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Radiologix, Inc. v. Radiology and Nuclear Medicine, LLC

United States District Court, D. Kansas

November 2, 2017

RADIOLOGIX, INC. and RADIOLOGY AND NUCLEAR MEDICINE IMAGING PARTNERS, INC., Plaintiffs,
v.
RADIOLOGY AND NUCLEAR MEDICINE, LLC, et al., Defendants.

          MEMORANDUM AND ORDER

          DANIEL D. CRABTREE, UNITED STATES DISTRICT JUDGE

         Plaintiffs Radiologix, Inc. (“Radiologix”) and Radiology and Nuclear Medicine Imaging Partners, Inc. (“RNMIP”) bring this lawsuit against defendants Radiology and Nuclear Medicine, LLC (“RNM”) and 19 individual physicians (“the Physician Defendants”). Plaintiff Radiologix is a national provider of imaging services based in California. Defendant RNM is a Kansas limited liability company and physician-owned radiology practice based in northeast Kansas. Since 1997, plaintiff Radiologix or one of its predecessors-in-interest has provided management services to defendant RNM under a long-term management service agreement. This lawsuit arises from defendant RNM's termination of that agreement in 2014.

         This matter comes before the court on four motions for summary judgment: (1) defendant RNM's Motion for Summary Judgment against plaintiffs' breach of contract, conversion, and unjust enrichment claims (Doc. 235); (2) defendant David L. Smith's Motion for Summary Judgment against plaintiffs' tortious interference with a contract claim (Doc. 237); (3) plaintiffs' Motion for Summary Judgment against defendant RNM's counterclaim for breach of contract and against any of defendant RNM's claims or defenses asserting that it had legal grounds to terminate the parties' contract unilaterally because it was illegal and unenforceable under Kansas law (Doc. 239); and (4) the Physician Defendants' Motion for Summary Judgment against plaintiff Radiologix's claim for breach of their Physician Employment Agreements (Doc. 242).

         For reasons explained below, the court grants plaintiffs' Motion for Summary Judgment (Doc. 239) in part and denies it in part. The court concludes that the undisputed facts fail to demonstrate that the parties' various contracts violate Kansas law. The court thus grants summary judgment against defendant RNM's claims and defenses that the contracts are illegal and unenforceable under Kansas law, and thus provide RNM a valid, legal basis for terminating the parties' management service agreement. The court denies plaintiffs' summary judgment motion in all other respects because genuine issues of material fact exist that the trier of fact must decide. The court also denies defendant RNM's Motion for Summary Judgment (Doc. 235) for the same reason-genuine issues of material fact preclude the court from entering summary judgment.

         But, the court grants defendant David L. Smith and the Physician Defendants' Motions for Summary Judgment (Docs. 237, 242). The court explains its reasons for these rulings in greater detail below.

         I. Motion to Strike

         Before addressing the pending summary judgment motions, the court considers defendant RNM's Motion to Strike. Doc. 250. RNM asks the court to strike certain portions of two affidavits that plaintiffs submitted to support their summary judgment motion. RNM asserts that the court should strike certain paragraphs from Stephen M. Forthuber and Rita Jayne Rarrick's Affidavits (Docs. 245-1, 245-2) because, RNM contends, those paragraphs' assertions are not based on affiants' personal knowledge. RNM thus argues that the factual assertions do not comply with the evidentiary requirements of Rule 56(c)(4) of the Federal Rules of Civil Procedure. See Fed. R. Civ. P. 56(c)(4) (“An affidavit or declaration used to support or oppose a motion must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated.”). Plaintiffs respond to the Motion to Strike with two arguments.

         First, plaintiffs accuse RNM of attempting to create a “dramatic effect” as opposed to substantiated objections to the summary judgment evidence. Doc. 266 at 2. Plaintiffs assert that the affidavits establish Mr. Forthuber and Ms. Rarrick's personal knowledge because one can infer from their job duties and length of employment that they have the requisite personal knowledge to support the facts in their affidavits. Id. at 4 (citing Stevens v. Water Dist. One of Johnson Cty., 561 F.Supp.2d 1224, 1233 (D. Kan. 2008) (“Personal knowledge of the subject matter attested to can be inferred based on [the affiant's employment] position . . . .”)). So, plaintiffs contend, RNM's reasons for asking the court to strike the affidavits are unsubstantiated.

