Opinion
CAUSE NO. IP 01-1404-C K/H
February 11, 2004
ENTRY ON MOTIONS FOR SUMMARY JUDGMENT
As medical devices have become more numerous, more complex, more expensive, and more critical in health care, hospitals face greater challenges in managing and maintaining the devices. One response to this challenge has been for hospitals to contract with outside companies for "capital asset management services." Plaintiff Columbus Regional Hospital (CRH) made such a contract with Novare Services, Inc. to provide services to manage and maintain CRH's medical equipment. In this diversity case between CRH and the successor to Novare, both sides assert claims for breach of that contract. The case is now before the court on cross-motions for partial summary judgment.
The original contract was made in 1998 for a three-year term to end February 28, 2001. Defendant Patriot Medical Technologies of Ohio, Inc. (Patriot) purchased Novare in 1999 and took over responsibility for the CRH contract. CRH was paying Patriot roughly $90,000 to $100,000 per month. On January 18, 2001, CRH and Patriot agreed to extend the terms of the existing contract for an additional ten months to December 31, 2001. The extension appears to have been a means for helping CRH show that it met hospital accrediting standards in a review during 2001. Over the summer of 2001, though, problems arose. In July and August 2001, the parties held meetings in which CRH complained about Patriot's performance under the contract. On September 4, 2001, CRH gave Patriot written notice that it was terminating the contract effective immediately, asserting that Patriot had failed to remedy the problems identified in July and August. CRH then filed this lawsuit less than three weeks later.
Defendant Patriot Medical Technologies, Inc. (PMT) is the parent company of Patriot Medical Technologies of Ohio, Inc.
CRH alleged that Patriot breached the contract by providing poor service. Patriot counterclaimed with its own assertions of breach by CRH. Patriot contends that CRH failed to pay outstanding invoices pursuant to the contract, that CRH did not provide it with sufficient notice of CRH's dissatisfaction with Patriot's performance, and that CRH hired two former Patriot employees in violation of a non-solicitation provision in the contract. CRH has raised several affirmative defenses to Patriot's counterclaims, including first breach, set-off, unclean hands, and waiver. CRH also argues that Patriot is not entitled to prejudgment interest. CRH has moved for summary judgment as to liability on most claims and counterclaims. Patriot has also moved for summary judgment on its own counterclaims for breach, and on CRH's claim for breach, CRH's computation of damages, and CRH's affirmative defenses to the counterclaims.
As explained below, each party's motion for summary judgment is granted in part and denied in part. The undisputed evidence shows that the original agreement between the parties extended all terms of the contract except for the non-solicitation provision in the contract. CRH is entitled to judgment as a matter of law on Patriot's claim for breach of that provision. The undisputed evidence also shows that CRH's affirmative defense of set-off misses the mark because the alleged set-off arose from the same contract that provides the basis for Patriot's counterclaims. Patriot is entitled to judgment as a matter of law with respect to that affirmative defense. On all other issues, the parties' motions for summary judgment are denied.
"On cross-motions for summary judgment, each movant must individually satisfy the requirements of Rule 56." Great W. Cas. Co. v. Rogers Cartage Co., 2001 U.S. Dist. LEXIS 20486 at *4 (N.D. Ill. Dec. 12, 2001). The traditional standards for summary judgment still apply even though both parties have moved for summary judgment. Blum v. Fisher Fisher, P.C., 961 F. Supp. 1218, 1222 (N.D. Ill. 1997). The court therefore considers the merits of each motion separately, and draws all reasonable inferences and resolves all factual uncertainties against the party whose motion is under consideration. O'Regan v. Arbitration Forums, Inc., 246 F.3d 975, 983 (7th Cir. 2001); Stanley v. Gentry, 2002 U.S. Dist. LEXIS 17063 at *8-9 (S.D. Ind. March 22, 2002). Pursuant to the parties' contract, the common law of Indiana governs in this case.
