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Highlands Physicians, Inc. v. Wellmont Health System

Court of Appeals of Tennessee, Knoxville

December 28, 2017


          Session November 15, 2017

         Direct Appeal from the Law Court for Sullivan County No. C41368C E. G. Moody, Chancellor

         This is an interlocutory appeal as of right from certification of a class. Plaintiff, a physician-owned independent practice association, and Defendant, an organization that owns several hospitals and medical clinics, formed a physician-hospital organization to further their mutual interests, such as joint negotiations with entities such as insurance companies. Plaintiff filed this class action lawsuit alleging, among other things, that Defendant breached the contractual non-solicitation and non-competition agreement between the parties, which caused harm to Plaintiff and its members. Plaintiff moved to certify a class consisting of itself and its members, and Defendant objected. The trial court certified the class with respect to all claims pursuant to each of the three categories of class actions specified in Rule 23.02 of the Tennessee Rules of Civil Procedure. We reverse the trial court's certification of the class pursuant to Rule 23.02 subsection (1) of the Tennessee Rules of Civil Procedure. We affirm the judgment of the trial court and certification of the class pursuant to subsections (2) and (3) of Rule 23.02 and remand for further proceedings.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Law Court Reversed in part, Affirmed in part, and Remanded.

          J. Ford Little and William Kyle Carpenter, Knoxville, Tennessee, for the appellant, Wellmont Health System.

          Elizabeth Hutton, Johnson City, Tennessee, and Gary Michael Elden, Pro Hac Vice, and Matthew C. Wolfe, Pro Hac Vice, Chicago, Illinois, for the appellee, Highlands Physicians, Inc.

          Brandon O. Gibson, J., delivered the opinion of the court, in which D. Michael Swiney, C.J., and John W. McClarty, J., joined.



         I. Facts & Procedural History

         This is an interlocutory appeal as of right filed pursuant to Tennessee Code Annotated section 27-1-125 by the Defendant/Appellant Wellmont Health System ("Wellmont"). Our review on appeal is therefore limited to the trial court's certification of a class of plaintiffs pursuant to Rule 23 of the Tennessee Rules of Civil Procedure and does not extend to the merits of the underlying case.

         Plaintiff/Appellee Highlands Physicians, Inc. ("HPI") is a doctor-owned independent practice association consisting of healthcare providers whose practices are primarily located in Northeast Tennessee and Southwest Virginia. HPI's membership consists of about 1, 500 physicians and other health care practitioners. The organization was formed to represent the interests of its physicians and their practices in negotiations and collaborative ventures with health care payors and hospitals. Wellmont is a Tennessee corporation that operates multiple hospitals and outpatient clinics in generally the same geographic area as HPI. Wellmont is also the successor by merger to Bristol Memorial Hospital, Inc. ("Bristol Hospital").

         In 1993, HPI and Bristol Hospital, Wellmont's predecessor, formed what is now known as Highlands Wellmont Health Network (the "Network"). The Network is a Physician-Hospital Organization ("PHO"), which is a common type of organization formed between doctors and hospitals to promote objectives such as negotiating contracts with health insurance companies (also known as "payors"). Both HPI and Wellmont are fifty percent owners of the Network, and they are parties to a Stockholders Agreement ("SA") that governs the rights and obligations of the parties in the Network. In the original SA, Section 3 set forth each party's agreement to a "Covenant Not to Establish Entity Similar to the [Network]." In general, this section provided that the parties, their officers, their shareholders, and their members were prohibited from competing with the Network or soliciting the Network's payors. In 1995, Wellmont and HPI purportedly entered into an amendment of the SA (the "Amendment"), but the record is unclear as to whether either party has ever located a fully executed copy thereof. Whether the Amendment is valid and enforceable is not for determination on this appeal, but while the purported Amendment reiterated the parties' non-competition and non-solicitation agreement, it removed those duties from the officers, directors, shareholders, and members of HPI and Wellmont.

         HPI and Wellmont operated well within the confines of the Network for several years. However, around 2011or 2012, the senior leadership at Wellmont began to change, and the relationship between HPI and Wellmont deteriorated over the next few years. According to HPI, the new leadership at Wellmont took an adversarial position to HPI and HPI's members who were not employed by Wellmont. HPI sets forth a multitude of allegations in its verified complaint to support the proposition that, under new leadership, Wellmont began to deliberately undermine HPI, dismantle the Network, and reduce resources previously devoted to maintaining clinical integration[1] within the Network. HPI alleges that this had a detrimental effect on the Network's ability to maintain a high level of clinical integration. Additionally, HPI alleges that Wellmont unlawfully diverted two major insurance contracts from the Network to Wellmont individually. The first contract was entered into separately by Wellmont with Humana Medicare Advantage in June 2012 (the "Humana Contract."). HPI apparently considered litigation against Wellmont at that time but ultimately decided against it. The second contract was entered into separately by Wellmont and Cigna in 2014. HPI alleges that Wellmont aggressively solicited Cigna to make a separate deal with Wellmont, including telling Cigna that the Network and/or HPI were not sufficiently clinically integrated. HPI claims that these actions by Wellmont constitute a clear breach of the Stockholders Agreement and cost HPI and its members tens of millions of dollars in damages.

