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Correctional Medical Services, Inc v. State of New Jersey

May 22, 2012


On appeal from the Superior Court of New Jersey, Law Division, Mercer County, Docket No. L-904-09.

The opinion of the court was delivered by: Payne, P.J.A.D.



Submitted January 18, 2012 - Decided Before Judges Payne, Reisner and Hayden.

The opinion of the court was delivered by PAYNE, P.J.A.D.

As the result of the grant by the New Jersey Supreme Court of the motion for leave to appeal filed by defendants State of New Jersey, Department of Corrections (DOC) and State of New Jersey, Department of the Treasury, Division of Purchase and Property (DPP), Contract Compliance and Audit Unit (CCAU) (collectively, State or defendants), and the Court's remand of the matter to us for consideration on the merits, we address defendants' appeal from a January 14, 2011 order by the trial court overruling defendants' assertion of the deliberative process and the official information privileges in connection with the production of certain documents in this contract litigation and the court's March 18, 2011 order denying reconsideration of its decision and requiring production of the disputed documents by April 18, 2011.*fn1


We recount the case's factual background and procedural history at some length to provide a context for our legal analysis of the issues raised. Commencing in 1995, plaintiff Correctional Medical Services (CMS), as a private contractor, provided medical and dental services to New Jersey's prison inmates under a series of contracts negotiated by the DPP and administered by the DOC. In 2004, CMS was awarded a further contract that ultimately ran from April 1, 2005 through September 30, 2008. That contract contained a series of "objective performance/critical indicators" by which CMS's performance would be gauged. It also contained a specified audit process that permitted the performance of quarterly audits of CMS's work at each institution, specified the level of monitoring that could be imposed, and established an administrative process by which results could be reviewed and contested by CMS until such time as a final decision was reached by the DOC. The contract also contained a liquidated damages provision that permitted the deduction of such damages from payments due CMS in the month following the expiration of the deadline for an appeal from a final administrative decision regarding the work.

However, on August 29, 2005, the Regional Vice-President of CMS, wrote to a DOC Assistant Commissioner memorializing his understanding that, in the preceding eight months, the DOC had agreed, among other things, to enforce the contract's liquidated damages clause only for CMS's "continued failure to progress in program improvement efforts." As a result of that agreement, no liquidated damages assessments were imposed in the early years of the contract.

In July 2005, the Contract Compliance and Audit Unit (CCAU) of the DPP commenced a performance audit of the dental portion of the CMS contract. In February 2006, it distributed a draft dental audit report to representatives of the DOC and CMS with a request for comments. A final report, timed to coincide with a report issued by the New Jersey Office of the Inspector General (OIG), was issued in October 2007 detailing the audit results pertaining to performance of dental services under the contract.*fn2

At approximately the same time that the CCAU was conducting its audit, the OIG instituted an independent investigation of services provided by CMS. On October 15, 2007, it issued its first report detailing the results of its investigation into alleged contract noncompliance by CMS, particularly in connection with dental services. The report described the OIG's investigative process as follows:

In conducting the investigation, OIG interviewed 24 people, many of them multiple times, including DOC employees, CMS representatives, the president of the former dental services provider,*fn3 and representatives from Treasury's Division of Purchase & Property. OIG gathered over 12,000 pages of documents that were logged into a database. OIG also performed a site visit at the DOC Central Reception and Assignment Facility, including an observation of the dental intake process.

OIG provided a draft of this report to the Commissioner of the Department of Corrections for review and comment. The Commissioner's comments and the comments of responsible staff have been included in this report as appropriate.

The OIG observed that the DOC had failed to assess CMS's compliance with contract requirements for purposes of potentially levying liquidated damages, and that the DOC's stated reason for adopting that course was because CMS's services were improving. The OIG concluded in that regard that the Assistant Commissioner's agreement with CMS's Vice-President to refrain from assessing liquidated damages was completely unauthorized. The OIG recommended that the DOC review dental records for improper payments and, under the direction of the DPP, calculate the amount of liquidated damages to be assessed against CMS "for the entire period of the contract and assess liquidated damages."

Thereafter, in December 2008, the OIG issued a supplemental report concerning its investigation of CMS's performance of both dental and medical services. Again, it detailed its investigative process, which included interviews with eighteen people and the gathering of over 1,000 pages of documents, and its provision of a draft version of the report to the DOC and the Assistant Commissioner for comment.

In its supplemental report, the OIG concluded that CMS's performance did not meet levels required by the contract, the State should have been imposing liquidated damages, and that the failure to do so was the result of the unauthorized agreement between the Assistant Commissioner and CMS's Vice-President.

In the meantime, in December 2007, the CCAU began an expanded audit to determine liquidated damages through a review of all available objective performance indicator reports. In a letter dated July 31, 2008, the Acting Director of the DPP, defendant Alice K. Small, provided details with respect to the DPP's calculation of $3,405,979.10 in liquidated damages that the Division planned to withhold from payments due CMS. Following an exchange of correspondence, the assessment was adjusted downward to $3,244,024.13. Thereafter, various additions and adjustments were made, resulting in the imposition of a total of $3,608,981.06 in liquidated damages for the entirety of the contract.

The contract with CMS was not renewed, and commencing on October 1, 2008, inmate health services were provided by the University of Medicine and Dentistry of New Jersey.

On November 10, 2008, CMS filed a verified complaint styled as an action in lieu of prerogative writs and an order to show cause in the Law Division. Defendants moved to dismiss the action, and their motion was granted without prejudice by Judge Feinberg, who held that the complaint should have been brought under the Contractual Liability Act, N.J.S.A. 59:13-1 to 10. At oral argument on the motion, the following exchange occurred between Judge Feinberg and the attorney for the defendants:

THE COURT: Do you take the position that under the liquidated damage clause the State acted appropriately?

COUNSEL: Your Honor, there's no way I can take the position, because it clearly - they're right. It says DOC will do a number of things that DOC absolutely did not do. There are a few DOC audits from June 2008, and liquidated damages were assessed from those as well. So there is some action later in the contract period, but . . . the State's argument is that . . . under the contract . . . we still had authority to assess liquidated damages. That's what we've done.

On January 10, 2009, Judge Feinberg executed an order dismissing CMS's complaint without prejudice.

CMS appealed Judge Feinberg's order. While the appeal was pending, on April 8, 2009, it filed the present action for breach of contract, alleging, among other things, that the proposed assessment of liquidated damages was in violation of contractual procedures and the substantive terms of the contract; that the assessment was untimely and based on incomplete or inaccurate facts and improper methodologies; and that a waiver of the right to assess liquidated damages existed as the result of the State's repeated and ongoing approval of CMS's performance.

On April 8, 2010, we affirmed Judge Feinberg's order of dismissal of the first action in an unreported opinion. Corr. Med. Serv. v. State of N.J., Docket No. A-3820-08 (App. Div. April 8, 2010). In the course of the opinion, we considered CMS's argument that Judge Feinberg erred in considering the OIG reports in rendering her decision. Id. (slip. op. at 8). We found her consideration of those documents proper as indicia that the State had some facially reasonable basis for withholding payments from CMS pending adjudication of the claims for liquidated damages. Ibid. However, we observed: "The accuracy and validity of the OIG reports, as well as audits performed by ...

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