         Second, plaintiffs argue that a motion to strike is not the proper method to exclude this evidence from the summary judgment record. The Tenth Circuit held almost 50 years ago that an affidavit which fails to meet the requirements of Rule 56 is subject to a motion to strike. Noblett v. Gen. Elec. Credit Corp., 400 F.2d 442, 445 (10th Cir. 1968). But, more recently, our court has refused to strike affidavits for failing to comply with Rule 56(e). Instead, our court simply disregards the affidavit's portions that are not based on the affiant's personal knowledge. See, e.g., Murray v. Edwards Cty. Sheriff's Dep't, 453 F.Supp.2d 1280, 1284 (D. Kan. 2006) (“Instead of striking an affidavit, the better approach is for the court to consider each affidavit and, to the extent it may assert a fact which is not admissible evidence, simply exclude the requested fact from the court's ultimate findings.”); Cuenca v. Univ. of Kan., 265 F.Supp.2d 1191, 1200 (D. Kan. 2003) (denying a motion to strike “[b]ecause of the size of the affidavit and its attachments, the task of deciding the motion to strike on its merits would take nearly as much of the court's resources as would deciding the parties' substantive motions” but excluding from the summary judgment record “the inadmissible portions of the challenged affidavit, i.e., all statements that do not comply with Rule 56(e)”); Maverick Paper Co. v. Omaha Paper Co., Inc., 18 F.Supp.2d 1232, 1235 (D. Kan. 1998) (denying a motion to strike an affidavit and holding that “[i]f the affidavit contains material that is not admissible or relevant, the Court will ignore it.”).

         The court follows this approach here and denies RNM's Motion to Strike. Instead, the court considers, below, whether the factual assertions in Mr. Forthuber and Ms. Rarrick's affidavits are based on their personal knowledge. Indeed, RNM has controverted many of these particular factual assertions in its Opposition to plaintiffs' Motion for Summary Judgment, claiming they are not based on personal knowledge and thus violate Rule 56(e)(4). See, e.g., Doc. 269 at 19, 23-26, 36, 44, 62, 66, 71-73, 84. But, as explained below, the court accepts many of the factual assertions supplied by Mr. Forthuber and Ms. Rarrick's Affidavits because plaintiffs have carried their burden to establish that the witnesses are qualified. See Fed. R. Evid. 104(a) (authorizing court to decide a preliminary question of this nature).

         II. Motions for Summary Judgment

         The court now turns to the four pending summary judgment motions.

         A. Uncontroverted Facts

         The following facts are either stipulated in the Pretrial Order (Doc. 227), are uncontroverted, or where controverted, stated in the light most favorable to the party opposing summary judgment. Scott v. Harris, 550 U.S. 372, 378 (2007).

         The Parties

         Plaintiffs are two Delaware corporations, each with its principal place of business in California. Plaintiff RNMIP is a wholly owned subsidiary of plaintiff Radiologix. Radiologix is a wholly owned subsidiary of RadNet Management, Inc. (“RadNet Management”). Before its name change in September of 1999, Radiologix was known as American Physician Partners, Inc. (“APPI”).

         Defendant RNM is a Kansas limited liability company with its principal place of business in Topeka, Kansas. All shareholders of RNM are Kansas licensed physicians who provide radiology or radiation oncology services at hospitals and clinics in northeast Kansas, including Topeka. The 19 Physician Defendants are shareholders and employees of RNM.

         In 1997, the physician-members of Radiology and Nuclear Medicine (“RNMPA”), a Kansas professional organization, formed RNM. Also in 1997, the physician-members approved an Agreement and Plan of Reorganization and Merger between RNMPA and APPI (the “1997 APPI-RNMPA Agreement”). Certificate of Mergers were filed with the Kansas Secretary of State and the Delaware Secretary of State.

         The 1997 APPI-RNMPA Agreement

         Under the 1997 APPI-RNMPA Agreement, the RNMPA physicians agreed to a “Spin-Off Transaction.” This transaction required the physicians to form a new Kansas limited liability company (RNM), to “transfer certain of [RNMPA's] assets most of which relate solely to the practice of medicine” to RNM, and to cause RNM to enter into a long-term “Service Agreement” (attached as an exhibit to the Agreement). Doc. 241-1 at 7. The physicians also agreed to merge the professional association out of existence, form RNM and transfer all medical assets to it, transfer all non-medical assets to APPI, cause RNM to execute and enter into a 40-year service agreement with APPI and its subsidiary (the “Original Service Agreement”), and for each physician to execute a “Physician Employment Agreement” naming APPI as one of its beneficiaries entitled to enforce its restrictive covenants.

