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Kaiser Foundation Health Plan, Inc. v. Medquist

April 8, 2009


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

[relates to Docket Item 16]



This matter is before the Court upon Defendants' motion to dismiss Plaintiffs' Complaint [Docket Item 16]. Plaintiffs, a collection of hospitals and health care providers, allege that Defendants, providers of medical transcription services, fraudulently overbilled Plaintiffs for the transcription services they provided and breached their contractual agreements with Plaintiffs. As the ensuing discussion makes clear, the allegations in the Complaint are in many respects similar to those addressed in the Court's prior Opinion in South Broward Hosp. Dist. v. MedQuist Inc., 516 F. Supp. 2d 370 (D.N.J. 2007). For the reasons set forth below, the Court will grant Defendants' motion to dismiss Plaintiffs' claim brought pursuant to the California Unfair Competition Law's fraudulent business practices prong, but will deny the remainder of the relief Defendants seek.


A. Facts

The facts of this dispute, as they appear from Plaintiffs' Complaint, are as follows. Plaintiffs (collectively "Kaiser") are six hospitals and health care providers located in California, Maryland, and Colorado.*fn1 (Compl. ¶¶ 1-7.)

Defendants MedQuist, Inc. and MedQuist Transcriptions, Ltd. (collectively "MedQuist") are New Jersey-based business organizations. (Id. at ¶¶ 8-9.) MedQuist is, according to the Complaint, "the largest medical transcription company... in the United States." (Id. at ¶ 11.)

In or before 1998, MedQuist entered into contractual agreements with each of the Kaiser Plaintiffs for the provision of medical transcription services, and such agreements remain in effect to this date. (Id. at ¶ 12.) The Complaint describes the multi-step MedQuist transcription process as follows:

Doctors at... health care facilities dictate their reports free[-]form into a voice recorder that connects with MedQuist via telephone connections. That dictation is forwarded to a transcriptionist retained by MedQuist. The transcriptionist calls up a template for the particular type of report being prepared... and types the formal report. The report is then "uploaded" directly into the MedQuist computer system.... (Id. at ¶ 13.)

The dispute in this case centers on the billing practices used by MedQuist for its transcription services. Under MedQuist's contracts with each of the Kaiser Plaintiffs, the Plaintiffs were to be charged on a per-line basis, with the term "line" defined in the majority of the Kaiser-MedQuist agreements as an "AAMT line."*fn2 (Id. at ¶¶ 15-16.) The parties' contracts defined an "AAMT line" as "any line having 65 'characters'," with a "character" 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." (Id. at ¶ 17.) Under the terms of the contracts, "[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." (Id. at ¶ 17.)

As in South Broward, the Kaiser Plaintiffs allege that MedQuist did not calculate the number of billed lines in accordance with the previously quoted contractual provision. Instead, Plaintiffs allege that MedQuist "used ratios and formulas to determine the number of 'AAMT' transcription lines for which clients were billed rather than counting the number of relevant characters to determine a billable line as provided for in the contracts," and failed to disclose the use of such ratios and formulas to Plaintiffs. (Id. at ¶ 18.) In particular, according to Plaintiffs:

MedQuist carried out its fraud against Kaiser by, inter alia, either simply turning off the counting [mechanism] and [instead] multiplying a payroll line count by a multiplier to obtain a fraudulent line count to insert on invoices, or by inserting hard returns or bogus characters into reports to obtain a fraudulently inflated line count to insert on invoices. MedQuist then explicitly or implicitly communicated, falsely, to its clients including Kaiser that MedQuist had properly counted the lines in accordance with the contractual provisions. (Id. at ¶ 27.)

Plaintiffs allege that MedQuist employed such means of calculating billed lines "in order to increase the amount actually billed to a client in order to increase profit margins," (id. at ¶ 19); that is, Plaintiffs allege that MedQuist intentionally used "bogus" and "artificially inflat[ed]" line counts in order to bill Plaintiffs at a rate higher than the parties' contractual agreement provided, with the aim of "increas[ing] MedQuist's profits."*fn3 (Id. at ¶¶ 20-21.) Plaintiffs further allege that MedQuist has admitted to having employed ratios, rather than character counts, in order to produce such inflated line counts for billing purposes, although Plaintiffs do not specify the context of MedQuist's alleged admission in the Complaint. (Id. at ¶¶ 18-19.)

According to the Complaint, MedQuist also "employed a system to prevent Kaiser from discovering the inflated billing practices utilized." (Id. at ¶ 22.) Specifically, Plaintiffs allege that MedQuist "refused to release information to Kaiser about the manner in which its invoices were calculated," but would instead invoice Kaiser "twice a month without any breakdown for the costs charged." (Id.) MedQuist's aim in employing such deliberately nonspecific invoices, Plaintiffs allege, was to render Plaintiffs "unable to discern the inflated nature of MedQuist's bills because the manner of invoicing did not delineate the specific work performed but contained only gross amounts." (Id. at ¶ 21.) According to Plaintiffs' allegations, "[t]he only way for a hospital to find out if it had been overcharged was for it to count the total number of lines in all the reports prepared by MedQuist for the corresponding time frame on the invoice and compare that to the total invoice price." (Id. at ¶ 22.) Plaintiffs' facilities were incapable of performing such an assessment of the contents of all participating physicians' reports during a particular billing period. (Id.)

B. Procedural History

Plaintiffs commenced this lawsuit in California Superior Court on June 6, 2008. (Docket Item 1 Ex. A at 1.) In their Complaint, Plaintiffs assert claims for common law fraud (Count I), breach of contract (Count III), and unjust enrichment (Count V), as well as a claim that Defendants violated California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200 et seq. (Count II), and a demand for an accounting (Count IV). Defendants removed the action to the United States District Court for the Northern District of California pursuant to 28 U.S.C. § 1441(a) [Docket Item 1]. Upon the parties' Joint Stipulation, wherein the parties "agree[d] that this action is related to [South Broward]," the Honorable Phyllis J. Hamilton, United States District Judge for the Northern District of California, entered an Order transferring the case to this Court. (Docket Item 27 at 2-3.) By stipulation [Docket Item 28], the parties agreed to stay the briefing on Defendants' motion to dismiss [Docket Item 16] until the matter was transferred to this Court. The Court heard oral argument on Defendants' motion on March 19, 2009 and reserved decision.


A. Standard of Review

This Court has jurisdiction based on diversity of citizenship, 28 U.S.C. § 1332. On a Rule 12(b)(6) motion to dismiss for failure to state a claim for which relief may be granted, the Court must "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008)

(quoting Pinker v. Roche Holdings Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)).

While Rule 12(b)(6) does not permit dismissal of a well-pleaded complaint simply because "it strikes a savvy judge that actual proof of those facts is improbable," the "[f]actual allegations must be enough to raise a right to relief above the speculative level."

Phillips, 515 F.3d at 234. "To survive a motion to dismiss, a civil plaintiff must allege facts that 'raise a right to relief above the speculative level on the assumption that the allegations in the complaint are true (even if doubtful in fact).'" Victaulic Co. v. Tieman, 499 F.3d 227, 234 (3d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965 (2007)).

"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." ...

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