Author Archives: George Sanderson

Failure to Hold Back Settlement Funds Subject to a Medical Lien Can Expose an Insurer to Treble Damages

A court’s decision to impose liability for committing an unfair or deceptive trade practice in a particular case may have wide-ranging implications—even when the amount in dispute in the matter itself is relatively minor.

Such is the case in Nash Hospitals, Inc. v. State Farm Mutual Automobile Insurance, Co., a recent decision by the North Carolina Court of Appeals.

In Nash, the Court of Appeals concluded that State Farm committed an unfair and deceptive trade practice in its handling of the disbursement of settlement proceeds subject to a medical lien. Although the matter arose over a hospital bill of only $757, the reasoning and holding in Nash could have broader implications for how insurers handle personal injury settlements.

State Farm settles without notifying the hospital

Jessica Whitaker was injured in an automobile accident caused by another driver. She incurred medical expenses with Nash Hospitals and two other healthcare providers following the accident.

State Farm insured the culpable driver. State Farm negotiated a settlement with Ms. Whitaker to pay a substantial portion of her medical expenses. Ms. Whitaker did not involve counsel in those negotiations.

State Farm sent a check to Ms. Whitaker for the negotiated settlement amount. The check was jointly payable to Ms. Whitaker, Nash Hospitals, and the other medical providers. Ms. Whitaker was unable to cash the check because it required the endorsement of the co-payees.

North Carolina law grants hospitals and medical providers with certain statutory rights to assert an interest in the personal injury recoveries of their patients. These statutory rights are commonly referred to as medical liens. Pursuant to N.C. Gen. Stat. § 44-50, Nash Hospitals possessed a medical lien on Ms. Whitaker’s settlement proceeds pro rata with the other healthcare providers. Under the statute, the lienholders’ recovery was capped at 50% of the total settlement. 

Nash Hospitals notified State Farm of its medical lien prior to the settlement. State Farm did not notify Nash Hospitals, however, that it had reached a settlement with Ms. Whitaker.

Nash Hospitals subsequently contacted State Farm to inquire about the status of the claim. Only then did State Farm disclose that it had reached a settlement with Ms. Whitaker and issued the joint check to her. State Farm took the position that the issuance of the joint check satisfied and extinguished any obligation it had to satisfy Nash Hospitals’ medical lien. State Farm told Nash Hospitals to contact Ms. Whitaker directly to resolve how the settlement proceeds should be divided.

After finding out about the settlement, Nash Hospitals advised State Farm that State Farm’s failure to retain funds sufficient to satisfy its lien violated the medical lien statutes. Nash Hospitals also pointed out that, by issuing a joint check to Ms. Whitaker that she was unable to cash, Ms. Whitaker would be forced to obtain an attorney and incur additional unnecessary expenses in order to actually recover any of the insurance proceeds.

Nash Hospitals sues for its share of the settlement proceeds

State Farm did not respond to the letter. Nash Hospitals then sued State Farm for violating North Carolina’s medical lien statutes. Nash Hospitals’ complaint also included an unfair and deceptive trade practices claim.

The trial court granted summary judgment to Nash Hospitals, finding that State Farm violated both the medical lien statutes and N.C. Gen. Stat. § 75-1.1.

State Farm appealed and the North Carolina Court of Appeals affirmed State Farm’s liability for both claims. The Court of Appeals remanded the case, however, to have the trial court recalculate the damages originally awarded.

The Court of Appeals determined that State Farm had a statutory duty to retain sufficient funds from the settlement to satisfy the lien claims and to distribute proceeds to the lienholders before disbursing to Ms. Whitaker.

With respect to the 75-1.1 claim, State Farm first challenged the hospital’s standing to bring the claim. State Farm argued that Nash Hospitals lacked privity with the insurer. The Court of Appeals rejected that argument. The court reasoned that Nash Hospitals was a third-party beneficiary of the insurance contract and came into privity with State Farm upon notifying State Farm of its asserted lien.

The court also found that State Farm’s failure to notify Nash Hospitals of the settlement with Ms. Whitaker, coupled with its direction that Nash Hospitals seek recovery from Ms. Whitaker herself, was both an unfair and a deceptive act.  The Court of Appeals appears to have viewed the insurer’s conduct as a species of direct unfairness. The court also indicated that the same conduct met the statutory definition of a deceptive act because State Farm’s handing of the lien claim possessed “the capacity or tendency to deceive.”

