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JOHNSTON v. GARDEN STATE MEDICAL GROUP

August 22, 2000

PATRICIA J. JOHNSTON, ET AL., PLAINTIFFS,
V.
GARDEN STATE MEDICAL GROUP, P.A., ET AL., DEFENDANTS, AND GARDEN STATE MEDICAL GROUP, P.A., THIRD-PARTY PLAINTIFF, V. HIP OF NEW JERSEY, INC., D/B/A HIP HEALTH PLAN OF NEW JERSEY THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Simandle, District Judge:

OPINION

In this action, a certain group of former employees ("Former Employees" or "plaintiffs") have brought claims, on behalf of themselves and similarly situated individuals, alleging that defendant Garden State Medical Group, P.A. ("GSMG") improperly failed to give them severance when terminating their jobs when third party defendant H.I.P. of New Jersey, Inc. d/b/a HIP Health Plan of New Jersey ("HIP") solicited GSMG's employees, in violation of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq. and various aspects of New Jersey tort law. Now before this Court are the parties' cross-motions for summary judgment. Defendant GSMG argues that it is entitled to summary judgment on plaintiffs' ERISA and state law claims because plaintiffs had no contractual or other right to severance pay. Plaintiffs argue that summary judgment should be granted against GSMG and its fiduciaries because they are entitled to severance benefits under the clear language of GSMG's severance plan.

For the reasons that follow, plaintiffs' motion for summary judgment will be denied and defendant's motion for summary judgment will be granted. Accordingly, this case will be dismissed. Additionally, the Court will administratively terminate GSMG's Third Party Complaint against HIP for indemnification.

I. BACKGROUND

A. Procedural History

Plaintiffs*fn1 filed this lawsuit for severance benefits under ERISA on October 5, 1998. GSMG filed an Answer and Third-Party Complaint against HIP for indemnification.*fn2 On December 22, 1998, plaintiffs amended their Complaint to add additional plaintiffs. On May 10, 1999, the plaintiffs requested and received permission to further amend their Complaint to add additional counts. GSMG filed Answers to the Amended Complaint and Second Amended Complaint, and left the Third-Party Complaint untouched.

On January 14, 1999, this Court entered an order staying the third-party complaint against HIP (the "Stay Order"). As set forth in the Stay Order, the order of rehabilitation entered in the matter of LaVecchia v. HIP of New Jersey, Inc., Docket No. C-275-98 (N.J.Super. Ct. Ch. Div.) (which placed HIP in rehabilitation and stayed state litigation against HIP) was given due consideration in connection with the court's decision to stay this proceeding as to HIP. The Stay Order has not been lifted.

Plaintiffs' Second Amended Complaint is written in three counts. Count I asserts a claim against defendants GSMG and its fiduciaries for failure to pay severance benefits in violation of ERISA, 29 U.S.C. § 1132(a)(1)(B). Count II asserts a claim against the same defendants for violation of 29 U.S.C. § 1104 and 1105 for breach of fiduciary duty to speak truthfully. Count III asserts a claim against the same defendants for breach of contract and the covenant of good faith and fair dealing.

Following the close of discovery, the parties filed cross-motions for summary judgment, which are now before this Court. This Court has original jurisdiction over Counts I and II pursuant to 28 U.S.C. § 1331, as they both allege violations of federal law. The Court has supplemental jurisdiction over Count III pursuant to 28 U.S.C. § 1367. For the reasons expressed herein, plaintiffs' motion will be denied, defendant's motion will be granted, and judgment will be entered in favor of GSMG and against plaintiffs. Additionally, because the stay of the Third Party Complaint still stands, in light of the dismissal of plaintiffs' Complaint, the Court will direct the Clerk to administratively terminate the Third Party Complaint.

B. Relationship Between HIP and GSMG

In January of 1996, an entity also known as Garden State Medical Group, P.A. (the "Old Garden State") merged into the Central New Jersey Medical Group, P.A. ("CNJMG"), forming the organization known now as GSMG. Until December 31, 1996, GSMG, along with its network of community physicians, was the exclusive provider of medical services to the members of HIP, a federally-qualified health maintenance organization ("HMO"). (Lenz Certif. ¶ 3.) GSMG's physicians provided medical care to HIP's members at each of the health centers owned by HIP throughout the State of New Jersey. (Id.) Although the health centers were owned by HIP, they were staffed and managed by GSMG. (Id.) GSMG also managed, developed, and contracted with a certain network of community physicians, who provided care to those of HIP's members who received care outside of the health centers. (Id.) GSMG also performed certain administrative functions on behalf of HIP, which HIP was required to perform as an HMO. (Id. at ¶ 4.) In order to perform those functions and treat HIP's nearly 200,000 members, GSMG employed approximately 200 staff physicians and 1,600 non-physician and administrative personnel. (Id.)

The relationship between GSMG and HIP was governed by a written contract known as the "Medical Services Agreement." (Id. at ¶ 5.) The final Medical Services Agreement ("MSA") was executed as of January 1, 1995 and, by its terms, expired on December 31, 1996. (Id.) The MSA was a cost-plus contract and essentially set forth that GSMG was to provide medical care and other related functions. (Id. at ¶ 6.) In exchange, HIP was to fund the payment of any and all expenses that GSMG incurred in connection with its performance under the MSA. (Id.) HIP also funded the employer-related expenses that GSMG incurred in connection with its performance under the MSA, including all salary and compensation that GSMG paid to its employees. (Id.)

