Opinion
NOT TO BE PUBLISHED
Appeal from a judgment of the Superior Court of Orange County Super. Ct. No. 04CC07416, William M. Monroe, Judge.
Reich Radcliffe, Richard J. Radcliffe for Defendants and Appellants.
Lopez & Morris, Geoff S. Morris and Sy Nazif for Plaintiff and Respondent.
OPINION
O’LEARY, J.
Avalon Rehabilitation and one of its principals, Craig Carlson, were ordered to pay Medical Nutritionals $75,000 for the breach of two contracts, which the trial court determined comprised one transaction. On appeal, we conclude there are in fact three overlapping layers of written agreements in this case, but together they fall like a house of cards. Standing alone the agreements are each illusory. In combination, the business deal is illegal. Accordingly, the judgment is reversed.
I
Avalon Rehabilitation provides physical and occupational therapy to patients. During the course of treatment, therapists can recommend to patients that they obtain durable medical equipment, such as wheelchairs, walkers, canes, crutches, braces, and hospital beds. For insurance purposes, often patients will first obtain a prescription from their physician before ordering the needed durable medical equipment from a vendor.
In August 2002, Avalon’s vice president, Carlson, entered into a written “Exclusive Referral” agreement with Peter Edalt, president of Sigmedica Inc., promising “to refer all durable medical equipment prescriptions” to Sigmedica (hereafter, the Avalon-Sigmedica Agreement). Avalon did not receive a fee for this exclusive arrangement. Carlson testified it would have been illegal to have received a kickback from any medical equipment referrals.
Within two years, Sigmedica hired a broker to find a buyer for the exclusive referral arrangement. In February 2004, Medical Nutritionals, a pharmacy and home medical equipment company, expressed an interest in making a deal. After meetings and telephone calls with the broker, Carlson and Edalt, regarding the quantity and types of referrals, Medical Nutritionals agreed to purchase the exclusive referral arrangement for $75,000.
Medical Nutritionals executed two agreements on the same day. The first was with Carlson, on behalf of Avalon, and the second was with Edalt, on behalf of Sigmedica. Both contracts contained provisions expressly integrating the prior Avalon-Sigmedica agreement’s terms, stating the documents constituted “the complete and exclusive statement of the [a]greement between the [p]arties[.]”
Medical Nutritionals’s agreement with Avalon (hereafter, referred to as the Exclusive Referral Agreement) stated Avalon agreed “to refer all durable medical equipment prescriptions to Medical Nutritionals” for a term of five years. In the document, Avalon was called either the “‘physical therapy/referral company’” or “‘Seller.’” Medical Nutritionals was either the “‘Buyer’” or “‘exclusive referral recipient.’” There was no provision stating Avalon would be paid a fee in exchange for the exclusive referral rights. Moreover, Medical Nutritionals did not promise to actually fill the prescriptions referred.
Paragraph 7 of the Exclusive Referral Agreeement also contained a “due diligence acknowledgement” stating, “Sigmedica . . . does not warrant or guarantee documents or information provided to Medical Nutritionals or Avalon . . . in connection with this Agreement. . . . Medical Nutritionals and Avalon . . . both understand and agree that each have had sufficient opportunity, time, and disclosures by Sigmedica . . . to conduct due diligence in anticipation of executing this Agreement.” The parties agreed the agreement could be terminated for good cause by giving three weeks written notice.
The second agreement stated Medical Nutritionals (buyer) had agreed to pay Sigmedica (seller) $75,000 “for the sixty (60) month Avalon . . . Exclusive Referral Agreement from Sigmedica . . . .” This contract (hereafter, referred to as the Purchase Agreement) provided, “Seller represents that . . . Sigmedica is not an affiliate, subsidiary or under contract with Avalon excepting the [Avalon-Sigmedica] agreement.” It also included a due diligence acknowledgement, stating the seller did not “warrant or guarantee documents or information provided by Avalon . . . to buyer in connection with this Agreement” and buyer had sufficient time “and disclosure by Sigmedica . . . and Avalon” to conduct due diligence. The payee on checks written for the purchase was Sigmedica.