The court was careful, however, to indicate that State Farm’s violation of the North Carolina medical lien statutes did not make State Farm per se liable under 75-1.1. Rather, liability stemmed from State Farm’s underlying conduct and “its failure to cure the violation absent litigation.”

The Court of Appeals directed the trial court to enter summary judgment to Nash Hospitals for a mere $971.07 (treble the actual damages of $323.69 awarded) . Upon remand, it is possible that Nash Hospitals will also seek an attorney fee per N.C. Gen Stat. § 75-16.1.

Although it appears that State Farm will not incur a significant cash outlay in this matter, the case is likely to have broader implications for how the company handles claims settlement generally. State Farm’s counsel indicated at oral argument that the insurer routinely issued joint checks and told “the . . . parties [to] agree . . . who’s going to get what.” State Farm will presumably need to end the practice of issuing joint checks to head off potential future treble damages awards. Going forward, it also appears the burden of determining how personal injury settlement proceeds should be allocated will fall more on the insurer.

Author: George Sanderson

Can Forcing a Company into Bankruptcy Be an Unfair or Deceptive Trade Practice? Part 2

In a recent post, we examined the bankruptcy case of In re American Ambulette & Ambulette Service, Inc.—a case in which a trustee raised a novel theory of liability under N.C. Gen. Stat. § 75-1.1. The bankruptcy trustee alleged that certain business strategies that forced the debtors into bankruptcy constituted unfair and deceptive trade practices.

The bankruptcy court dismissed the trustee’s original 75-1.1 claim for failing to plead how the defendants’ alleged conduct affected either competitors or consumers. But the court allowed the trustee to amend the complaint.

The trustee’s amended 75-1.1 claim survived dismissal. Today, we examine the court’s opinion about the amended complaint.

The Trustee’s Original Allegations

The debtors in American Ambulette were in the medical-transport business. Each of them filed for liquidation under chapter 7 of the bankruptcy code. The bankruptcy court consolidated the cases and appointed a single bankruptcy trustee to administer the debtors’ assets.

The trustee then filed an adversary proceeding against the debtors’ parent and sister corporations, as well as their officers and directors.

The trustee alleged that the debtors’ corporate parents developed a business plan to expand their operations. As part of the expansion plans, the parent entities established two new subsidiaries. The new subsidiaries allegedly competed with the debtors. According to the trustee, the corporate parents and their officers and directors caused the debtors to incur substantial expenses to further the expansion plans.

In the original complaint, the trustee accused the defendants of (1) diverting the fruits of their business-development activities to the competing subsidiaries, (2) transferring assets from the debtors to those subsidiaries, and (3) forcing the debtors into liquidation. Those activities, the trustee argued, eliminated the debtors as competition for the new subsidiaries.

The complaint included a claim against the parent companies and their officers and directors for violations of section 75-1.1.

The First Motion to Dismiss

The defendants moved to dismiss the original complaint. The motion largely relied on a recent federal district court decision since affirmed on appeal. The defendants argued that, under the recent decision, a business can pursue a 75-1.1 claim only when the business has acted as a consumer or is engaged in commercial dealings with the defendant. The defendants also stressed that the defendants on the 75-1.1 claim did not include the competing subsidiaries themselves.

The bankruptcy court granted the motion to dismiss. The court identified three categories of cases in which a business plaintiff may assert a 75-1.1 claim:

  • The plaintiff has acted as a consumer or has otherwise engaged in commercial dealings with the defendant.
  • The plaintiff and the defendant were competitors.
  • The conduct that gives rise to the claim has had a negative effect on the consuming public.

In the original complaint, the trustee did not allege that the debtors were engaged in commercial dealings with—or were competitors of—the defendants. The complaint also lacked any allegations on how the defendants’ conduct affected consumers. 

After the court dismissed the original 75-1.1 claim, the trustee filed an amended complaint. The amended complaint added the competing subsidiaries as parties to the 75-1.1 claim. It also asserted that the defendants’ actions benefited the competing subsidiaries.

The amended complaint also contained detailed allegations about how the defendants affected the marketplace and the consuming public.  The trustee’s amended complaint specifically alleged that the defendants’ conduct did not merely cause the replacement of one competitor with another, but actually removed a competitor from the relevant market altogether.  The trustee further alleged that the removal forced the county in which the debtors previously operated to declare a state of emergency. The county was also allegedly forced to obtain an injunction to compel the debtors to continue to provide the 911 emergency services that the debtors contracted to provide to the county.