Discussion
I. First Breach
One critical issue is which party was the first to breach the contract. "A party first guilty of a material breach of a contract may not maintain an action against the other party or seek to enforce the contract against the other party should that party subsequently breach the contract." Licocci v. Cardinal Associates, Inc., 492 N.E.2d 48, 52 (Ind.App. 1986). The issue turns on genuine issues of fact that this court cannot resolve as a matter of law at the summary judgment stage. Each party has presented evidence that would allow a jury to find that the other first breached the agreement.
James "Butch" Friese was Patriot's regional director responsible for the CRH contract. In his deposition, he acknowledged a number of problems with Patriot's performance. That testimony does not establish the absence of a genuine issue of fact.
First, the contract did not hold Novare and Patriot to a standard of perfection. Instead, termination by CRH was authorized if No vare/Patriot did not "substantially perform in a manner reasonably consistent with performance standards of the clinical/bio-med industry," and if No vare/Patriot failed to cure problems identified by CRH within 20 days after receiving notice of a claimed breach. The evidence allows room for debate about the industry standards and how they apply to the problems identified by CRH.
Second, Friese also provided evidence that some of the performance problems CRH identified and for which it faulted Patriot had been caused by what might have amounted to sabotage by a CRH employee whose job had essentially been "out-sourced" to Novare and Patriot in the contract. Patriot contends, with some evidentiary foundation, that such actions were CRH's responsibility.
Third, even if CRH was dissatisfied with Patriot's performance under the contract, the contract called for notice and an opportunity to cure claimed breaches before CRH could terminate the contract. As explained below, there are issues of fact concerning the adequacy of the notice that was given and whether Patriot was in fact given opportunities to cure alleged breaches that CRH claims justified its termination of the contract.
On the other side, Patriot also is not entitled to summary judgment as to whether CRH committed the first breach. A jury must consider in deciding first breach exactly when CRH was obliged to pay Patriot on the outstanding invoices. CRH explains its delayed payment of the invoices as a customary practice between the parties. The evidence would allow a finding that, by the time of the confrontation in the summer of 2001, the customary billing practice between these parties was for Patriot to bill CRH one month in advance for services not yet rendered. The contract called for payment of each invoice "upon receipt", and the invoice was considered "delinquent 10 days into the month for which services have been billed." However, CRH routinely paid Patriot one month after the invoiced services had been rendered. Patriot accepted these payments and did not attempt to charge late fees or interest.
The contract provides: "Termination of the agreement shall not relieve either party of any obligations as set forth in this agreement or the obligation to pay any amounts due . . . for services rendered prior to the effective date of termination." Whether that provision entitles Patriot to damages for services rendered before the date of termination of the contract, and if so in what amount, depends on genuine factual issues. The resolution of the first breach issue is central to the determination of this issue as well. CRH contends that it owes Patriot nothing because Patriot had not performed according to the contract. Also, as to at least the last two invoices that Patriot submitted, the services being billed were never actually provided because of the contract termination.
CRH also claims that as a result of the customary billing practice, Patriot cannot claim that its initial delay in paying the June and July invoices amounted to breaches of the contract that would preclude CRH from asserting its own rights under the contract. Patriot responds that, under the waiver provision of the contract, it could not have waived its contractual right to demand prompt payment. That waiver provision states as follows:
Failure by either party at any time to require performance by the other party or to claim any breach of any provision of this Agreement will not be construed as a waiver of any subsequent breach nor affect the effectiveness of the Agreement nor any part thereof, nor prejudice either party as regards any subsequent action.
Assuming that this provision was effective to prevent waiver by course of performance with respect to future events, the course of performance could have prevented Patriot from claiming that the initial delays in paying the June and July invoices amounted to a breach. In short, in both directions, the issue of first breach depends on disputed issues of fact.
