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Atlantic Medical Specialists, LLC v. Gastroenterology Associates, P.A.

Superior Court of Delaware

April 20, 2017

ATLANTIC MEDICAL SPECIALISTS, LLC, a Delaware Limited Liability Company, Plaintiff,
v.
GASTROENTEROLOGY ASSOCIATES, P.A., MICHELE CAMPONELLI, THOMAS SPAHR, MARK CORSO, M.D., DAVID R. BESWICK, M.D, IRA F. LOBIS, M.D. and JOSEPH F. HACKER III, M.D., Defendants.

          Submitted: February 13, 2017

         Upon Defendants' Motions for Summary Judgment. GRANTED in Part and DENIED in Part.

          Laurence V. Cronin, Esquire, SMITH KATZENSTEIN & JENKINS LLP, Wilmington, Delaware. Attorney for Plaintiff.

          Art C. Aranilla, Esquire, MARSHALL DENNEHEY WARNER COLEMAN & GOGGIN, Wilmington, Delaware. Attorney for Defendant Michele Camponelli.

          C. Scott Reese, Esquire and Christopher H. Lee, Esquire, COOCH AND TAYLOR P.A., Wilmington, Delaware. Attorneys for Defendants Gastroenterology Associates, P.A., Thomas Spahr, Mark Corso, M.D., David R. Beswick, M.D., Ira F. Lobis, M.D., and Joseph F. Hacker, III, M.D.

          MEMORANDUM OPINION

          Charles E. Butler, Judge

         THE PARTIES

         The Endoscopy Center of Delaware ("ECD") is an "ambulatory surgical center" ("ASC") operated near the Christiana Hospital primarily for the purpose of conducting endoscopic services.[1] It has been in operation for approximately 20 years.[2]

         The ECD was founded by a medical practice of gastroenterologists that operates as a corporation called Gastroenterology Associates (GA).[3]

         In 2001, a company based in Kentucky called Amsurg purchased a 51% stake in the ECD from GA.[4] Amsurg has a controlling interest in approximately 260 ASCs nationwide.[5] The remaining 49% interest in ECD was retained by the physicians of GA.[6]

         Dr. Michael Katz ("Katz") is an anesthesiologist who formed an anesthesiology practice called Outpatient Anesthesia Services ("OAS") in 2002.[7] OAS performed anesthesiology services for a number of medical practice groups, GA being one of them.[8]

         We will also be hearing about Atlantic Medical Specialists ("AMS"). When Katz was preparing to leave OAS, he created AMS. At all times relevant to this case, Katz was the sole shareholder of AMS.[9]

         The other major player in this dispute is Diamond Medical Management Services, LLC ("DMMS"). This group was founded by doctors at ECD and includes most of the GA doctors as members. The function of DMMS is to provide medical billing, insurance, payment and related "back office" services to medical practices - the primary one being GA.[10]

         FACTUAL BACKGROUND 2002-2011

         Dr. Katz and 3 other anesthesiologists formed OAS.[11] Katz wrote the business plan.[12] The purpose of the business was to provide anesthesia services to ASCs.[13] OAS was successful at obtaining business from several ASCs, including the ECD.[14]

         OAS made fee reimbursement arrangements with various insurance companies with whom it had "participating" relationships[15] - these are called "par" in the industry.[16] These "par" arrangements set the rates at which the insurance payer will compensate the physician for his services. Services performed for insureds with which the physician is "non-par" are paid at the "usual and customary" rate as determined by the insurance company, less any copay, with the patient left to pay the physician any balance of the bill.[17]

         The specific rate that a physician and insurance company work out in a "par" arrangement is considered confidential between the insurance company and the physician. Indeed, disclosure of a physician's reimbursement rate is fraught with legal peril.[18]

         As outsiders might well imagine, medical practices are supported by accountants, bookkeepers, billing clerks, insurance liaisons, and various other "back office" assistance. GA created DMMS to support its own back office and, over time, offered its services to other medical practices.[19] The record indicates that today DMMS is the largest support service to emergency service providers state wide.[20]