The Second Motion to Dismiss

The defendants moved to dismiss the amended complaint, but the court refused to dismiss the amended 75-1.1 claim. The court used the same analytical framework, and categories for when a business may assert a 75-1.1 claim, as in the prior opinion.  This time around, however, the trustee convinced the court that the debtor’s alleged removal from the relevant market, and the alleged interruption of emergency medical service to citizens that was a result, made a sufficient impact on the consuming public to violate section 75-1.1.

The factual scenario in which the possible 75-1.1 violation in American Ambulette arose is relatively unique.  But the caselaw concerning when a business may assert a 75-1.1 claim is developing quickly.  Going forward, we may see other “theft of corporate opportunity” claims—both in and out of bankruptcy.

Author: George Sanderson

The North Carolina Business Court Hands Down an Important Healthcare Antitrust Decision, Part 2

In a recent blog post, we discussed a new antitrust decision from the North Carolina Business Court that involves healthcare providers and health insurers. In that post, we examined the significance of that opinion to indirect-purchaser standing under North Carolina antitrust law. Judge Michael Robinson’s decision in Christopher DiCesare, et al. v. The Charlotte Mecklenburg Hospital Authority d/b/a Carolinas HealthCare is also noteworthy because of its in-depth discussion of the pleading requirements for state antitrust claims under Chapter 75.  We explore Judge Robinson’s treatment of the antitrust claims themselves in this post. But first, let’s review the relevant facts:

Insureds Allege Antitrust Injuries from Contracts between Health Insurers and Hospitals

The plaintiffs in DiCesare are individual North Carolinians that purchased health insurance that covered acute hospital services. The plaintiffs brought the action on behalf of a putative class of all North Carolinians that purchased insurance from four particulars health insurers since January 1, 2013.

The plaintiffs alleged that the defendant, Carolinas HealthCare, maintains a 50% share of the Charlotte-area hospital market.

The plaintiffs accused Carolinas HealthCare of forcing insurers to enter into service contracts that contained provisions that violate state antitrust law. The plaintiffs alleged that the contracts contained “anti-steering” terms that discouraged insurers from providing accurate information to their insureds about treatment alternatives to Carolinas HealthCare.

The plaintiffs claimed that the anti-steering provisions harmed competition because insurers would pay hospitals less if insurers could provide customers with more complete information about their healthcare options. The plaintiffs further alleged that the insurers would pass the savings on to their insureds. Ultimately, plaintiffs contended that individual North Carolinians would pay less for insurance in the absence of the anti-steering contract provisions.

The plaintiffs brought two separate claims: (1) that the contracts were an unlawful contract, combination, or conspiracy in restraint of trade in violation of  N.C. Gen. Stat. sections 75-1, and 75-2; and (2) monopolization in violation of section 75-1.1, 75-2, and 75-2.1.

After the plaintiffs filed an amended complaint, Carolinas HealthCare moved to dismiss for lack of standing pursuant to both North Carolina Rule of Civil Procedure 12(b)(1) and 12(b)(6). Carolinas HealthCare also moved for judgment on the pleadings as to both antitrust claims. Judge Robinson denied both motions, but issued a single opinion that covered both.

In our first post, we discussed Judge Robinson’s determination that the plaintiffs had standing to bring their antitrust claims. In this post, we will discuss the court’s analysis of the substantive antitrust claims.

The Plaintiffs Adequately Pleaded an Unlawful Contract Claim

The part of Judge Robinson’s opinion that decided Carolinas HealthCare’s motion for judgment on the pleadings first addressed the plaintiffs’ unlawful restraint of trade claim. The judge noted that Section 75-1 is based on section one of the Sherman Act. As such, federal decisions applying the Sherman Act are “instructive” in determining if an agreement unlawfully restrains trade under North Carolina law.

Applying Fourth Circuit precedent, Judge Robinson determined that the elements of a restraint of trade claim under North Carolina law are: (1) a contract, combination, or conspiracy; (2) that imposed an unreasonable restraint of trade.

Judge Robinson indicated that the relevant case authorities generally find horizontal restraints on trade (e.g. price-fixing among direct competitors) to be per se unreasonable. By contrast, courts evaluate vertical restraints under a “rule of reason” analysis. The parties agreed that the anti-steering provisions were, as alleged, vertical restraints.

