Therapy Resources Management LLC, et al. v. Whittier Health Network, Inc., et al. (Lawyers Weekly No. 12-120-17)
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
No. 1784CV0942 BLS 1
THERAPY RESOURCES MANAGEMENT LLC, et al
vs.
WHITTIER HEALTH NETWORK, INC., et al
ORDER ON CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT
Count IV of the Amended Complaint seeks a declaratory judgment to the effect that
defendants (referred to collectively as “Whittier”) are barred from seeking indemnity from
plaintiffs (referred to collectively as “Therapy”). Whittier has not yet answered the amended
complaint or asserted a counterclaim, but the record is clear that Whittier believes it has the right
to be indemnified by Therapy for litigation costs and a settlement payment incurred by Whittier
in connection with an investigation and lawsuit under the False Claims Act (“FCA”), 31 U.S.C.
§3729.1 There is an actual controversy between the parties regarding whether, as a matter of law,
Whittier can obtain indemnification under its contracts with Therapy which state that “[Therapy] shall indemnify and hold [Whittier] harmless from and against all claims, demands, costs,
expenses, liabilities and losses (including reasonable attorney’s fees) which may result against
[Whittier] as a consequence of any malfeasance, negligence . . . caused . . . by [Therapy] . . . .”
1 Whittier has effectively obtained some indemnification by refusing to pay invoices for
services rendered by Therapy. Thus, Therapy is the plaintiff in this action seeking recovery for
non-payment of invoices. The claim for indemnification by Whittier is anticipated because such
claim is the stated basis for Whittier’s refusal to pay the invoices.
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Therapy’s argument for summary judgment on Count IV is based on the following
undisputed facts. The losses that Whittier wants indemnification for arise from the fact that
Whittier was sued, along with Therapy, for fraud under the FCA. The suit was brought by a
former employee of Therapy. There was also another suit by a different former employee of
Therapy against Therapy alone. The filing of the suits triggered an investigation by federal
officials. The gist of the FCA claims was that Whittier and Therapy knowingly presented false
claims for Medicare reimbursement. Both Whittier and Therapy denied the allegations.
At some point, the claims against Therapy were dismissed. It is unclear from the record
whether the dismissal was a result of a settlement or whether it was a dismissal without
prejudice. Sometime later, Whittier entered into a settlement with the FCA plaintiffs, including
the government, requiring, among other things, payment by Whittier of $ 2.5 million. Therapy
was not a party to the settlement. FCA claims against Therapy were not released in the Whittier
settlement.
The settlement agreement alleges that Whittier failed “to take sufficient steps to prevent
[Therapy] from engaging in a pattern and practice of fraudulently inflating the reported amounts
of therapy provided to Medicare Part A patients.” There is no admission of liability by Whittier
in the settlement agreement and there was no finding by a court or jury that Whittier engaged in
the fraudulent conduct alleged.
DISCUSSION
Therapy seeks a declaration that the indemnity provision, quoted above, is unenforceable
as against public policy and the FCA. In short, Therapy argues that indemnification of Whittier
would relieve it of liability for its own fraud. The parties concede that if Whittier had been found
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by a court to have committed fraud, or admitted to fraud, case law under the FCA would prohibit
Whittier from obtaining indemnification. Therapy argues that the FCA preempts state law claims,
based on contract or common law, for indemnification that would offset liability for fraud.
But Whittier asserts that it did not commit fraud. There has been no finding or admission
that it committed fraud. The issue presented is identical to what was presented to the United
States Court of Appeals for the Ninth Circuit in Cell Therapeutics, Inc. v. Lash Group, Inc., 586
F. 3d 1204, 1205 (2009)(“But what happens when a target defendant settles with the government
and the relator and then seeks recovery against a third party for contractual indemnity and
independent claims?”). The facts of Cell Therapeutics are closely aligned with the facts in the
present case.
The Court in Cell Therapeutics answered its rhetorical question by holding that a
defendant settling FCA claims with no admission of liability is free to seek indemnification from
a third party. Id. at 1212. “In resolving disputes under the FCA, we have recognized ‘the general
policy in favor of encouraging parties to settle disputes.’ Treating a qui tam settlement as a de
facto finding of liability would inevitably chill the settlement spirit.” Id. (Citation omitted). After
considering both the policy behind the FCA and principles of issue and claim preclusion, the
Court reversed a lower court’s dismissal of a settling defendant’s claim for indemnification. Id. at
1213.
I find the reasoning and conclusion in Cell Therapeutics to be thoroughly persuasive. The
cases cited by Therapy are all distinguishable from the facts of both Cell Therapeutics and the
present case. Whittier should not be precluded from making a claim for indemnification merely
because it settled the FCA case. Ultimately, whether Whittier can recover indemnification will
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depend on its ability to prove its contract claim (whether Whittier’s losses were “as a
consequence of any malfeasance” of Therapy). Therapy, however, will have the opportunity to
prove that Whittier’s conduct was fraudulent. If so, Whittier may be precluded from
indemnification. These issues are not ripe for determination on the present record.
CONCLUSION
The cross-motions for partial summary judgment on Count IV of the amended
complaint (Docket Nos. 20 and 21) are DENIED.
By the Court,
Edward P. Leibensperger
Justice of the Superior Court
Date: August 3, 2017
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