which CHE and Sacaris profited through their misconduct, the court was required to exercise its discretion to fashion a remedy. We will reverse the portion of the judgment affected by the error and remand so the trial court can determine the appropriate amount of the award of disgorgement. However, we reject ICJR's claim that the court erred in determining that running symposia for pharmaceutical companies was not a corporate opportunity of ICJR.

FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Summary¹

In 2008, a small number of nationally prominent orthopedic surgeons formed ICJR² for the purpose of presenting accredited continuing medical education conferences on the subject of joint-reconstruction surgery. It had become common in the years before ICJR's formation for prosthetic device manufacturers to sponsor conferences, a practice that led to concerns over the conferences' educational value and attracted the scrutiny of the United States Department of Justice under the Physician Payments Sunshine Act ( 42 U.S.C. § 1320a-7h ), a reporting statute that requires medical device manufacturers to report transfers of value to physicians. The orthopedic surgeons who established ICJR believed the quality and stature of medical education conferences about joint reconstruction surgery would be improved if the conferences were overseen by medical experts.

The board members of ICJR were volunteers with active medical practices who lacked the time and business expertise to produce medical conferences. Shortly after ICJR was formed, its president, Dr. William Norman Scott, met Sacaris, whose employment history included organizing educational conferences and providing management support for pharmaceutical companies. Sacaris and his business partner, Steve Coley, provided these services through two companies, Tier One Corporation (Tier One) and CHE. Sacaris and Coley each owned half of the shares of Tier One. Tier One, in turn, owned CHE. Both Tier One and CHE were for-profit enterprises; Sacaris and Coley profited directly from the earnings of Tier One and indirectly from the income of CHE. Sacaris was the president of CHE and managed its day-to-day operations. He was also responsible for setting the billable hourly rates CHE charged its clients.

Scott hired Sacaris in June of 2009 to coordinate and manage conferences for ICJR and ensure all logistical details necessary for a successful conference took place. Both men described this as a "handshake" agreement; there was never a written contract between Sacaris and ICJR. Moreover, Sacaris never provided, and Scott never requested, any information about the rates ICJR would be charged for his services.³

From the beginning, Sacaris provided all of ICJR's management service needs through CHE. At trial, the parties disputed whether ICJR had agreed to or was even aware of CHE's participation. Sacaris testified that he viewed himself as an agent of CHE, and that in his mind, by retaining him, ICJR had also retained CHE. While he claimed to have disclosed CHE's existence during conversations with Scott, his communications with the board were less than transparent. In two written updates sent to the full board in October 2013 and April 2014, he characterized CHE employees as being part of ICJR's organizational structure. It was not until July 2014 that he first notified the full board of CHE's existence.

Scott testified he was aware of CHE from the start and associated it with Sacaris, but at trial he could not recall what he had understood about CHE's role in the arrangement with ICJR at the time he retained Sacaris's services. He also testified that he was not made aware that certain individuals Sacaris had hired to work for ICJR were actually employees of CHE. The trial court found, "based on [ ] Scott's awareness of CHE, coupled with his failure to recall what he was told about CHE's involvement," that "ICJR did not prove that Dr. Scott was ignorant or unaware of CHE's role in the management of ICJR throughout the chronology." The parties do not challenge this finding.

As part of the arrangement with ICJR, Sacaris was given full control over ICJR's money accounts, including its checking account, for payment of all invoices and expenses associated with ICJR's conferences. As a result, Sacaris had the ability to prepare and adjust his own bill as manager of CHE, and then approve payment of CHE's bill on behalf of ICJR, without the knowledge or approval of ICJR's board of directors, a circumstance the court found "created an obvious conflict of interest."

Sacaris and CHE organized and ran conferences for ICJR from 2009 until 2016.

As ICJR proposed conferences to Sacaris, Sacaris dispatched up to 11 CHE employees to do the work necessary to arrange them.

Sacaris profited by funneling the services provided to ICJR through CHE. CHE employees, including Sacaris, billed for their services by the hour. As conferences were completed, Yana Drozdova, CHE's accountant, would prepare internal worksheets for Sacaris that summarized the hourly rates, and number of hours billed, for every CHE employee. Sacaris, on behalf of CHE, would then increase the employees' hourly rates by between 17 percent and 20 percent to reimburse CHE for its overhead expenses, and he would add an additional markup of up to 80 percent of the employees' hourly rates to create a profit for CHE, and indirectly, for himself.⁴ Sacaris did not disclose to ICJR that he was profiting by marking up its labor costs.

Once Sacaris determined the amounts to be billed to ICJR, Drozdova would create...