         When OAS obtained its contract to provide services at the ECD, it elected to contract with DMMS to provide back office support to OAS.[21] DMMS typically bills its clients a percentage of the practice's billings.[22] Indeed, DMMS billed GA - the very physicians that founded it - 10% of GA's monthly billings.[23]

         Through his work with OAS, Katz worked at the Endoscopy Center on a daily basis and he became friendly with the gastroenterologists working there, in particular with Dr. Joseph Hacker, the president of GA.[24]

         2011-2013

         In early 2012, Katz approached Dr. Hacker - who was a member of both GA and DMMS - and told him that he (Katz) believed that his partners at OAS were going to remove him as a partner with OAS.[25] Katz asked Hacker if Hacker and GA would consider keeping him at the ECD, where Katz had developed relationships with most of the staff.[26]

         Hacker and Katz were personal friends and they discussed several different employment scenarios, including simply hiring Katz on to GA as a partner or employee.[27] Those conversations ultimately led to Hacker recommending - and ECD formally terminating - the OAS/ECD service agreement and signing a new agreement with AMS, which Katz had formed several months earlier.[28]

         The AMS/ECD agreement worked in much the same way as the OAS/ECD agreement did. Katz/AMS would draw no income directly from ECD but would instead derive his/its income from insurance payers that insured clients of the ECD.[29]

         As had OAS before him, Katz/AMS signed a separate agreement with DMMS, the billing company, to provide the billing and collection function for the arrangement between Katz/AMS and ECD.[30] It is to be noted here that while DMMS performed billing and collection services for OAS, the predecessor to AMS, as well as the doctors of GA, there is no evidence that either DMMS or GA forced AMS to use DMMS for its billing and collection services.[31] The AMS/DMMS agreement contained one provision that looms large in this litigation: a provision that bound DMMS to keep financial information about AMS confidential.[32]

         The changeover from OAS to AMS was effective officially in May 2012.[33] AMS negotiated its own reimbursement "par" rates with some insurance companies and hired staff to do the anesthesia work. From the record, it appears that AMS was "par" with Medicare/Medicaid, Highmark Blue Cross/Blue Shield and Aetna.[34] Even months later at the end of 2012, AMS was still "non par" with all of the other insurers in the area.[35]

         For a number of years, GA doctors had been seeking ways to consolidate services that were being subcontracted to other services.[36] For example, endoscopy and colonoscopy specimens must be analyzed. GA arranged to stop utilizing an outside lab to study the samples and brought the service in house.[37] Likewise, GA began delivering REMICADE, a drug frequently prescribed for their patients, in house.[38]

         GA physicians had also learned of the growing trend in endoscopy to bring anesthesia in house and that this approach was being taken by endoscopy practices elsewhere.[39] Indeed, this was one of the options discussed when Katz was seeking employment in early 2012 when faced with the prospect of his ouster from OAS.[40] While Katz says by affidavit that this option was declined because GA was not convinced they could provide anesthesia services profitably, [41] GA doctors say the option was declined because they were still busy standing up the laboratory practice they had recently taken in house.[42]

         In any event, in August 2012 -just months after AMS had replaced OAS as the anesthesia service provider, GA doctors Hacker and Corso attended a national conference where once again the subject of bringing anesthesia practices in house was discussed.[43] In addition, Amsurg, which owned any number of ASC centers, counseled the GA doctors that this was an approach a number of their other centers had taken.[44]

         THE NOVEMBER 2012 INQUIRIES OF DMMS

         By November 2012, Katz/AMS had been operating at ECD for approximately 6 months. According to Plaintiff, even though the fledgling operation had to wait for insurance payments for services previously rendered to come in, AMS was beginning to find its profitability.[45] But the AMS/ECD relationship was not without its problems.

         One issue that some doctors from GA have testified about arose when they heard complaints from their "non-par" patients about insurance payments and anesthesia services.[46] The doctors testified that they were concerned enough that they inquired of their billing arm - DMMS - about how anesthesia services were being coded and submitted to insurance companies.[47] This inquiry, about which Katz was never informed, [48] was quietly dismissed when they were satisfied by legal advice that Katz' billing practices were appropriate.[49]

         There are several emails between the doctor directors of DMMS (who are also partners of GA) and DMMS staff making inquiry into how anesthesia is billed and responses from the staff enclosing copies of AMS' financial information. Whether these requests were benign or filled with tortuous intent is very much at the center of this dispute. We can safely say, however, that questions were asked of DMMS and answers were given.