         More specifically, the 1997 APPI-RNMPA Agreement's Recitals provided that RNMPA would “merge with and into [APPI] upon the terms and conditions set forth herein and in accordance with the laws of the State of Kansas” and “the outstanding shares of [RNMPA] Common Stock shall be converted at such time into cash and shares of common stock, par value $.0001 per share, of [APPI] (the “APP Common Stock”) as set forth herein.” Doc. 241-1 at 7 (Recitals ¶ D). Section 2.8(a) of the 1997 APPI-RNMPA Agreement provided the manner for converting the shares of RNMPA Common Stock. It read:

Section 2.8 Conversion of Company Common Stock. The manner of converting shares of [RNMPA] Common Stock in the Merger shall be as follows:
(a) As a result of the Merger and without any action on the part of the holder thereof, all shares of [RNMPA] Common Stock issued and outstanding at the Effective Time (excluding shares held by [APPI] pursuant to Section 2.8(d) hereof) shall cease to be outstanding and shall be cancelled and retired and shall cease to exist, and each holder of a certificate or certificates representing any such shares of [RNMPA] Common Stock shall thereafter cease to have any rights with respect to such shares of [RNMPA] Common Stock, except the right to receive, without interest, (i) cash and (ii) validly issued, fully paid and nonassessable shares of [APPI] Common Stock, all as determined in accordance with the provisions of Exhibit B attached hereto (the “Merger Consideration”).
. . .
(d) At the Effective Time, each share of [APPI] Common Stock issued and outstanding as of the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, continue unchanged and remain outstanding as a validly issued, fully paid and nonassessable share of [APPI] Common Stock.

Doc. 241-1 at 13.

         The Agreement defined the “Effective Time” in this fashion:

Section 2.3 Effective Time. If all the conditions to the Merger set forth in Articles XI and XII shall have been fulfilled or waived in accordance herewith and this Agreement shall not have been terminated in accordance with Article XVI, the parties hereto shall cause to be properly executed and filed on the Closing Date, Certificates of Merger meeting the requirements of Section 252 and Section 17-6702 of the Kansas General Corporation Code. The Merger shall become effective at the time of the filing of such documents with the Secretaries of State of the States of Kansas and Delaware, in accordance with such law or at such later time which the parties hereto have theretofore agreed upon and designated in such filings as the effective time of the Merger (the “Effective Time”).

Id. at 12. Section 2.9 of the 1997 APPI-RNMPA Agreement provided:

         Section 2.9 Exchange of Certificates Representing Shares of the Company Common Stock.

(a) At or after the Effective Time and at the Closing (i) the Stockholders, as holders of a certificate or certificates which, until the Effective Time, represented shares of [RNMPA's] Common Stock, shall upon surrender of each certificate or certificates (or completion of appropriate affidavit of lost certificate and indemnity) receive such allocation of Merger Consideration as determined in accordance with the provisions of Exhibit B attached hereto . . . .
(b) Each Stockholder shall deliver to [APPI] at the Closing the certificates representing Company Common Stock owned by him, her or it, duly endorsed in blank by the Stockholder, or accompanied by duly executed stock powers in blank, and with all necessary transfer tax and other revenue stamps, acquired at the Stockholder's expense, affixed and cancelled . . . Upon such delivery (or completion of appropriate affidavit of lost certificate and indemnity), each Stockholder shall receive in exchange therefor the Merger Consideration pursuant to Exhibit B and Section 2.10 hereof, if applicable.

Id. at 13-14.

         The parties intended the merger to “qualify as a tax-free transaction under Section 351 of the [Internal Revenue] Code in which [RNMPA] will not recognize gain or loss . . . .” Id. at 44 (Section 13.2(a)); see also Id. at 7 (Recitals ¶ G).