II. Notice of Termination
If CRH felt that Patriot was not substantially performing its duties under the contract, CRH had a contractual obligation to inform Patriot that its performance was deficient before CRH could terminate the contract. The contract provided:
In the event that Novare [or Patriot as its successor] does not substantially perform in a manner reasonably consistent with performance standards of the clinical/bio-med industry, COLUMBUS REGIONAL HOSPITAL shall so inform Novare in writing, specifying the manner in which COLUMBUS REGIONAL HOSPITAL believes the services to be deficient, and Novare shall have a period of twenty (20) business days from the receipt of such notice to correct such deficiencies in performance. In the event that Novare does not correct the deficiency within such a period, COLUMBUS REGIONAL HOSPITAL shall then have the option of terminating this agreement and have available all remedies in law or equity.
Patriot claims that CRH did not give proper written notice of any deficiencies in its performance and did not allow 20 business days to cure.
CRH and Patriot held meetings in July and August 2001 in which CRH complained about a number of perceived defects in Patriot's performance. The writings referenced by CRH as the requisite notice do not, by themselves, provide express written notice that CRH believed Patriot was in breach, let alone that CRH was trying to trigger the 20-day cure period required before termination. See Def. Ex. 6 ("Agenda for Discussion" for July 23, 2001); Def. Ex. 7 ("Follow Up Tasks per Meeting on 8/7/01"). The next writing was a letter dated September 4, 2001, in which CRH purported to terminate its agreement with Patriot.
Patriot contends that, as a matter of law, the identified writings were not sufficient to satisfy the requirements of the contract that CRH specify performance deficiencies. CRH has presented evidence in David Lenart's testimony that would allow a reasonable jury to find that the combination of the writings and the meetings was sufficient to comply substantially with the contract's notice requirement and to put Patriot on notice that CRH believed its performance to be so deficient as to warrant termination if the problems were not cured quickly. Whether the writings are evidence that CRH provided sufficient written notice to Patriot of its deficiencies or whether, as Patriot claims, the writings are evidence that Patriot and CRH were in continuing talks for contract renewal and termination, is a fact question for a jury to decide.
The contract also required CRH to give Patriot 20 business days to cure any deficiencies. Patriot argues that CRH was required to give explicit written notice that the 20-day period had begun. The contract does not expressly require such explicit notice. The only express requirement for CRH in that portion of the contract was that it alert Patriot to any dissatisfaction with Patriot's performance, not that it specify that the 20-day clock for the cure period was ticking. Patriot had 20 days from the first notice of CRH's dissatisfaction to cure.
Patriot cites Sallee v. Mason, 714 N.E.2d 757, 762 (Ind.App. 1999). In Sallee, the enforceability of a covenant not to compete depended on which party first breached the contract in question. The contract required the employer to give written notice 30 days before termination of the contract would be effective. The Indiana Court of Appeals affirmed a finding after trial to the effect that the employer had breached first by terminating the contract without giving 30-days advance notice. Sallee did not involve issues of performance or an opportunity to cure, nor did it involve a combination of writings and oral notice at meetings. Also, Sallee did not attempt to resolve the notice issue as a matter of law. For these reasons, the case does not control the issue here. Here, the language of the contract placed the burden on Patriot to cure deficiencies in its services within 20 days of CRH's written notice of those deficiencies. There was no express requirement that CRH inform Patriot that the 20 days had begun.
III. Non-Solicitation
The next issue is the effect that the parties' extension of the original contract had on the non-solicitation provision in the original agreement. That issue can be decided as a matter of law. Paragraph 8(E) of the original contract stated in relevant part:
During the term of this Agreement and for a period of one (1) year after the termination or expiration of the term of this Agreement, COLUMBUS REGIONAL HOSPITAL shall not solicit for employment nor hire, nor retain as a consultant, any current Novare employee or any individual who was a Novare employee at any time during the term of this Agreement. This provision shall survive the termination of this Agreement.