         Quite aside from these emailed inquiries of DMMS staff, the record demonstrates that the GA doctors also sought out consultants and lawyers to advise them on the feasibility of bringing anesthesia in house, including the preparation of pro forma projections of a consolidated operation.[50]

         January to July, 2013

         By January 2013 - about 7 months after AMS began operating - GA decided it would bring anesthesia in house. Dr. Hacker broke the news to Katz, telling him that the agreement with AMS and ECD was going to come to an end but that Katz would be given a substantial employment contract with GA to continue delivering anesthesia services at the ECD.[51]

         According to Katz' affidavit, he was "stunned" by the news, but took solace in Hacker's assurance that Katz would become a partner at GA[52] - an assurance that Hacker denies ever making.[53]

         The record is quiet as to what happened between January and March of 2013, except for the arrival of Thomas Spahr as the new "practice manager" at GA. According to Spahr, his first assignment at GA was to develop the planning to bring anesthesia - and Dr. Katz - in house.[54]

         In April 2013, the ECD gave AMS "official" 90 day notice of the termination of the AMS/ECD agreement to be effective on August 1, 2013.[55]

         June 2013 - Katz Signs Employment Agreement with GA

         On June 10, 2013, Katz signed an employment agreement with GA bringing him in house.[56] That contract gave Katz the title of "Medical Director" of the "Anesthesia Division" of GA at a salary of $425, 000 with additional compensation that began at $50, 000 and increased depending on other factors.[57] Although it was drafted to commence on July 1, a subsequent amendment made the effective date October 1, 2013.[58]

         During this period, from the time Katz signed the employment agreement in June until it actually went into effect on October 1, 2013, there is other evidence supporting the proposition that employees of DMMS, GA and Katz all shared information concerning anesthesia insurance contacts and reimbursement rates for anesthesia services.

         Plaintiff directs us to one insurance contract with which AMS was "par" as demonstrative of GA's improper use of AMS' information. The record shows that Thomas Spahr was the GA employee most concerned with arranging the "par" agreements with the various insurance companies. In his emailed correspondence with Aetna in July 2013, Spahr was unclear whether the rate being offered by Aetna was consistent with the rate Aetna had been paying AMS.[59] Spahr made inquiry of both Katz and DMMS whether Aetna's offer was a good one.[60] Although an email response from Katz is in the record, [61] Katz swears that he told Spahr it was inappropriate to even ask the question.[62] Whether Spahr sought a specific rate from Aetna or simply the same rate that Aetna was giving AMS is one of those fact issues that is hotly contested but is not "material" to the Court's ruling here. Whatever happened, Katz points to this event as direct evidence of GA exploiting AMS' "trade secret" information for its own benefit.

         Apparently Katz as employee was not nearly as comfortable as Katz as contract worker for OAS or AMS. The one year employment contract between Katz and ECD that began on October 1, 2013, was terminated by ECD on October 1, 2014, effective January 31, 2015.

         I. PROCEDURAL HISTORY

         AMS filed this lawsuit on June 23, 2015 - about 6 months after Katz was let go under his contract with the ECD. He filed against GA, the "CEO" of DMMS Michele Camponelli, and the "practice manager" of GA, Thomas Spahr.

         It is noteworthy who is not in this lawsuit - DMMS. Plaintiffs counsel candidly advised the Court that the written contract between AMS/Katz and DMMS includes an arbitration clause. Plaintiff says Ms. Camponelli is not subject to the arbitration provision of the DMMS contract because she is sued here in her "individual capacity." Thomas Spahr, also named individually as a defendant, began his employment with GA in March 2013 and thus was not so employed at the time at least some of this history was being developed. Again, Plaintiff avers Spahr is also sued in his "individual capacity."

