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Therapy Resources Management, LLC v. Whittier Health Network, Inc.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

August 3, 2017

Therapy Resources Management, LLC et al.
Whittier Health Network, Inc. et al

          Filed August 3, 2017


          Edward P. Leibensperger, Justice

         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 attorneys fees) which may result against [Whittier] as a consequence of any malfeasance, negligence . . . caused . . . by [Therapy] . . ."

         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.


         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 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 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.


         The cross motions for partial summary judgment on Count IV of the amended complaint ...

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