         As consideration for entering into the 1997 APPI-RNMPA Agreement, the physician-members and shareholders of RNMPA received “Merger Consideration, ” as described in Exhibit B to the Agreement. Id. at 57. The “Merger Consideration” totaled about $14 million. Stephen M. Forthuber (Radiologix's President and Chief Operating Officer of East Operations) and Rita Jayne Rarrick (RNMIP's Director of Accounting and Finance) know of no RNMPA physician-member who rescinded the 1997 APPI-RNMPA Agreement or returned the consideration received in this transaction.[1]

         The 1997 APPI-RNMPA Agreement was the subject of videotaped meetings with the physicians. The physicians' counsel (Mr. Jeff Ellis, then of the Lathrop & Gage law firm) and its then practice administrator (Mr. Vernon Brown) were present at these meetings. According to the 1997 videos, Mr. Ellis and Mr. Brown accompanied one of the doctors to a meeting in Dallas to spend a day working on the service agreement. During the videos, the physicians commented upon and understood that they were entering into a 40-year commitment.

         The RNMPA physicians also “knew the contract specified a service fee percentage, ” “had an opportunity to review that service agreement, ” had “[their] attorney, Jeff Ellis, there as well, ” and all “voted for the deal.” Doc. 246-11 (Allen Dep. at 89:15-90:8). An independent investment banking firm, Shattuck Hammond Partners, Inc., found that the 40-year Service Agreement was “commercially reasonable” and that the service fee contemplated in the Agreement was “comparable to payments due under other arms-length management services agreements providing for similar services in independent transactions.” Doc. 244-29 at 4.

         When the parties executed the 1997 APPI-RNMPA Agreement, RNM never received any legal advice that the Agreement was void under Kansas law and RNM never asked counsel for an opinion about the Agreement's legality.

         In the Form 424B1 that APPI filed with the SEC in 1997, APPI acknowledged: “There can be no assurance that regulatory authorities or other parties will not assert that [APPI] is engaged in the corporate practice of medicine . . . or that the payment of service fees to [APPI] by [RNM] pursuant to the service Agreements constitutes fee-splitting or the corporate practice of medicine.” Doc. 270-11 at 11, 41. But, the Form 424B1 also explained that APPI attempted “to structure its relationship with the Affiliated Practices (including the purchase of assets and the provision of services under the Service Agreements) to keep [APPI] from engaging in the practice of medicine or exercising control over the medical judgments or decisions of the Affiliated Practices or their physicians.” Id. at 11.

         The Form 424B1 also explained that the shares of APPI stock issued to the former shareholders of RNMPA were “being valued at the historical cost of the nonmonetary assets acquired net of liabilities assumed.” Id. at 27. And, “[t]he cash consideration will be reflected as a dividend by APPI to the owners of the Founding Affiliated Practices.” Id. The cash dividend received by the former shareholders of RNMPA totaled $4, 473, 216. Id. at 54.

         2002 Amended Service Agreement

         On July 1, 2002, plaintiffs and defendant RNM entered into an Amended and Restated Service Agreement (“2002 Amended Service Agreement”). The 2002 Amended Service Agreement “reflect[ed] a modification of the financial structure contained in” the parties' amended and restated service agreement dated November 7, 1997. Doc. 270-10 at 6. The 2002 Amended Service Agreement also “supercede[d] all prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof.” Id. at 50.

         The parties agreed that the 2002 Amended Service Agreement expired on November 26, 2037. Id. at 41. Also, the parties agreed that plaintiff RNMIP would serve as “the exclusive manager and administrator of non-medical business services relating to the operation of [RNM], subject to matters reserved for [RNM] or referred to the Joint Planning Board as herein contemplated” and “[e]xcept as provided in Exhibit 3.2(a)[.]” Id. at 13. And, the 2002 Amended Service Agreement prohibited RNM from “enter[ing] into any other management or administrative services agreement or other arrangement with any other person or entity (other than with [RNMIP]) for purposes of obtaining management, administrative or other support services.” Id. at 29-30.

         Under the 2002 Amended Service Agreement, the parties agreed that RNM and RNMIP “intend[ed] to act and perform as independent contractors, and the provisions hereof are not intended to create any partnership, joint venture, agency or employment relationship between the parties.” Id. at 11. The 2002 Amended Service Agreement reserved to RNM “exclusive authority to direct the medical, professional, and ethical aspects of its medical practice.” Id. at 11. The parties agreed that plaintiffs “shall neither exercise control or direction over the medical methods, procedures or decisions nor interfere with the physician-patient relationships” of RNM. Id. The parties also agreed that plaintiffs were not authorized to engage in any activity that “may be construed or deemed to constitute the practice of medicine and that nothing herein shall be construed as the practice of medicine” by plaintiffs. Id. at 12. The parties' Agreement gave plaintiffs “no authority, directly or indirectly, to perform, and shall not perform, any professional medical function.” Id. at 13. The parties agreed that RNM “shall be solely and exclusively in control of all aspects of the practice of medicine” and that “all professional medical services, including, but not limited to, diagnosis, treatment, therapy, the prescription of medicine and drugs, and the supervision and preparation of medical reports shall be the sole responsibility” of RNM. Id. at 23. And, the 2002 Amended Service Agreement released plaintiffs from performing any act or service constituting the corporate practice of medicine. Id. at 12.

