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South Broward Hospital Dist. v. MedQuist Inc.

March 30, 2007


The opinion of the court was delivered by: Hon. Jerome B. Simandle



I. INTRODUCTION........................ 4

II. BACKGROUND......................... 6

A. The Parties, Procedural History and Summary of the Claims........................ 6

B. Underlying Facts................... 8

C. The Arbitration Clause. . . . . . . . . . . . . . . 12

III. STANDARD OF REVIEW.. . . . . . . . . . . . . . . . . . . 14


V. DEFENDANTS' MOTIONS TO DISMISS.. . . . . . . . . . . . . 23

A. Plaintiffs' Fraud Claim Against MedQuist (Claim 2). 23

B. Plaintiffs' Demand for Accounting (Claim 3) and Claim for Unjust Enrichment (Claim 4).. . . . . . . . . . 28

1. MedQuist, Scarpone and Clark. . . . . . . . . . 29

2. Kearns and Suender.. . . . . . . . . . . . . . 30

C. Violation of the RICO Act (§1962(c))(Claim 5) and Conspiracy to Violate RICO ((§1962(d))(Claim 6) . . 33

1. Violation of RICO (§1962(c))(Claim 5). . . . . 34

a. MedQuist, Scarpone and Clark. . . . . . . 34

i. Existence of a RICO "Enterprise".. . 34

ii. "Operations and Control" Allegations ................... 41

b. Kearns and Suender. . . . . . . . . . . . 43

2. RICO Conspiracy Claim against Scarpone, Clark, Suender and Kearns (Claim 6).. . . . . . . . . 46

a. Scarpone and Clark. . . . . . . . . . . . 47

b. Suender and Kearns. . . . . . . . . . . . 49

D. Plaintiffs' Claims for Negligent Misrepresentation (Claims 7-11).................... 51

1. Claims Against MedQuist (Claim 7). . . . . . . 51

2. Claims Against Scarpone, Clark, Suender and Kearns (Claim 8, 9, 10, 11).. . . . . . . . . . . . . 56

E. Plaintiffs' Claims for Negligent Supervision (Claims 12-15)....................... 57

F. Plaintiffs' Claims under the New Jersey Consumer Fraud Act and California Unfair Business Practices Act (Claim 16)..................... 60

1. New Jersey Consumer Fraud Act. . . . . . . . . 61

2. California Unfair Business Practice Act .. . . 64

G. Plaintiffs' Class Allegations.. . . . . . . . . . . 66

VI. MEDQUIST'S MOTION FOR SANCTIONS. . . . . . . . . . . . . 69

VII. CONCLUSION........................ 73


This matter is a complex civil action involving a putative class of hospitals asserting claims of fraud, negligent misrepresentation, negligent supervision, unfair business practices, a violation of the Racketeer Influenced and Corrupt Organizations Act, and other tort claims against MedQuist, Inc. ("MedQuist"), MedQuist Transcriptions, Ltd., (MedQuist's wholly-owned subsidiary and a transcription service company)(hereafter "Transcriptions") and four senior executive officers of either MedQuist or Transcriptions -- Ronald Scarpone, Michael Clark, John Suender, and Brian Kearns.*fn1 Presently before the Court are five motions. First, is a motion filed by MedQuist to dismiss the first claim of the Third Amended Complaint ("TAC") (fraud in the inducement of the arbitration clause) for failure to state a claim upon which relief can be granted, to compel arbitration of all claims by certain plaintiffs, and to stay the case pending arbitration. [Docket Item No. 136]. Second, this Opinion will address three motions to dismiss the TAC brought by: (1) the MedQuist Defendants [Docket Item No. 135]; (2) Suender [Docket Item No. 133], and (3) Kearns [Docket Item No. 134]. Finally, this Opinion will address MedQuist and Transcriptions' motion for Rule 11 sanctions. [Docket Item No. 111.]

For the reasons discussed in Part IV, below, the Court will not compel arbitration, finding instead that MedQuist has waived its right to compel arbitration. Because the Court finds that MedQuist has waived this right, MedQuist's motion to dismiss Claim 1 (fraud in the inducement) is moot. Furthermore, the Court will grant in part and deny in part the Defendants' motions to dismiss the TAC as follows, as discussed in Part V, below:

* Claim 2 (fraud), the Court will deny MedQuist's motion to dismiss;

* Claim 3 (demand for accounting), the Court will deny the MedQuist Defendants' motions to dismiss but grant Defendants Suender and Kearns' motions to dismiss;

* Claim 4 (unjust enrichment), the Court will deny all Defendants' motions to dismiss;

* Claims 5 and 6 (RICO and RICO conspiracy), the Court will dismiss Plaintiffs' substantive RICO claims against MedQuist only and all other Defendants' motions to dismiss will be denied;

* Claims 7-11 and 12-15 (negligent misrepresentation and negligent supervision), the Court will grant all Defendants' motions to dismiss;

* Claim 16 (violation of the New Jersey Consumer Protection Act and California Unfair Business Practices Act), the Court will grant all Defendants' motions to dismiss.

Finally, the Court will grant MedQuist's motion for Rule 11 sanctions and admonish Plaintiffs' counsel for violating their Rule 11 duties to conduct adequate pre-filing due diligence, as set forth in Part VI, below.