The relationship between HIP and GSMG, which was a continuation of the relationship HIP had with GSMG's predecessors, was a joint enterprise — GSMG provided all staff and physicians and took care of administrative functions, and HIP paid all of the salaries and expenses. In particular, HIP and GSMG executives formed joint committees and regularly attended meetings together. (Id. at ¶ 8.) All meetings and committees were aimed at fostering and enhancing the economic development of the joint enterprise. (Id.) Both HIP and GSMG's employees, many of whom worked side-by-side, viewed HIP and GSMG as a single unified entity. (Arora Dep. 84:4 — 85:10.)

C. Events Leading to Lawsuit Between GSMG and HIP

During 1995 (prior to GSMG's contract with HIP), HIP dramatically reduced premiums due to the substantially increased competition in the HMO marketplace, and in order to try to regain some of its lost market share. (Lenz Certif. ¶ 10.) Despite this reduction and the offering of additional products, HIP's enrollment was substantially behind budget for that year and dropped precipitously throughout 1996. (Id.)

Aware of HIP's financial downward spiral, GSMG became concerned that if it was to have any long-term future and continue to service the needs of HIP, some changes were called for in the way in which business was conducted. (Id. at ¶ 11.) GSMG approached HIP with the suggestion of reconsidering the requirement that GSMG exclusively service HIP's members. (Id.)

Rather than accede that suggestion, beginning in the summer of 1996, HIP began to aggressively solicit GSMG's workforce. (Id. at ¶ 2.) First, HIP solicited GSMG's physicians. (Id. at ¶ 3.) Then it turned its efforts to GSMG's non-physician employees, many of whom had been HIP employees in the early 1990's prior to the transfer of jobs and employees by HIP to either CNJMG or the Old Garden State. (Id. at ¶¶ 14-18.) By August, thirty GSMG employees had been solicited away from GSMG. (Id.)

D. Filing of the Chancery Court Action

GSMG then commenced a lawsuit in the Superior Court of New Jersey, Chancery Division, Middlesex County, for the purpose of derailing HIP's efforts to hire away all of GSMG's employees. (Virgil Certif. ¶ 13.) GSMG filed a motion for an order to show cause to obtain temporary and preliminary restraints enjoining HIP from, among other things, hiring away GSMG's workforce. (Id.) The chancery court entered an order dated August 9, 1996 (the "August Order"), which imposed various temporary restraints upon both parties aimed at maintaining the status quo until the return date of GSMG's order to show cause. (Virgil Certif. Ex. B, ¶ 4.) This included a restraint on HIP's solicitation or hiring of GSMG employees. (Id.)

On August 28, 1996, HIP filed a motion on short notice to vacate the portion of the August Order which prohibited HIP from hiring or soliciting GSMG's employees. (Virgil Certif. ¶ 5.) HIP argued that it needed to immediately hire GSMG's employees so that it could put a replacement health care delivery system in place. (Id.) GSMG vigorously opposed HIP's motion, arguing that it needed its employees to maintain the integrity of its organization so that it could continue to survive after the MSA expired on December 31, 1996. (Id.) In addition, GSMG attempted to illustrate to the chancery court that HIP was seeking to take over GSMG gratis, without its leadership, and was seeking to destroy GSMG as a potential source of competition. (Id.)

On September 11, 1996, the chancery court ruled that HIP could begin to hire GSMG's employees to commence employment after the expiration of the MSA (as of January 1, 1997) (the "September 11th Order"). (Id. at ¶ 6.) The chancery court also ordered that the parties once again appear on September 24, 1996, for the purpose of discussing how to accomplish an orderly transition once the MSA expired. (Id.)

GSMG and HIP were unable to come to an agreement concerning an orderly transition. (Id. at ¶ 7.) The disagreement centered upon HIP's insistence that HIP be permitted to hire GSMG's employees beginning October 1, 1996, three months before the MSA was set to expire. (Id.) The chancery court acknowledged GSMG's argument that the premature hiring of GSMG's employees would irreparably injure and destroy GSMG, thereby precluding GSMG from having a future beyond December 31, 1996, but nonetheless granted HIP's application in full. (Id. at ¶ 8.) By way of an order dated September 27, 1996 (the "September 27th Order") (id. at Ex. A), the chancery court said as follows:

1. As of October 1, 1996, HIP is permitted to assume and to commence performing, in the place and stead of GSMG, the functions and services in the following areas that heretofore were provided under the Agreement by GSMG: (a) quality/ utilization management; (b) maintenance of medical records; (c) case management including Triage and Lifestarts; and (d) operation of all business offices, security services and receptionist.
2. In connection with HIP's performance of the functions and services set forth in paragraph 1, HIP is permitted to recruit and to hire, effective October 1, 1996, those GSMG employees who are performing the same functions and services under the Agreement.
3. Any claims in this action for breach of contract and/or money damages are not affected by this Order ...

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