         The 2002 Amended Service Agreement applied both to “Technical Operations” and “Professional Operations.” Technical Operations consisted of the imaging centers and other facilities that RNMIP owned or managed and generated “Technical Revenues.” Id. at 11. “Technical Revenues” were those “fees and income of [RNM] or [RNMIP], as determined pursuant to GAAP applied on a consistent basis, that [were] recorded each month (net of Adjustments) by or on behalf of [RNM] or [RNMIP], for the use of [RNMIP's] facilities and equipment, and net of any Professional Revenues.” Id. “Professional Operations” consisted of the “business and operations conducted by [RNM] including, without limitation, the provision of professional medical services to patients” by the physicians and their employees (but “excluding Technical Operations”). Id. at 10. “Professional Revenues” were those “fees and income of [RNM] . . . generated by the Professional Operations.” Id.

         Article III of the 2002 Amended Service Agreement required RNMIP to “provide or arrange for” certain administrative services for RNM. Id. at 12. The administrative services required under the Agreement included: billing and collection services; accounting services and cash management; clerical, purchasing, payroll, legal, bookkeeping, computer services, information management, print, postage and duplication, and medical transcribing services; recordkeeping; providing an office facility and supplies; recruiting assistance; financial planning and budgeting; providing non-physician professional support employees; negotiating provider and payor contracts; and advertising and public relations. Id. at 13-21. The Agreement also prohibited RNM from “act[ing] in a manner which would prevent [RNMIP] from performing its duties hereunder.” Id. at 12. And, the Agreement required RNM to “provide such information and assistance to [RNMIP] as is reasonably required by [RNMIP] to perform its services hereunder.” Id.

         Section 3.2(b) required RNMIP to “bill and collect [directly] from patients, insurance companies, Managed Care Payors, and other third-party payors for professional supervision and interpretation fee charges and technical fee charges incurred in connection with services rendered . . . .” Id. at 13-14. This section also authorized RNMIP to “deposit all collections . . . directly into the Deposit Account [an RNM bank account] . . . .” Id. at 14. Section 3.2(b)(iii) prohibited RNM from “materially interfer[ing]” with RNMIP's billing, collection, and deposit account transfer activities as described in that section. Id. Section 3.2(d) authorized RNMIP to transfer “the cash and cash equivalents of [RNM] and [RNMIP]” “to the account of [RNMIP] and to use such cash for purposes that [RNMIP] deems appropriate, subject to and consistent with the terms and provisions of this Agreement.” Id. at 16. Section 3.2(e) authorized RNMIP to “purchase accounts receivable of [RNM] arising during the day or days just ended” for “an amount equal to the aggregate face amount of the accounts receivable being sold less contractual adjustments and estimated allowances for bad debt as determined from time to time based on recent historical collection experience of one year or less.” Id.

         In Section 3.3 of the 2002 Amended Service Agreement, RNMIP agreed to “make available” “Premises” for use by RNM and to “provide [RNM] with the use of the equipment, furniture, fixtures, furnishings and other personal property acquired in the Acquisition or any replacements thereto, together with such other equipment, furniture, fixtures, furnishings and other personal property necessary or appropriate for the efficient operation of the Technical Operations acquired by [RNMIP] or [Radiologix] . . . .” Id. at 17-18. Section 8.1 of the Agreement provided that “[a]ll records relating in any way to the operation of the Professional Operations and the Technical Operations (other than [RNM] Records), shall . . . at all times be the property of [RNMIP] as set forth in Section 3.2(g).” Id. at 38-39.

         Section 3.7 authorized RNMIP to “negotiat[e], establish[ ] and supervis[e] all contracts and relationships . . . with all managed care, institutional health care providers and payors, health maintenance organizations, preferred provider organizations, exclusive provider organizations, Medicare, Medicaid, insurance companies, and other similar persons or entities . . . related to the Professional Operations and Technical Operations.” Id. at 20. “[A]ny approval, disapproval, termination or amendment of” payor contracts “shall be the responsibility and obligation of the Joint Planning Board.” Id.