A. The Parties, Procedural History and Summary of the Claims

Plaintiffs are six hospitals or hospital systems that claim to be among MedQuist's nearly 3,000 medical transcription customers. (TAC ¶ 3, 8-13.) Defendant MedQuist is the largest provider of medical transcription services in the United States and Transcriptions is MedQuist's wholly-owned subsidiary. (Id. at ¶ 31.) The four individual defendants are senior executive officers of either MedQuist, Transcriptions or both. Specifically, Ronald Scarpone is the former executive vice president of marketing and new business development at MedQuist. (Id. at ¶ 16.) Michael Clark is a senior vice president at MedQuist responsible for three client service centers. (Id. at ¶ 19.) John Suender is the former executive vice president and chief legal officer of MedQuist and vice president of Transcriptions. (Id. at ¶ 17.) Brian Kearns is the former chief financial officer of both MedQuist and Transcriptions. (Id. at ¶ 18.)

On December 13, 2005, this Court ordered Plaintiffs to file the TAC. [Docket Item No. 126.]*fn2 On January 4, 2006, Plaintiffs filed the TAC [Docket Item No. 131].*fn3 Defendants moved to dismiss all claims in the TAC for failure to state a claim [Docket Item Nos. 133-135], and MedQuist moved to dismiss Claim 1, to compel arbitration, and to stay the proceedings. [Docket Item No. 136.] Plaintiffs filed opposition [Docket Item Nos. 139-141, 143] to which Defendants timely replied. [Docket Item No. 146-149.]

The TAC contains sixteen claims. In Claim 1, a subset of Plaintiffs (Childrens Hospital Los Angeles, NorthBay, and Partners HCS, who are collectively called the "Arbitration Plaintiffs") bring a claim for fraud in the inducement of the arbitration clauses in their transcriptions services agreement. (Claim 1, TAC ¶¶ 49-67.) Second, Plaintiffs bring claims of fraud and negligent misrepresentation against MedQuist. (Claims 2 and 7, TAC ¶¶ 68-75 and 109-116.) Next, Plaintiffs bring claims for accounting, unjust enrichment and violation of state unfair and deceptive trade practices acts against all Defendants. (Claims 3, 4 and 16, TAC ¶¶ 76-83 and 177-181.) Fourth, Plaintiffs bring an action for violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962. ("RICO") and conspiracy to violate RICO against MedQuist, Scarpone, Clark, Suender and Kearns. (Claims 5 and 6, TAC ¶¶ 84-108.) Finally, Plaintiffs bring actions for negligent misrepresentation (Claims 8-11) and negligent supervision (Claims 12-15) against Scarpone, Suender, Kearns and Clark, individually. (TAC ¶¶ 117-159 and 160-177.)

B. Underlying Facts

MedQuist is in the business of providing medical transcription services to hospitals and other healthcare facilities throughout the United States and has provided transcription services to all of the Plaintiffs. (Id. at ¶ 31.) According to the TAC, MedQuist's service involves several steps. (Id. at ¶ 33.) First, doctors at customer hospitals dictate their reports in free form into a voice recorder that connects via telephone with MedQuist. (Id.) The dictation is then forwarded to a medical transcriptionist, who calls up a template for the particular type of report being prepared, types the formal report, and uploads it directly into the MedQuist computer server. (Id.)

This dispute centers on the billing practices used by MedQuist for its transcription services. According to Plaintiffs, MedQuist, by using a number of different computer programs, artificially inflated invoices for transcription services. (Id. at ¶ 34.) According to the TAC, the MedQuist billing terms varied depending upon the type of report produced. (Id. at ¶ 36.) For example, the contractual cost per line, word or character of an operative medical report differed from the cost per line, word or character of a discharge summary. (Id.) The definition of a "line" for purposes of determining costs was set forth in many of MedQuist's contracts as sixty-five characters, or sometimes specifically referred to as an "AAMT line." (Id.) By way of example, according to an exemplary contract between MedQuist and several Plaintiffs:

An AAMT line is defined as any line having 65 "characters." A character is defined as any letter, number, symbol or function key necessary for the final appearance and content of a document including, without limitation, the space bar, carriage return, underscore, bold and any characters contained within the macro, header, or footer. A defined line is calculated by counting all characters contained within a document and simply dividing the total number of characters by 65 to arrive at the number of defined lines. Client acknowledges that the charges set forth in this Agreement are based upon the fact that character counts shall be determined using Vendor's software system and shall not be derived from any third party software or interface system.

(Id. ¶ 37.) According to the TAC, MedQuist stopped using a computer program that accurately counted the characters in a transcript in 1998 at which point MedQuist "began utilizing various methods to inflate its counting," leading to "artificially inflated characters, which inflated the line counts, thereby inflating the invoice." (Id.)

According to Plaintiffs, a review of internal corporate mechanisms and operations will reveal that all Defendants were aware of this and other fraudulent methods of counting characters. (Id. ¶ 39.) In the TAC, Plaintiffs describe a number of methods MedQuist used in furtherance of its fraudulent scheme to inflate customer invoices. (Id. at ¶ 40-44.) Such methods include:

* Repeatedly and systematically counting the same letter as multiple characters;*fn4 (Id. ¶ 40.)

* Using percentages or ratios to multiply by the payroll count of the transcriptionist; (Id.)

* Counting "invisible" characters known as "print strings" that are embedded within the body of each report;*fn5 (Id. ¶ 41.)

* Adding between seven and ten percent to each invoice as an allocated cost for company overhead (with the charges hidden through artificial ...

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