Due to the difficulty of ascertaining damages in the event of a breach of this provision, as liquidated damages, each party agrees to pay a sum . . . Novare will waive this paragraph upon the completion of the full thirty-six month duration of this Agreement
(Emphasis added.) In September 2001, after CRH sent its termination letter to Patriot, CRH hired two Patriot employees who had worked on the CRH contract. Patriot claims that these hirings breached the contract.
CRH hired those employees six months beyond the 36-month duration of the original agreement. Patriot contends, however, that the parties' agreement to extend the original contract had the effect of continuing the non-solicitation provision beyond that 36-month period. The operative language of the extension stated: "The terms of this agreement shall be extended an additional term of Ten (10) months from the conclusion of the original agreement commencing March 1, 2001, through and including December 31, 2001." Patriot contends that this general reference to the "terms of this agreement" effectively extended the non-solicitation provision.
Patriot's interpretation of the contract runs into a serious problem. Exactly what was extended? Was it the CRH promise not to solicit, or the Novare-Patriot promise to "waive" that provision after completion of a full 36-month term?
The provisions of a contract are to be construed together, and specificterms control over general terms. Where the parties have agreed to a specific term, an apparently inconsistent general statement must yield to the more specific term. Fowler v. Campbell, 612 N.E.2d 596, 600-01 (Ind.App. 1993). That is the case here. The parties' general language extending "the terms" of the contract for another ten months did not affect the very specific language in the original contract providing that the non-solicitation provision would be waived after 36 months. The non-solicitation provision was distinct from the rest of the contract in that the one-year prohibition would have survives the expiration of the other terms of the original contract, at least if the contract had been terminated early.
The specific "waiver" provision tied to the term of the original contract had the effect of presuming, in effect, that any extension of that contract term would not extend the non-solicitation provision. Accordingly, if Patriot wanted to extend the non-solicitation term, it needed to obtain a specific agreement to that effect. The general language extending the term of the overall contract by ten months was not sufficient, as a matter of law, to secure the term that Patriot now seeks to enforce. See Fowler, 612 N.E.2d at 600-01. Contract interpretation is particularly suited to disposition by summary judgment, e.g., United States v. 4500 Audek Model Number 5601 AM/FM Clock Radios, 220 F.3d 539, 543 (7th Cir. 2000), and that is the case here. CRH is entitled to summary judgment on the claimed breaches of the non-solicitation provision.
IV. Patriot's Parent Company
The court finds that there are genuine issues of material fact as to whether Patriot Medical Technologies, Inc. (PMT), the parent company of Patriot Medical Technologies of Ohio, Inc., is a proper defendant in this case. There is evidence from which a reasonable jury could find that the parent and subsidiary failed to observe the corporate distinctions between them, so that piercing the corporate veil would be justified. See generally Aronson v. Price, 644 N.E.2d 864, 867 (Ind. 1994). Patriot's and PMT's motion for summary judgment is denied as to that issue.
V. Damages Issues
Patriot has moved for summary judgment as to whether some of the damages claimed by CRH are recoverable as a matter of law, assuming that CRH can prove that Patriot breached the contract and that CRH properly terminated it. Under Indiana law, the general standard is that the victim of a breach of contract is entitled to the benefit of the bargain, i.e., damages that place it in the same position it would have been in if the breaching party had fully performed the contract. Fowler, 612 N.E.2d at 603. Such damages may include consequential damages where the consequences were reasonably foreseeable to the parties. Id.
CRH's damage claims present genuine issues of fact as to whether the claimed expenses of "cover" for Patriot's services were foreseeable and otherwise proper. Patriot has labeled certain of CRH's claimed damages, including consulting fees, as litigation damages for which recovery is not permitted without a statute or contract explicitly allowing such recovery. See Riehle v. Moore, 601 N.E.2d 365, 372 (Ind.App. 1992). However, Patriot's labeling presents a genuine factual dispute, such as whether CRH needed someone with expertise comparable to Patriot's to help it manage the efforts to cover the services that should have been provided under the contract with Patriot. Patriot is not entitled to summary judgment on the issue of CRH's claims for damages. Because the court is granting summary judgment to CRH on the alleged claim for breach of the contract's non-solicitation provision, the court need not decide the issue raised by CRH as to whether liquidated damages would be proper for the alleged breach.