         The 2002 Amended Service Agreement required payment of a Service Fee to plaintiff RNMIP. Id. at 57. The Service Fee consisted of 100% of Technical Revenues and a certain percentage, adjusted over time, of Professional Revenues. Id. The 2002 Amended Service Agreement's Recitals clause explicitly provided that the parties had “determined a fair market value for the services to be rendered by [RNMIP], and based on this fair market value, have developed a procedure for compensation of [RNMIP].” Id. at 6. The parties also agreed that the “Service Fee” was “negotiated at arms' length” and “fair, reasonable and consistent with fair market value” in view of the “substantial commitment and effort” by RNMIP to enter the Agreement. Id. at 37. The 2002 Amended Service Agreement provided that the “Service Fee is not intended to and shall not be interpreted or implied as permitting [RNMIP] to share in [RNM's] fees for medical services but is acknowledged as the negotiated fair market value compensation to [RNMIP] considering the scope of services and the business risks assumed by [RNMIP].” Id.

         Section 3.1(b)(i) allowed RNM to acquire replacement administrative services on a temporary basis if plaintiffs failed to provide services that were “reasonably consistent with commercially available services offered by third party providers of physician practice management services of the type and scope offered by [APPI].” Id. at 13. This section provided:

(b) Alternative Management Arrangements.
(i) If [APPI] fails to perform, provide or arrange for the services set forth in this Article III in a manner reasonably consistent with commercially available services offered by third party providers of physician practice management services of the type and scope offered by [APPI], then [RNM] shall provide written notice of such event to [APPI], Parent or their Affiliates, including reasonable evidence of such commercially available services. [APPI] shall deliver to [RNM] within thirty (30) days after receipt by [APPI] of such written notice a written plan detailing the methods and procedures [APPI], Parent or their Affiliates shall utilize to restore the level of service contemplated by this Agreement. In the event [APPI] fails to restore the level of service contemplated by this Agreement in accordance with such plan submitted or in any event within ninety (90) days, [RNM] shall be entitled to reimbursement by [APPI] for the reasonable costs and expenses of obtaining such service on a temporary basis until such time [APPI] demonstrates its ability to perform such service at the level contemplated by this Agreement. Nothing contained in this subsection (b)(i) shall be construed to limit [RNM's] ability to provide notice of a Material Administrator Default pursuant to Section 10.3(b) of this Agreement.

Id.

         Section 4.1 gave RNM “complete control of and responsibility for the hiring, compensation, supervision, training, evaluation and termination of its Physician Employees” except as set forth in Article V. Id. at 22. Section 4.1 also required RNM to “deliver to [RNMIP] copies of all executed employment agreements with [RNM's] Physician Employees” and that these employment agreements comply “with all applicable terms and conditions contained in this Agreement.” Id.

         Section 4.2 required RNM to “provide professional supervision and interpretation services to its patients in compliance at all times with ethical standards, laws, rules and regulations applicable to the operations of the Professional Operations, the Physician Employees, and the Physician Extender Employees.” Id. at 23. The Agreement also obligated RNM to ensure that all of its physician employees have “all required licenses, credentials, approvals or other certifications to perform his or her duties” and to inform RNMIP promptly of any disciplinary or medical malpractice actions initiated against any of its physician employees. Id. Section 4.5 permitted RNM to use its corporate name only “on a non-exclusive and non-transferable basis for the term of this Agreement . . . as may be necessary or appropriate in the performance of [RNM's] services and obligations hereunder.” Id. at 24. Section 4.9 prohibited RNM from “enter[ing] into or offer[ing] any Physician Employee or other employee of [RNM] or [RNMIP] any ‘employee benefit plan' (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) without express written consent of [RNMIP], which consent shall not be unreasonably withheld.” Id. at 25.