         The Complaint is brought in two counts. The claim in Count I is that the Defendants misappropriated "trade secrets" consisting of "confidential business information" that included "financial information about its operations that demonstrated its profitability." Count II is denominated "tortious interference with contractual relationships." Specifically, Plaintiff claims that the named defendants, knowing that DMMS was precluded by contract from sharing AMS' business information, nonetheless induced DMMS to share its information with GA. According to Plaintiff, that sharing of tortuously obtained information caused GA to induce ECD to terminate its contract with AMS.

         The complaint was duly answered and discovery commenced. Noteworthy for these purposes is a motion to compel filed by defendant GA as to certain interrogatory answers filed by Plaintiff.

         Defendants sought information from Plaintiff fleshing out its claim to a misappropriation of "trade secrets" as well as Katz' personal tax returns in support of the claim for damages. Before those issues came up for argument, the Defendants withdrew their claim for Katz' personal financial information when Plaintiff assured Defendants that Katz was not seeking any damages whatsoever, that Plaintiff AMS was the only damaged party seeking recovery. Defendants apparently accepted that argument but pressed the "trade secrets" question.

         In response to this latter issue, Plaintiff urged that its trade secrets included: 1) the income it received, 2) the rates it negotiated with payers/insurance companies, 3) the money it actually received from payers and 4) its profit margin. Because discovery was ongoing at that point, the Court was unwilling to foreclose Plaintiff from making whatever case it could that its "trade secrets" had been misappropriated. But the Court made it clear that the issue whether Plaintiffs case was indeed over a "trade secret" was by no means certain and would be further plumbed after discovery was completed.

         In September 2016, Plaintiff filed its amended its complaint adding individual defendants Drs. Corso, Beswick, Lobis and Hacker. According to the amended complaint, each of the newly named individual defendants are/were owners of both GA and DMMA. The only "new" allegation predicating this claim of individual liability is this: "Defendants Camponelli, Spahr, Beswick, Corso, Lobis and Hacker were personally involved in causing the confidential business information of AMS to be shared with GA without the consent of AMS."

         After additional discovery, the Court has been presented with: 1) a motion for judgment on the pleadings as to the newly named defendants Corso, Beswick, Lobis and Hacker, [63] 2) an expansive motion for summary judgment filed by the GA defendants, and 3) a separate motion for summary judgment filed by Defendant Camponelli. Permission to file expanded briefs was requested and granted. Each of these motions have been duly answered by the Plaintiff and reply briefs have been filed. In addition, the Court had the benefit of extended oral argument on the motions on February 13, 2017.

          What follows is the Court's ruling on the motion for summary judgment of the GA defendants and the separate motion of defendant Michele Camponelli.

         II. STANDARD OF REVIEW

         Pursuant to Superior Court Rule 56, summary judgment "shall be rendered forthwith if... there is no genuine issue as to any material fact, and that the moving party is entitled to a judgment as a matter of law."

         Plaintiff bears the burden of proving the existence and misappropriation of a trade secret.[64] When a motion for summary judgment is supported by a showing that there are no material issues of fact, the burden shifts to a non-moving party to demonstrate that there exist genuine issues of material fact.[65] If Plaintiff fails to meet this burden, this Court's inquiry ends and judgment must be entered for defendants.[66] "Specifically, under DUTSA, the plaintiff affirmatively must prove the following: first, that a trade secret exists, i.e., that the statutory elements- commercial utility or value arising from secrecy and reasonable steps to maintain secrecy-have been shown; second, that the plaintiff communicated the trade secret; third, that such communication was made pursuant to an express or implied understanding that the secrecy of the matter would be respected; and fourth, that the trade secret has been used or disclosed improperly to the plaintiffs detriment."[67]

         III. ANALYSIS

          A. BRIEF HISTORY OF DUTSA

         Count 1 of the Amended Complaint seeks damages for misappropriation of a "trade secret" and so the first question deserving our attention is whether the information in dispute here is one.

         In the first half of the 20th century, the business community was concerned that business competition could be hampered by exposing innovation and capital to harmful lawsuits. At the same time, some businesses were being victimized by predatory competitors that engaged in unfair practices, including hiring away key personnel who brought the former employer's confidential business information with them. While our early history surely favored competition and open markets over complaints of sharp practices, the law needed to evolve to repudiate a class of competitive behavior that crossed the line.