         Based on the aforementioned conduct, HPI filed a verified complaint against Wellmont on February 2, 2016, [2] for claims of breach of contract, declaratory and injunctive relief, breach of fiduciary duty, defamation, tortious interference with a business, and deceit of a third party. With respect to declaratory and injunctive relief, HPI requests that the trial court make the following declarations and enjoin Wellmont from taking any action inconsistent with such declarations:

1. The SA does not permit Wellmont to contract with an existing Network payor separately from the Network or solicit payors of the Network (except, if the Amendment is effective, as provided in its Section 3.2.2(i)).
2. In Section 3.2.2(i) of the Amendment, the phrase "managed care networks competing with" does not include a network that already includes the HPI-Wellmont Network.
3. By its conduct, Wellmont breached SA 3.
4. By its conduct, Wellmont has breached its fiduciary duties of care and loyalty to HPI.
5. By its conduct, Wellmont has committed an intentional tort damaging HPI and its members, as set out [in the complaint].
6. Each shareholder must put the interest of the Network ahead of its own interest.
7. Absent consent of both shareholders, neither shareholder may: (i) divert for its own benefit a corporate opportunity of the Network; (ii) compete with the Network; or (iii) solicit any payor of the Network to contract with a shareholder separately from the Network.
8. Each shareholder must comply with SA 4 procedures to call to the other's attention any potential legal or practical impediment to continuation of the Network or the SA and thereafter to arbitrate any issues on those subjects.
9. Each shareholder must take all actions and invest all resources reasonably necessary to ensure that the activities of the Network, HPI and Wellmont remain lawful, ethical, and clinically integrated.
10. Neither shareholder may retaliate against any witness or member of HPI[3]: (i) for participation in this lawsuit; (ii) for testimony given in this lawsuit; (iii) for cooperation with counsel to provide information for this lawsuit; or (iv) in general for advancing the interests of the Network or HPI in this lawsuit.

         HPI filed a motion for class certification contemporaneously with its verified complaint. HPI sought to certify a class of itself and each of its approximately 1, 500 members. HPI alleged that its members pay "tithes" to HPI based on the payments made to those members under the contracts HPI negotiates with payors on behalf of the members. Therefore, any actions by Wellmont that caused harm to HPI would necessarily harm its members, and vice versa.

         Wellmont filed an unverified answer to the complaint on April 4, 2016. Later that month, Wellmont filed a motion in opposition to class certification. HPI's motion for class certification was heard on June 7, 2016, and August 31, 2016. At the hearing on June 7, 2016, the trial court heard the arguments of counsel for both sides but eventually agreed to give Wellmont time to take discovery on the issue of class certification. On August 31, 2016, the court again heard arguments from counsel regarding class certification and ordered the parties to participate in mediation to settle as many issues in the case as possible. At a status conference on February 24, 2017, the parties informed the court that the parties had been in direct communication without the aid of counsel and that the discovery process was still ongoing. On July 5, 2017, the court once again urged the parties to continue negotiations in an effort to resolve the case but stated that he would be ruling on HPI's motion for class certification within thirty days.

         On July 27, 2017, the trial court granted HPI's motion, certifying the class of plaintiffs against Wellmont as: "All medical practitioners or practice groups who were members of Highland's Physician's Inc. for part or all of the period beginning June 22, 2012 through the date of this order." The court certified the class as to "all claims." The trial court found that the class satisfied the numerosity, commonality, typicality, and adequacy of representation requirements of Rule 23.01 of the Tennessee Rules of Civil Procedure. The trial court also concluded that HPI satisfied all three subparts of Rule 23.02 in order to maintain a class action. Further, the court held that HPI could proceed as a proper class representative on behalf of the class. Wellmont filed this interlocutory appeal regarding class certification.

         II. Issues Presented

         Wellmont presents the following issues for review on appeal:

1. Whether the trial court erred in certifying a class because HPI, a for profit corporation, does not have standing to assert claims for individualized damages against Wellmont on behalf of its shareholders, members, and independent medical practice groups?
2. Whether the trial court erred in certifying a class because HPI failed to establish the requirements for class certification under Tennessee Rule of Civil Procedure 23.01?
3. Whether the trial court erred in certifying a class because HPI failed to establish the requirements for class certification under Tennessee Rule of Civil Procedure 23.02?

         III. ...

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