         Section 6.1(a)(ii) prohibited RNM from “enter[ing] into any other management or administrative services agreement or other arrangement with any other person or entity (other than [RNMIP]) for purposes of obtaining management, administrative or other support services . . . .” Id. at 30. Section 6.1(b) prohibited RNM from taking any action that would “disrupt, damage, impair or interfere with the business of any member of [plaintiffs.]” Id. at 30. Section 6.2 required RNM to “obtain and enforce formal agreements” with each of its licensed physicians that “each contain certain restrictive covenants thereof pertaining to covenants not to compete and/or solicit with and not to divulge the Confidential and Proprietary Information of [plaintiffs or RNM] (“Restrictive Covenants”).” Id. at 33. Section 6.5 also prohibited RNM from releasing any of its physician employees from the Restrictive Covenants in their employment agreements unless it satisfied certain conditions precedent including obtaining RNMIP's consent to do so and obtaining a formal agreement requiring the physician to hire RNMIP if the physician provided any professional service within 15 miles of any RNM practice site for a period of two years following termination of the employment agreement. Id. at 34-35. Section 7.4 of the 2002 Amended Service Agreement required RNM to “execute a Security Agreement . . . [that] grants a security interest in all of RNM's accounts receivable” to RNMIP. Id. at 38.

         Article V of the 2002 Amended Service Agreement governed formation, operation, duties, and responsibilities of a Joint Planning Board. Id. at 26-29. The Agreement required the parties to “establish” a Joint Planning Board who was “responsible for developing long-term strategic planning objectives and management policies for the overall operation of the Technical Operations” and would “facilitate communication and interaction between [RNMIP] and [RNM].” Id. at 26. One duty of the Joint Planning Board required it to “advise [RNM]” on various matters. These included capital improvements and expansion, annual budgets, advertising, patient fees, ancillary services and fees, provider and payor relationships, strategic planning, capital expenditures, provider hiring, and nonphysician personnel. Id. at 27-28.

         The Joint Planning Board consisted of two RNMIP representatives and up to four RNM representatives. Id. at 26. Each of RNMIP's representatives had one vote, and RNM's representatives had two votes collectively. Id. Section 5.3 of the 2002 Amended Service Agreement prohibited RNM from taking any action or implementing any decision that would “(ii) have a material adverse effect on the amount of [RNMIP's] management fee under Article VII; or (iii) otherwise have a material adverse effect on [RNMIP]'s financial interests under this Agreement” without the approval of both members of the Joint Planning Board appointed by RNMIP. Id. at 28. The Agreement also provided that, in the event of a tie vote among members of the Joint Planning Board, either Radiologix's Board of Directors or a committee designated by Radiologix's Board of Directors and containing at least one RNM representative would make the final decision for the Board. Id.

         Section 12.11 of the 2002 Amended Service Agreement included a “No Waiver” provision. It provided:

No party shall by any act (except by written instrument pursuant to Section 12.3 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power or privilege hereunder shall operate as a waiver thereof.

Id. at 51.

         The 2002 Amended Service Agreement also contained provisions addressing the legality of the Agreement. Section 10.3(c) authorized defendant RNM to terminate the Agreement if:

An independent law firm with nationally recognized expertise in health care law and acceptable to the parties hereto renders an opinion to the parties hereto that (i) a material provision of this Agreement is in violation of applicable law or any court or regulatory agency enters an order finding a material provision of this Agreement is in violation of applicable law and (ii) this Agreement can not be amended pursuant to [Section 12.6] hereof to cure such violation.

Id. at 42.[2] Also, Sections 12.6 and 12.9 allowed the parties to modify or sever any provisions of the contract that are deemed illegal, invalid, or unenforceable. Id. at 50. Section 12.6 stated:

Section 12.6 Contract Modifications for Prospective Legal Events. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or independent legal counsel in such a manner as to indicate that this Agreement or any provision hereof may be in violation of such laws or regulations, [RNM] and [RNMIP] shall amend this Agreement as necessary to preserve the underlying economic and financial arrangements between [RNM] and [RNMIP] and without substantial economic detriment to either party. If this Agreement cannot be so amended, the terms of Section 10.3(c) and 10.4(b) shall apply. To the extent any act or service required of [RNMIP] in this Agreement should be construed or deemed, by any governmental authority, agency or court to constitute the practice of medicine, the performance of said act or service by [RNMIP] shall be deemed waived and forever unenforceable and the provisions of this Section 12.6 shall be applicable. Neither party shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section 12.6 and Section 12.9.

Id. Section 12.9 provided:

Section 12.9 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.

Id.

         Section 10.3(b) also allowed RNM to terminate the Agreement for another reason. RNM could terminate the Agreement if: (1) plaintiffs materially have defaulted on the duties imposed by the agreement and failed to cure their default within 60 days after being notified in writing of the default; and (2) two-thirds of RNM's equity holders have voted to approve the agreement's termination. Id. at 41.

