United States District Court, E.D. Tennessee, Chattanooga
CHATTANOOGA-HAMILTON COUNTY HOSPITAL AUTHORITY, d/b/a ERLANGER MEDICAL CENTER and ERLANGER HEALTH SYSTEM, Plaintiff,
XEROX CORPORATION; XEROX BUSINESS SERVICES, LLC, f/k/a AFFILIATED COMPUTER SERVICES, INC., d/b/a ACS, Defendants.
W. PHILLIPS SENIOR UNITED STATES DISTRICT JUDGE
civil action is before the Court on two pending motions to
dismiss: the motion to dismiss [Doc. 7] filed by defendant
Xerox Business Services, LLC (“XBS”), f/k/a
Affiliated Computer Services, Inc., which owned ACS
Consultant Company, Inc., d/b/a ACS Healthcare Solutions
(“ACS”); and the motion to dismiss [Doc. 9] filed
by defendant Xerox Corporation (“Xerox”). The
parties have filed briefs in support of and in opposition to
the pending motions [Docs. 8, 10, 14, 18, 27, 28], which the
Court has carefully reviewed.
considering the pending motions, defendant XBS's motion
to dismiss [Doc. 7] will be GRANTED in part and DENIED in
part and defendant Xerox's motion to dismiss [Doc. 9]
will be GRANTED.
case arises from a contract for services between plaintiff
Chattanooga-Hamilton County Hospital Authority, d/b/a
Erlanger Medical Center and Erlanger Health System
(“Erlanger”) and ACS in 2005 and 2006 [Doc. 1 at
¶10]. Subsequent to the events at issue, defendant Xerox
acquired ACS [Id. at ¶ 4].
the settlement of a prior civil suit under the False Claims
Act (“FCA”), 31 U.S.C. § 3729, et
seq., Erlanger contracted with ACS to improve its
billing and other financial practices [Id. at
¶¶ 9-11]. In December 2005, Erlanger and ACS
entered into a Service Agreement and then into a Master
Service Agreement (“MSA”) on January 25, 2006
(collectively the “Agreement”) [Id. at
¶ 10]. Under this Agreement, ACS agreed to provide
Erlanger with “consultants, managers, technical
personnel, and other personnel to furnish healthcare
information technology, strategic, financial and operations
management consulting services, and computer program
development services” who would work at Erlanger
[Id. at ¶ 13]. During the term of this
Agreement, ACS and its employees had the authority to assume
almost complete control of specific areas of Erlanger's
operations and ACS was authorized to appoint its own
employees to leadership positions at Erlanger [Id.
at ¶ 14]. Thus, ACS employees essentially controlled or
exerted significant influence upon Erlanger's financial
operations, its revenue cycle, its employment and staffing,
and its clinical resource management programs [Id.
at ¶ 15]. However, all of the ACS consultants working at
Erlanger remained employees or subcontractors of ACS
[Id. at ¶ 16].
order to perform the services provided for under the
Agreement, ACS and its employees were given access to
sensitive, confidential, and proprietary information,
including patient and financial information [Id. at
¶ 19]. Accordingly, the Agreement required ACS to hold
any proprietary information it received from Erlanger
“in confidence;” to “exercise reasonable
care to protect it;” and to take affirmative actions to
guard against its disclosure and misappropriation
[Id. at ¶ 20]. ACS agreed that its work would
“be performed in a workmanlike and professional manner
consistent with the level of care and skill ordinarily
exercised by providing similar services under similar
conditions” [Id. at ¶ 21]. ACS further
agreed that it would indemnify and hold Erlanger harmless
“from and against any third-party claims for loss,
damage, expense (including attorneys' fees) liability
… caused by the negligent acts or omissions of the
indemnifying party, its employees, agents or subcontractors
…” [Id. at ¶ 22].
and ACS entered into a Business Associate Addendum to the
Agreement which required ACS “to return to [Erlanger]
or destroy all PHI [“Protected Health
Information”], in whatever form or medium” under
ACS's control “as promptly as possible, but not
later than 30 days after the effective date of the
termination, cancellation, expiration, or other
conclusion” of the agreement [Id. at ¶
23]. The Addendum also imposed indemnification obligations
upon ACS for “any claim, cause of action, liability,
damage, cost or expense, including attorneys' fees and
court or proceedings costs, ” arising out of or
connection with any “breach of this Addendum by ACS or
any subcontractor, agent, person or entity under ACS's
control” [Id. at ¶ 24].
work at Erlanger lasted from November 2005 through at least
December 2006 [Id. at ¶ 25]. In December 2005,
ACS hired Robert Whipple as a revenue cycle consultant for
the Erlanger contract [Id. at ¶ 26]. In
February 2006, Whipple was named Erlanger's Director of
Utilization Review/Case Management and he remained in this
position until he was removed in July 2006 [Id.].
Erlanger claims that Whipple and ACS pressured Erlanger to
bill fewer observation claims and more inpatient claims in
order to increase revenue [Id. at ¶
ACS did this by directing the rebilling of a larger number of
observation claims from 2004-2005 as inpatient claims;
altering patient status guidelines for Erlanger's
utilization review staff; and changing the patient status in
certain patient records from observation to inpatient,
regardless of whether the change was supported by a physician
order and in violation of Medicare billing requirements
[Id. at ¶ 29].
alleges the following specific incidents:
• In December 2005, Whipple requested billing data for
all observation services and short-stay inpatient admissions
for May 2004 through October 2005 and he directed that 143
claims previously billed as “observation” claims
should be rebilled as inpatient stays [Id. at ¶
• On December 21, 2005, Whipple met with Erlanger
managers and stated that Erlanger should not be putting any
Medicare patients in observation status and that
“emergent” admissions and surgeries should always
be billed as inpatient claims [Id. at ¶ 33].
