Red Mountain Medical Holdings, Inc. v. Brill

• Decision Date: 27 September 2021
• Docket Number: 20 Civ. 2652 (NRB)
• Citation: 563 F.Supp.3d 159
• Parties: RED MOUNTAIN MEDICAL HOLDINGS, INC. f/k/a CDx Diagnostics, Inc., Plaintiff, v. Joel V. BRILL, M.D. and Predictive Health, LLC, Defendants.
• Court: U.S. District Court — Southern District of New York

563 F.Supp.3d 159

RED MOUNTAIN MEDICAL HOLDINGS, INC. f/k/a CDx Diagnostics, Inc., Plaintiff,

v.Joel V. BRILL, M.D. and Predictive Health, LLC, Defendants.

20 Civ. 2652 (NRB)

United States District Court, S.D. New York.

Signed September 27, 2021

Channing Jay Turner, Erik Scott Groothuis, Jeffrey M. Eilender, Jessica Rubin Caterina, Schlam Stone & Dolan LLP, New York, NY, for Plaintiff.

Andrew Lawrence Hurst, Baker Donelson, Washington, DC, Christopher Albert DeGennaro, Robert Allen Scher, Foley & Lardner LLP, New York, NY, for Defendant Joel V. Brill, M.D.

Andrew Lawrence Hurst, Baker Donelson, Washington, DC, for Defendant Predictive Health, LLC.

MEMORANDUM & ORDER

NAOMI REICE BUCHWALD, UNITED STATES DISTRICT JUDGE

This case arises out of two failed financing deals between plaintiff Red Mountain Medical Holdings ("Red Mountain") and potential investors to help fund Red Mountain's esophageal cancer detection technology. In both instances, the investors hired defendant Dr. Joel Brill either directly or through his consulting company, defendant Predictive Health, LLC, to perform due diligence on Red Mountain. Unbeknownst to Red Mountain or the investors, Brill was working for Red Mountain's direct competitors at the time to help them establish their technology as the industry standard. According to Red Mountain, Brill falsely claimed to be conflict free to secure his role as an adviser in the due diligence process and then used that role to scare off potential investors by dishonestly advising them that Red Mountain had been employing fraudulent billing practices.

This case was originally filed in the Supreme Court of the State of New York, County of New York, on December 13, 2019 and was properly removed on March 30, 2020. On September 24, 2020, Red Mountain filed the operative First Amended Complaint ("FAC" or "Complaint" (ECF No. 22)) asserting claims against defendants for (1) breach of contract, (2) fraud, (3) constructive fraud, (4) tortious interference with prospective business advantage, (5) tortious interference with contract, and (6) unfair competition.

Defendants now move to dismiss the Complaint in its entirety. (ECF No. 29.) Oral argument was held on defendants’ motion on September 3, 2021. For the reasons below, defendants’ motion is granted in part and denied in part.

BACKGROUND ¹

Red Mountain is a medical technology company that developed a diagnostic tool called Wide Area Transepithelial Sampling with 3D Computer Assisted Tissue Analysis ("WATS3D") that can detect esophageal adenocarcinoma ("AEC") cancer in its early stages.

At all times relevant to this lawsuit, Red Mountain, along with its competitors, Mauna Kea and NinePoint Medical (together, the "Competitors"), were the three companies vying to establish their respective technologies as the industry standard for early AEC detection. Because of limitations in the medical reimbursement system, only one of these technological approaches could be designated as the official standard of care adopted by the American Society of Gastrointestinal Endoscopy Standard of Practice Guideline (the "Guideline"). In effect, this created a zero-sum competition between Red Mountain and its Competitors.

By January 2015, Red Mountain needed to secure funding from investors to repay its debt and to further develop its WATS3D technology by financing the clinical trials that were necessary to bring the technology to market. That month, the company began talks with Kohlberg Kravis Roberts & Co. ("KKR"), a prominent private equity firm, about a potential investment in Red Mountain. After their negotiations, KKR and Red Mountain signed a preliminary term sheet on May 18, 2015, which valued Red Mountain at $125 million following KKR's anticipated investment of $35 million. While the term sheet's funding provisions were preliminary and non-binding, other aspects of the contract, such as its confidentiality and use-of-information terms, were binding and enforceable. The term sheet also contained a limited exclusivity period that prevented Red Mountain from exploring other financing options. Before finalizing the transaction, KKR informed Red Mountain that it would hire an independent consultant to perform confirmatory due diligence on Red Mountain's coding and billing practices.