Relying on federal precedent, Judge Robinson indicated that a plaintiff would have to prevail under a very convoluted test in order to prove ultimately an unlawful restraint of trade under the rule of reason. First, the plaintiff must prove an adverse effect on competition in the relevant market. The burden then shifts to the defendant to demonstrate that the challenged agreement has pro-competitive effects. If the defendant is able to prove that the agreement provides a benefit to competition, the burden shifts again. The plaintiff must then prove that any legitimate competitive benefit could be achieved through less restrictive means.

Judge Robinson noted that the Court first had to determine the relevant market before analyzing the competitive effect of the defendant’s challenged activity. The parties did not dispute that the relevant market was the sale of general acute inpatient hospital services to insurers in the Charlotte area. 

Judge Robinson then analyzed whether the plaintiffs had adequately alleged an adverse effect on competition. Judge Robinson required that the plaintiffs first had to plead adequately that Carolinas HealthCare possessed market power within the relevant market. The judge determined that the plaintiffs’ allegations, which included: (1) that Carolinas HealthCare had a market share of approximately 50% of the relevant market; (2) that the hospital’s largest competitor had less than half of Carolinas HealthCare’s annual revenues; and (3) that licensing requirements and acquiring suitable sites for hospitals to build created significant barriers to entry, sufficiently alleged market power.

Finally, Judge Robinson detailed the potential anti-competitive effects flowing from Carolinas HealthCare’s alleged conduct. The plaintiffs had alleged that the anti-steering provisions contained in the insurance contracts had the following anti-competitive effects:

  • Protecting Carolinas HealthCare’s market power and enabling the hospital to charge supercompetitive prices;
  • Substantially lessening competition among service providers;
  • Restricting the introduction of innovative insurance products that could lower prices;
  • Reducing consumer incentives to obtain treatment for more cost-effective providers;
  • Depriving insurers and insureds of the benefits of a competitive market for services;
  • Reducing the number of insurance plans from which consumers can choose.

Judge Robinson held that the plaintiffs’ factual allegations were sufficient to overcome the motion for judgment on the pleadings. The judge did not require the plaintiffs to prove that alleged anticompetitive risks outweighed Carolinas HealthCare’s pro-competitive justifications, which would be the plaintiffs’ ultimate burden under the rule of reason analysis. The plaintiffs only needed to allege sufficient anti-competitive effects of the challenged conduct in order to get past the pleading stage.

The Plaintiffs’ Monopolization Claim Also Survives

Judge Robinson also used federal antitrust precedent in rejecting Carolinas HealthCare’s challenge to the monopolization claim.  Judge Robinson determined that a monopolization claim requires possession of monopoly power in the relevant market and willful maintenance of that power.

Carolinas HealthCare challenged the sufficiency of plaintiffs’ claim that it possessed monopoly power, but did not challenge the adequacy of the willful maintenance allegation. 

Although the plaintiffs bore a higher burden than to allege market power, Judge Robinson found that the plaintiffs’ allegations concerning market power were sufficient to assert monopoly power, too. Judge Robinson noted that the plaintiffs would bear a heavy burden ultimately to prove monopoly power. He recognized that, in other monopolization cases, market share below 50% is rarely evidence of monopoly power and market share between 50% and 70% is only occasionally proof of monopoly power.

Throughout Judge Robinson’s opinion, the judge emphasized the relatively low burden that the plaintiffs possessed at the pleading stage. He expressly noted that pre-discovery dismissals of state antitrust actions are relatively rare. The judge did, however, express some degree of skepticism that the plaintiffs would be able to meet their burden at summary judgment for several aspects of their claims.  Nevertheless, he allowed plaintiffs discovery as to both of their antitrust claims

Judge Robinson’s opinion in DiCesare appears to set a relatively low bar for state antitrust claims to survive to discovery, even where the claims may have a hard time ultimately making it to trial. We will have to see if there is an increase in state antitrust claims as a result.

Author’s Note: In our prior post about DiCesare, we discussed the unusual step that Judge Robinson took to invite Carolinas HealthCare to seek interlocutory review of the judge’s decision on indirect purchaser standing. Carolinas HealthCare took the judge up on his offer. Last Friday, the defendant filed a Petition for Writ of Certiorari to the North Carolina Supreme Court. 

Author: George Sanderson