• In January and February 2006, ACS instituted changes
to the patient status guidelines to increase the amounts
billed by Erlanger [Id. at ¶ 34].
• On February 1, 2006, ACS consultants directed
Erlanger's Patient Financial Services (“PFS”)
Department to rebill as inpatient claims the observation
claims previously identified by ACS [Id. at ¶
• In mid-February 2006, ACS advised the Erlanger Board
of Trustees that rebilling the 700-plus historical
observation records as inpatient claims would produce $4.99
million in revenue for Erlanger and an additional $3.32
million moving forward [Id. at ¶ 38].
• Erlanger then requested that ACS not rebill any more
observation claims until ACS had met with Erlanger's
fiscal intermediary to discuss the propriety of ACS's
billing directives [Id. at ¶ 39].
• Starting in early February 2006, Whipple reviewed the
observation charts daily and personally changed numerous
observation patient accounts to inpatient status without
physician authorization [Id. at ¶ 40].
• In March 2006, Erlanger staff began flagging the
records reviewed by Whipple in order to document the Health
Information Management's disagreement with the ACS
billing and patient status directives [Id. at ¶
• On May 1, 2006, an Erlanger employee called
Erlanger's internal compliance hotline to complain about
Whipple's billing recommendations. From May to July 2006,
Erlanger's Chief Compliance Officer and staff met on
multiple occasions to review accounts where Whipple had
changed the patient status from observation to inpatient
without a physician order [Id. at ¶ 43].
• In June 2006, Erlanger's Chief Compliance Officer
informed employees to call the compliance hotline or notify
Erlanger Leadership directly and immediately if they saw
accounts where Whipple made status changes [Id. at
• On July 12 and 16, 2006, the internal compliance
hotline received complaints that Whipple had changed patient
statuses without a physician order [Id. at ¶
• Whipple was removed from the Erlanger engagement in
late July 2006, and he kept PHI and confidential documents
belonging to Erlanger [Id. at ¶¶ 49, 51].
March 7, 2011, Whipple filed a qui tam complaint against
Erlanger in the United States District Court for the Middle
District of Tennessee [Id. at ¶ 52]. Whipple
alleged that Erlanger violated the FCA by submitting
fraudulent reimbursement claims to Medicare and Medicaid for
medically unnecessary inpatient and observation services
during the period he worked for ACS at Erlanger
[Id.]. These allegations were based upon
confidential documents, data, and other information that
Whipple obtained from Erlanger [Id. at ¶ 53].
The United States and the states of Tennessee, Georgia, and
North Carolina declined to intervene in the lawsuit, but
Whipple pursued the claims on his own [Id. at
¶¶ 54-55]. The parties settled the lawsuit in July
2016 and the case was dismissed. As part of the settlement,
the parties signed a settlement agreement and release
[Id. at ¶ 56; Doc. 7, Ex. 2].
a June 18, 2012 letter from Erlanger's counsel to
ACS's counsel, the parties negotiated and executed a
Tolling Agreement [Doc. 1, Ex. C] relative to disputes that
had arisen between the parties, including alleged breaches of
the service agreements [Doc. 1 at ¶¶ 57-60].
Therein, the parties agreed to toll the statutes of
limitations, statutes of repose, and contractual periods of
limitation and preserve any claims or defenses arising from
“disputes relating to Mr. Whipple's conduct as part
of the work performed for Erlanger by ACS under the
Agreements, and actions taken with respect to Erlanger by Mr.
Whipple” effective June 18, 2012 [Id. at
¶ 61, Ex. C]. Erlanger terminated the Tolling Agreement
on November 14, 2016 [Id. at ¶ 63] and this
action followed. Erlanger asserts claims for: (1) breach of
contract; (2) breach of warranty; (3) breach of fiduciary
duties; (4) negligent misrepresentation; (5) negligence; and
(6) indemnification [Id. at ¶¶ 64- 111].
Standard of Review
Rule of Civil Procedure 8(a)(2) sets out a liberal pleading
standard, Smith v. City of Salem, 378 F.3d 566, 576
n.1 (6th Cir. 2004), requiring only “‘a short and
plain statement of the claim showing that the pleader is
entitled to relief, ' in order to ‘give the
[opposing party] fair notice of what the . . . claim is and
the grounds upon which it rests, '” Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting
Conley v. Gibson, 355 U.S. 41, 47 (1957)). Detailed
factual allegations are not required, but a party's
“obligation to provide the ‘grounds' of his
‘entitle[ment] to relief' requires more than labels
and conclusions.” Twombly, 550 U.S. at 555.
“[A] formulaic recitation of the elements of a cause of
action will not do, ” nor will “an unadorned,
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
deciding a Rule 12(b)(6) motion to dismiss, a court must
construe the complaint in the light most favorable to the
plaintiff, accept all factual allegations as true, draw all
reasonable inferences in favor of the plaintiff, and
determine whether the complaint contains “enough facts
to state a claim to relief that is plausible on its
face.” Twombly, 550 U.S. at 570; Directv,
Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007)
(citation omitted). “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.” Iqbal, 556
U.S. at 678. “Determining whether a complaint states a
plausible claim for relief will [ultimately] . . . be a
context-specific task that requires th[is Court] to draw on
its judicial experience and common sense.” Id.
Xerox's Motion to Dismiss [Doc. 9]
is the parent corporation of XBS. Xerox has moved to dismiss
the claims against it because Erlanger fails to allege any
facts by which Xerox can be liable for the conduct alleged in
the complaint. Indeed, the only allegations in the complaint
against Xerox are as follows:
• Xerox is a New York corporation with a principal place
of business in Norwalk, Connecticut and Xerox has done
business within Hamilton County, ...