In May 2015, KKR hired Brill, an expert in coding and reimbursement of claims for gastrointestinal procedures, as its independent contractor to perform the due diligence of Red Mountain and other potential investment targets. At the time he was hired, Brill represented to KKR that he did not have any conflict of interest that would interfere with his assessment of Red Mountain and signed an agreement with KKR not to disclose confidential information he received in the course of his assessment. KKR, in turn, assured Red Mountain that its independent consultant had no conflicts of interest and had signed a non-disclosure agreement. Based on these representations, Red Mountain agreed to go forward with the due diligence process involving Brill.

After reviewing Red Mountain's information, Brill advised KKR in November and December 2015 that Red Mountain had improperly been using a billing code with a higher reimbursement rate for one of the laboratory services it routinely performed and, consequently, Red Mountain might eventually face penalties and have to repay millions of dollars in Medicare reimbursements and other payments it received. Red Mountain attempted to assuage KKR's concerns about overbilling, including providing KKR with the opinions of other experts who specialized in billing for these types of medical procedures. However, in December 2015, KKR informed Red Mountain that it was not ready to invest because of the reimbursement concerns raised by Brill. KKR also told Red Mountain that were it not for these concerns, it would have closed the deal with Red Mountain months earlier. While Red Mountain continued to try to persuade KKR to follow through on the proposed financing deal throughout 2016 and 2017, these efforts were fruitless.

With no KKR deal in place, Red Mountain began exploring other sources of financial investments. In November 2016, it entered into a proposed term sheet with an investment company called Accelmed Growth Partners that valued Red Mountain at $100 million following Accelmed's anticipated investment. As with KKR, Accelmed hired Brill, through his company Predictive Health, as its independent consultant to perform due diligence on Red Mountain. In the consulting agreement with Accelmed, Brill agreed to maintain the confidentiality of non-public information he received during his evaluation. Brill also certified that he had no conflicts that would prevent him from performing his contractual duties for Accelmed.

As before, Brill advised Accelmed that Red Mountain was using fraudulent billing practices. And, in December 2016, Accelmed informed Red Mountain that it was not going to invest in the company.

By 2017, Red Mountain's creditors threatened to put the company into bankruptcy. Given the exigencies of the situation, Red Mountain entered into a financing agreement with the private equity company Galen Management, Inc. in July 2017 that valued Red Mountain at $57 million following Galen's anticipated investment. Unlike the contemplated KKR and Accelmed financing deals, this investment, inter alia, required Red Mountain to give Galen a majority stake in the company. With financing secured, Red Mountain was able to successfully launch the WATS3D technology, and it became the official standard of care endorsed in the Guideline in 2019.

At some point in 2018, after the financing deal with Galen was completed, Red Mountain discovered that Brill had been working with the Competitors between 2015 and 2017 at the same time that he was advising KKR and Accelmed on their potential investments in Red Mountain. The Competitors had combined their resources and hired Brill to petition the American Medical Association to create a unique billing code for the Competitors’ technology and to convince the Center for Medicare Services to agree to reimburse the new billing code at a profitable rate.

LEGAL STANDARDS

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’ " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A claim has facial plausibility 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.

In assessing the sufficiency of a complaint, we "accept[ ] as true all factual allegations in the complaint, and draw[ ] all reasonable inferences in the plaintiff's favor." Barrows v. Burwell, 777 F.3d 106, 111 (2d Cir. 2015) (citation omitted). However, we "are not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955 ). Moreover, we may consider documents that are attached to the complaint, incorporated by reference in the complaint, or otherwise integral to the complaint. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010). As relevant here, that includes the contract between Brill and KKR and the contract between Predictive Health and Accelmed, which underlie Red Mountain's claims for breach of contract and are attached as exhibits to the Declaration of Andrew L. Hurst (ECF Nos. 31-1, 31-2).

DISCUSSION

I. Breach of Contract

Red Mountain's first claim is for breach of contract. Specifically, Red Mountain alleges that it was the third-party beneficiary of defendants’ consulting contracts with KKR and Accelmed and that it may therefore recover for defendants’ breaches of the provisions...