Thereafter, Avalon failed to refer any medical equipment prescriptions to Medical Nutritionals, prompting it to file a lawsuit against Avalon, Carlson, Sigmedica, and Edalt. It alleged two claims for breach of contract as well as a fraud cause of action. The first cause of action alleged that in February 2004, Avalon executed and breached its Exclusive Referral Agreement by referring prescriptions to other businesses.
The second claim for breach of contract alleged that in February 2004, Sigmedica breached the Purchase Agreement by failing to facilitate the transfer of referrals from Avalon, and instead Avalon referred those prescriptions to other businesses. It was alleged Sigmedica “promised to deliver and facilitate to plaintiff the exclusive referrals of all durable medical equipment prescriptions from Avalon pursuant to an Avalon-Sigmedica agreement” executed on August 20, 2002.
On the first day of the court trial, Medical Nutritionals advised the court that Edalt was in the terminal stages of cancer and it was willing to dismiss him and Sigmedica in an exchange for a mutual waiver of costs and attorney fees. The parties agreed they would use Edalt’s deposition testimony when necessary at trial.
The court considered testimony from several witness and 47 exhibits. The parties agreed the court could orally give its statement of decision. The court found in favor of Medical Nutritionals on the first and second breach of contract actions, awarding $75,000 plus attorney fees. However, it found the evidence of fraud “tenuous” and ruled in favor of the defendants on this cause of action. It noted, “This whole business transaction, as far as the this court was concerned, was just a nightmare of inept amateurists, poor business on the part of both the plaintiff, and to a lesser extent on the part of the defendant[s]. I think the plaintiff should have been a whole lot more aggressive and clear in what they were doing.”
The court determined Carlson’s testimony that he was uninvolved in the sale transaction was “for the most part, incredulous, and to be charitable about it, at best, disingenuous . . . .” It concluded, “Avalon, through . . . Carlson, misrepresented the value of the referrals,” and breached its contract with “Medical Nutritionals when they terminated the contract without good cause.” It found “the evidence supports the proposition that . . . Carlson, on behalf of Avalon and . . . Edalt, on behalf of Sigmedica, had worked together to fashion a business or a contract to sell this business to what appears to be either an overly anxious or unbelievably unsophisticated Medical Nutritionals for a total for $75,000[.]”
The court added, “As far as this court is concerned, . . . Edalt entered into the agreement with . . . Medical Nutritionals, and that Avalon . . . through . . . Carlson, was part of that agreement. [¶] Thus, the court believes and finds, based on the evidence, that there had to be more than just a passing relationship between Edalt and Carlson, and as I had said, I discounted almost all of . . . Carlson’s testimony as being improbable, if not incredulous. [¶] Although there was some reference made to the parol-evidence rule, I never heard any objections during the course of trial.”
The court concluded Avalon and Carlson (an individual) and Edalt (an individual) to “jointly and severally, owe $75,000 to Medical Nutritionals, and that part of the tie-in with Avalon is the relationship that doesn’t quite amount to a conspiracy, but certainly is enough to tie . . . Carlson and . . . Edalt through their businesses and individually together.”
II
Avalon and Carlson (hereafter, referred to in the singular as Avalon for convenience) asserts the court erroneously found Avalon liable for breaching a contract it did not execute, i.e., the $75,000 purchase contract between Sigmedica and Medical Nutritionals. They maintain no evidence suggests they were parties to the Purchase Agreement, and the judgment violates due process because such liability was not alleged in the pleadings or argued at trial. Medical Nutritionals responded by pointing to several of the trial court’s statements, ruling the defendants acted together in securing the sale, and were therefore jointly liable. Medical Nutritionals asserts the judgment should be affirmed because the two contracts comprised one transaction that when viewed together binds Avalon to the sale. Although we agree the various contracts comprise just one agreement, the judgment must be reversed because if we imply consideration and combine these illusory promises, the contracts are rendered illegal and unenforceable.