         We will begin our review of the developing law of trade secrets with the First Restatement of Torts. Like other Restatements, it represented a broad overview of the state of the law as practiced in state courts across the country at the time of its publication (1939). Section § 757 of the Restatement directed the practitioner to factors that might trigger liability if one disclosed or used the trade secret of another. But rather than defining a trade secret specifically, the Restatement settled for a discussion of what one might be, in comment (b):

It differs from other secret information in a business (see § 759) in that it is not simply information as to single or ephemeral events in the conduct of the business... A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article. It may, however, relate to the sale of goods or to other operations in the business, such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management.[68]

         This somewhat amorphous "definition" was distinguished from a different class of misappropriation of business information. Restatement section 759 recognized liability for "Procuring Information by Improper Means, " which involved, as its name implies, procurement of "information about another's business" by improper means for the "purpose of advancing a rival business interest."[69] This was, in essence, a category of confidential business information that was not a trade secret. As we shall see, its absence in the codified law, or in any subsequent Restatement, is sorely missed.

          Aside from the difficulties in defining exactly what a trade secret is, federal law was evolving as well. States were consolidating their courts of law and equity, broadening the scope of available remedies. In addition, the Supreme Court's Erie[70] decision that "there is no federal common law" with its direction to federal courts in diversity cases to follow the common law of the forum states left many in the bar concerned with how a common law of "business torts" would develop.

         Meanwhile, states were beginning to pass their own trade secrets protection and deceptive trade practice laws, [71] but there was no effort to coordinate the statutes across state lines, leaving business and employees with differing and potentially conflicting duties and remedies among the states.

         In 1964, the Supreme Court issued its "Sears/Compco" decisions[72] invalidating Illinois' unfair competition laws because they conflicted with federal patent law. So to the extent businesses were hoping for a "federal common law" of unfair trade practices, their hopes were dashed by Erie. To the extent they were hoping for a developing state law barring unfair competitive practices, their hopes were dashed by Sears/Compco. It has been called the "Erie/Sears/Compco Squeeze": "the very entities that were charged with developing unfair competition law - state courts and legislatures - were prevented by principles of federal preemption from adopting state laws that interfered with federal patent policies."[73]

         Whether it was the "squeeze" of Supreme Court jurisprudence, the press of other business, or simply difficult work by the American Bar Association's Patent, Trademark and Copyright Committee, the effort to produce a uniform trade secrets law that began in 1968 did not yield a Uniform Trade Secrets Act ("UTSA") until 1979.[74] While we must discuss its details presently, two overall features are worth mentioning at the outset.

         First, UTSA regulates the misappropriation of "trade secrets" and makes a strong effort to define what a trade secret is. Unlike the Restatement of Torts (First), there is no provision for business information that is confidential but does not meet the definition of a "trade secret."[75] Second, in order to promote the desired uniformity and predictability across the states, UTSA contains an important "displacement" provision that requires that all claims falling within its somewhat amorphous terms be preempted in favor of disposition under the Act.[76]

         But lest we get ahead of ourselves, an examination of the term "trade secret" is clearly our first order of business.

         B. IS THE SUBJECT MATTER OF THE LAWSUIT A TRADE SECRET?

Under DUTSA, a "trade secret" is defined as follows:
"Trade secret" shall mean information, including a formula, pattern, compilation, program, device, method, technique or process, that:
a. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
b. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.[77]

         1. Was The Information "Known or Readily Ascertainable by Proper Means?"

         In this dispute, Plaintiff claims misappropriation of its "trade secrets" with respect to two categories of information: 1) its profitability, and 2) its reimbursement rates from insurance companies.[78]

         a. Was information concerning AMS' profitability known or readily ascertainable?

         Plaintiff claims that Defendants obtained information concerning its profitability by ordering employees of DMMS, a company controlled by Defendants, to deliver it up. For purposes of this motion, we must assume this to be true. But while that may describe how Defendants learned the information, it begs the question whether the information they learned was also "known or readily ascertainable through other means."