VI. CRH's Affirmative Defenses
Patriot has moved for summary judgment on CRH's affirmative defenses to the counterclaim. First, Patriot claims that CRH's affirmative defense of set-off is improper because the claim to which that defense applies arises from the same contract giving rise to the counterclaim. See American Mgmt. v. MIF Realty, L.P., 666 N.E.2d 424, 432 (Ind.App. 1996) (explaining that a "set-off is a "counter-action against the plaintiff and grows out of matter independent of [the plaintiff's] cause of action"). The court agrees. Both the counterclaim and the alleged "set-off arose from the same contract, so "set-off is not a defense to Patriot's counterclaim. That ruling, however, will not prevent CRH from asserting any rights it may have to reduce Patriot's claims for damages based on a claim arising from the same contract. See First Nat'l Bank of Louisville v. Master Auto. Serv. Corp., 693 F.2d 308, 310 n. 1 (4th Cir. 1982) (describing ancient difference between set-off and recoupment), citing C. Wright A. Miller, Federal Practice and Procedure, Civil § 1401 (1971 Supp. 1982). For example, perhaps a jury could find that CRH owes Patriot for some of the services rendered, but that the amount owed should be reduced because the services were poor quality and in breach of the contract's standards for performance.
Next, Patriot contends that the defense of unclean hands does not apply to this case because it seeks only damages and no equitable relief. Patriot cites Foursquare Tabernacle Church of God in Christ v. Dep't of Metro. Dev. of Indianapolis, 630 N.E.2d 1381, 1385 (Ind.App. 1994), for the proposition that the doctrine of unclean hands is available as a defense only in equity suits. CRH says it has pled the unclean hands affirmative defense in case either Patriot or the court, sua sponte, raised an equitable claim against it.
Rule 2 of the Federal Rules of Civil Procedure allows a court to try legal, equitable, and admiralty issues in the same action effectively "eliminat[ing] any procedural impediment to interposing all relevant defenses"; therefore, "as a procedural matter, a party may assert all legal, equitable, and admiralty defenses that are available to it." 1-2 Moore's Federal Practice Civil § 2.05 at 31-32 (2003) ("there is no procedural barrier to the assertion of equitable defenses to legal claims"). Rule 8(e)(2) of the Federal Rules of Civil Procedure specifically allows a party to assert as many defenses "as the party has regardless of . . . whether based on legal, equitable, or maritime grounds." See also Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 508 (1959) ("any defenses, equitable or legal" may be raised against charges of antitrust violations); Byron v. Clay, 867 F.2d 1049, 1052 (7th Cir. 1989) (noting that with the merger of law and equity, perhaps unclean hands should no longer be limited to equitable suits); Maltz v. Sax, 134 F.2d 2, 5 (7th Cir. 1943) ("As to unclean hands: the maxims of equity are available as defenses in actions at law."), citing Fed.R.Civ.P. 2. Summary judgment is denied on the unclean hands affirmative defense, though it remains to be seen whether the defense should be submitted to the jury.
As for CRH's remaining affirmative defenses, that Patriot breached first, that Patriot waived the non-solicitation provision, and whether pre-judgment interest is available, summary judgment for Patriot is denied for the reasons stated above.
Conclusion
Pat riot has abandoned its counterclaim for breach of the contract by disclosing confidential information in CRH's complaint attachments, so CRH is entitled to summary judgment as to that claim. The undisputed facts show that plaintiff Columbus Regional Hospital is also entitled to summary judgment on defendant Patriot's counterclaim for breach of the non-solicitation provision, and that Patriot is entitled to summary judgment on CRH's affirmative defense of set-off. In all other respects, the parties' motions for summary judgment are hereby denied.
So ordered.