Our discussion starts with the original Exclusive Referral Agreement between Avalon and Sigmedica. It is this document upon which the house of cards was built. Simply stated, the agreement is illusory. As Carlson testified at trial, he knew it was illegal “to get anything back from referrals. It’s called a kickback.” Consequently, any promise to exclusively refer all prescriptions could not impose legal liability on the promisor.
The parties effectively dodged the illegality question on appeal. In the supplemental briefing, Avalon mentions in a footnote it “believes that any such payment would have been a violation of federal law.” It omitted any supporting legal citation. Medical Nutritionals provided no authority or discussion on the issue. But, it should come as no surprise to the parties that we must address the issue of illegality.
The federal and state statutes embody a clear and strong public policy against any improper influence being exerted in the realm of patient referrals, care, and services. For example, Business and Professions Code section 650 makes it unlawful for one licensed in the healing arts to receive or accept any rebate, refund, commission, preference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for the referral of patients. Similarly, Welfare and Institutions Code section 14107.2, modeled after the federal Medicare anti-kickback statute, proscribes criminal penalties for the offer or payment of “any remuneration, including, but not restricted to, any kickback, bribe, or rebate . . . to refer any individual to a person for the furnishing or arranging for furnishing of any service,” or “to purchase, lease, order or arrange for or recommend the purchasing, leasing or ordering of any goods, facility, service or merchandise,” for which payment may be made by Medi-Cal. Since Avalon agreed to exclusively refer all prescriptions, this would necessarily include Medi-cal and Medicare patients’ prescriptions. In light of the above serious consequences, Avalon’s promise to refer its patients’ prescriptions had to be discretionary and for no consideration, i.e., an illusory promise.
The federal Medicare anti-kickback statute is 42 U.S.C.A. section 1320a-7b.
Similarly, Avalon’s subsequent exclusive referral agreement with Medical Nutritionals was illusory and nonenforceable. Under the terms of the agreement, Avalon was not to receive any consideration for its promise to refer its patients’ durable medical equipment prescriptions. The parties were tacitly aware any kickback from Medical Nutritionals would be illegal. (See Welf. & Inst. Code, § 14107.2. & Bus. & Prof. Code, § 650.)
Moreover, under the terms of both Exclusive Referral Agreements, neither Medical Nutritionals nor Sigmedica was legally obligated to fill any specific quantity of prescriptions referred by Avalon. Absent from the agreements is any language indicating best efforts or good faith would be used with regard to filling the prescriptions. Indeed, nothing in the agreement bound Medical Nutritionals to do anything in return for the referrals. Likely, this is because the parties understood filling a patient’s prescription benefited the patient, not his or her physical therapist from Avalon. Avalon’s clients certainly were under no obligation to seek Avalon’s assistance in obtaining medical equipment prescribed by their treating physicians.
It is well settled sufficient consideration is an essential element of any contract. (Civ. Code, § 1550.) As stated long ago in Scott v. Cline Electric Mfg. Co. (1930) 104 Cal.App. 122, 125-126, “‘A promise is a good consideration for a promise, provided always that it imposes some legal liability on the person making it. If it imposes none, then it cannot be a good consideration. A promise may be too vague and uncertain to amount to a consideration for a promise made by the other party.’ [Citation.] [¶] ‘A purported contract between a cement manufacturer and a cement dealer, whereby the dealer, in consideration that he would give the manufacturer’s brand the preference in his sales and “push” the same, was to have a lower rate per barrel than other dealers, was void for lack of mutuality, since the dealer did not bind himself to make any sales of cement.’ [Citation.]” Similarly, here, the Exclusive Referral Agreement with Avalon was unenforceable because neither party was bound to perform.
Relying on the 1917 case Wood v. Lucy, Lady Duff-Gordon (1917) 222 N.Y. 88, 90-91, Medical Nutritionals argues there was an implied promise by both parties to use reasonable efforts in their dealings. It argues, “‘An implied obligation to use good faith is enough to avoid the finding of an illusory promise.’” (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 805-806.) However, in those cases the agreements at issue gave one party absolute discretion over whether or not to perform. Courts may decide whether an implied covenant of good faith and fair dealing should be applied to save an otherwise illusory agreement.