         The movement of anesthesia services "in house" at ASCs generally is not news, or secret.[79] There is testimony in this record that GA doctors had been considering bringing anesthesia services in house for some time before November 2012.[80] There is further testimony that in considering the question, they consulted practice specialists, attorneys and accountants who created pro forma financial information to project revenue and profit from an in house anesthesia practice.[81] There is no evidence that any of this data was generated by using revenue or expense data from the books of AMS.

          Plaintiff urges that while bringing the service in house may have been a topic of general conversation, Defendants had hitherto not done so because they were not impressed that doing so would be profitable.[82] Whether that is a correct history or not, it again begs the question: was the idea that ambulatory surgery centers bringing anesthesia services in house was profitable for the owners of the ASC information that was self-evident or at least readily ascertainable? Even if we accept the proposition that "cutting out the middleman" and employing an anesthesiologist in house would be profitable was not "self evident, " the Court cannot agree that figuring this out was not a conclusion "readily ascertainable" upon even the most basic analysis.

         For example, information is not "misappropriated" when it is "readily ascertainable" by "reverse engineering."[83] Here, there is record testimony that Dr. Beswick did exactly that. Knowing that the ECD serviced approximately 10, 000 patients per year and, using the "explanation of benefits" from his own procedure that included both the fee charged by the anesthesiology service and what the insurance company paid, he was able to determine a gross revenue number for the practice annually.[84] If a doctor can figure out the numbers from his own colonoscopy on the back of a napkin, it cannot rightly be considered a trade secret.

         b. Was the reimbursement rate from insurance companies known or readily ascertainable?

         The information concerning reimbursement rates stands on substantially different footing from the issue of profitability generally. We understand that individual physicians and practices must negotiate their reimbursement rates with insurance company payers separately from others.[85]

         On the other hand, the federal government maintains an open website through which anyone can learn the reimbursement rates for procedures covered by Medicare.[86] We also understand that doctors seeking a "par" relationship with an insurer may use the published Medicare reimbursement rate as one measure of the value of the service.[87]

         All of this helps us understand that while an outsider could obtain some idea of a reimbursement rate by consulting readily available and "trade" sources, the outsider could not learn the specific reimbursement rate between a specific insurer and a specific doctor.

         2. Did the Information Have Independent Economic Value Because it was Secret?

         a. Profitability

         The second requirement for a trade secret under the Code is that the information concerning AMS' profitability and reimbursement rates have "independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use."[88]

         We can think of this requirement as one that the "secret" - for example in this case, the profitability of the anesthesia business at the ECD - have independent economic value because it is a secret. It strikes us that profitability in a publicly traded company is not only not a secret, its profitability must be made known in public filings available for all the world to see.

         Let us assume that an entrepreneur, say, a doctor starting an anesthesia business, comes up with an idea to create an enterprise from which he derives great profit. Does the fact that he keeps the profitability a secret give the profitability "independent economic value?" The Court must answer this question in the negative. A business is either profitable or it is not. The Trade Secrets Act seeks to protect those ideas, information, processes, etc. that gives the enterprise profitability, not the fact that it is profitable. The fact that the enterprise is profitable has no independent economic value. We have been directed to no case that found profit or loss, standing alone, to qualify as a "trade secret."

         Even in Plaintiffs most sinister view of the meddling into its profitability, Plaintiff points to no evidence that GA used any specific information about profitability in its deliberations. After all, AMS had only been in business a few months and GA's cost structure would have been substantially different. About the most damaging thing Plaintiff can say is that GA looked at AMS' numbers, saw that it was profitable, and decided to move forward bringing anesthesia in house. This accusation lacks all of the typical hallmarks of a trade secret, i.e., new marketing plans, chemical formulas, client lists, and other materials developed by a business only after the extension of considerable effort. The trade secret law seeks to protect that investment in the business, the ideas, the effort and time spent by the business in developing it.

         If the profitability of AMS were coupled with other elements belonging to AMS depicting new business plans, pro formas, etc., Plaintiff might have a stronger argument. Under the facts in this record, the Court is not satisfied that mere profitability, standing alone, has "independent economic value" because it is kept a secret.

          b. Reimb ...


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