For example, “[C]ovenants to use ‘good faith’ or ‘best efforts’ to generate profits for the licensor are routinely implied where the licensor grants exclusive promotional or licensing rights in exchange for a percentage of profits or royalties, but the licensee does not expressly promise to do anything. [Citation.]” (Id. at p. 805.) In such cases, there is no issue the licensee will be paid for using his or her best efforts, and no question the licensor has legal rights over the licensed product. The case before us is not analogous. We found no authority, and Medical Nutritionals cites to none, upholding an agreement where both parties were given absolute discretion over whether or not to perform. “The courts cannot make better agreements for parties than they themselves have been satisfied to enter into or rewrite contracts because they operate harshly or inequitably.” (Id. at p. 809.)
Alternatively, Medical Nutritionals argues the Exclusive Referral Agreement is enforceable because it is tied to the $75,000 Purchase Agreement. It fails to appreciate that if the two agreements are treated as one, the $75,000 will serve as consideration and render the entire scheme illegal under anti-kickback laws.
We recognize an innocent buyer of property under an illegal contract of sale can recover the consideration paid to the seller. However, in this case, it was undisputed only Sigmedica received the sale proceeds. No evidence was produced that proved Avalon received a single dime. Recovery against Sigmedica (and its principal) is not feasible because they were dismissed for a waiver of costs at the beginning of trial. We find no legal basis to hold Avalon must return funds it never received.
For this reason, we also reject Medical Nutritionals’s argument the doctrine of unjust enrichment is grounds to enforce the agreement and the judgment. Medical Nutritionals glosses over the fact there was no evidence proving Avalon received any enrichment from the agreements. Its reliance on the court’s statement Avalon and Sigmedica had “worked together to fashion a business or a contract to sell this business” is misplaced. It cannot be assumed that just because Avalon may have helped Sigmedica with its efforts to broker the deal, Avalon necessarily received some of the sale proceeds. The court rejected the conspiracy and fraud claims, and Carlson testified neither he nor Avalon received anything from the transaction.
Finally, we reject Medical Nutritionals’s argument the $75,000 sale contract can be enforced against Avalon on a theory of estoppel. It is well settled, “Because an illegal contract is void, it cannot be ratified by any subsequent act, and no person can be estopped to deny its validity.” (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 432, p. 473.) Moreover, we are unpersuaded by the argument “justice” requires that Medical Nutritionals receive the benefit of its bargain. The bottom line is Sigmedica sold rights to something it did not, and could not, legally own. Just as it would be illegal for Avalon to sell an exclusive prescription referral deal, it was illegal for Sigmedica to purportedly resell the referral deal. The state and federal laws prohibiting kickbacks recognize justice requires that patients be protected from kickback deals between medical professionals, laboratories, services, and prescription suppliers. (See, e.g., Beck v. American Health Group Internat., Inc. (1989) 211 Cal.App.3d 1555, 1564 [“The evil to be proscribed by [Business and Professions Code] section 650 ‘“is not just the payment for the referral, but also any relationship where the referral may be induced by considerations other than the best interests of the patient . . . .”‘ (63 Ops.Cal.Atty.Gen. 89, 92 (1980), fn. omitted.)”].) The best interests of the patients trump whatever justice is required to unravel a profit motivated, badly negotiated, and poorly written business agreement.
Finally, we note Medical Nutritionals fails to appreciate that promissory estoppel is “a doctrine which employs equitable principles to satisfy the requirement that consideration must be given in exchange for the promise sought to be enforced.” (Raedeke v. Gibraltar Sav. & Loan Assn. (1974) 10 Cal.3d 665, 672.) If this court were to hold estoppel satisfied the missing consideration element, we would create an illegal prescription referral contract. This, we cannot do.
III
To summarize, the agreements in this case were either illusory or illegal. Either way, they cannot be the basis for damages in a breach of contract action. The judgment is reversed. In the interests of justice, neither party shall recover their costs on appeal. (Cal. Rules of Court, rule 8.276(a)(4).)
WE CONCUR: RYLAARSDAM, ACTING P. J., MOORE, J.