         The parties operated under this 2002 Amended Service Agreement until 2015, with defendant RNM paying a Service Fee for plaintiffs' management and administrative services.

         Amendment No. 1 to the 2002 Amended Service Agreement

         The parties agreed to amend the 2002 Amended Service Agreement by entering into an Amendment No. 1 to the Amended and Restated Service Agreement (“Amendment No. 1”) on January 1, 2003. Doc. 244-18. With Amendment No. 1, the parties agreed to reduce the Service Fee under the 2002 Amended Service Agreement in exchange for a “lump sum payment” of $4, 842, 293 by RNM to plaintiffs. Id. at 1. The Amendment called for a reduction in the Service Fee over time, from 26.6% to 15% of RNM's Professional Revenues. Id. at 2. This amendment followed RNM “vot[ing] to accept th[e] option to buy the service fee down to 15 percent.” Doc. 246-11 (Allen Dep. 85:9-11). The parties' execution of Amendment No. 1 was “how [the RNM physicians] agreed to address” the issues with the Service Fee. Id. (Allen Dep. 85:15-18). The RNM physicians “knew that what [they] were getting for [that] 15 percent was whatever the service agreement said [they] were getting for that 15 percent.” Id. at 64 (Allen Dep. 174:12- 21).

         Even after the parties executed Amendment No. 1, younger doctors within the RNM practice complained that the 15% Service Fee was exorbitant. In response, Dr. Timothy Allen, who agreed the Service Fee was “high, ” reminded the younger physicians that plaintiffs “pay for the staff members we rely on, . . . rent on the administrative office, et cetera, ” which should “count for something.” Id. at 83 (Allen Dep. 244:13-19). When Dr. Allen provided this response, he believed that a deal “with McKesson [, a competitor of RNMIP, ] billing and us paying the administrative cost, et cetera” the cost would still be “around 11 or 12 percent of our net.” Id. at 244-45 (Allen Dep. 244:20-245:4).

         Radiologix is Acquired by RadNet Management, Inc.

         In 2006, RadNet Management, Inc., acquired Radiologix as a wholly owned subsidiary. RadNet Management, Inc. is a subsidiary of RadNet, Inc., a publicly traded company that manages many radiology groups and practices around the United States. RadNet, Inc. is the largest owner and operator of fixed-site diagnostic imaging centers in the country. Radiologix has continued to exist since this 2006 acquisition. Plaintiff RNMIP also has continued in existence as Radiologix's wholly owned subsidiary.

         Physician Employment Agreements

         Consistent with the 2002 Amended Service Agreement, each one of defendant RNM's current physician-owners signed a “Physician Employment Agreement” with defendant RNM that names plaintiff Radiologix as a third-party beneficiary. See Doc. 243-9 (“the Physician Employment Agreement”). The Physician Employment Agreement provides, in pertinent part:

C. RNM desires to engage Physician to render Specialty services on behalf of RNM.
. . .
E. Physician acknowledges that RNM has entered into an Amended and Restated Service Agreement dated July 1, 2002 with American Physician Partners, Inc., a Delaware corporation (“APPI”) (as may be amended from time to time, the “Service Agreement”). APPI changed its name to “Radiologix, Inc.” (RDLX), September, 1999. Physician further acknowledges that in accordance with the provisions of the Service Agreement, [Radiologix] will have third party beneficiary rights to enforce certain provisions of this Agreement.
. . .
2.1 Professional Services. Physician shall render professional Specialty services in accordance with the laws of the State of Kansas as an employee or as a Member of, on behalf of and at the direction of RNM to patients who are assigned to Physician. In addition, Physician shall have such other duties as may from time to time be reasonably assigned to him or her by the Management Committee of RNM. Physician shall be committed to the enhancement of RNM's medical practice and shall use his or her best efforts to further the goals of and to promote such practice.
2.2 Standards of Practice. Physician . . . shall at all times conduct himself or herself in accordance with the ethical standards of the medical profession, and shall abide by all protocols of treatment and quality care policies as may be established from time to time by RNM . . . .
. . .
2.3 Exclusivity. During the term of this Agreement, Physician shall devote all of Physician's professional time and efforts exclusively to and for the benefit of RNM and shall not, directly or indirectly, render professional, medical, managerial or directive services to any person, whether or not for compensation, except as an employee or Member of RNM, unless Physician obtains the prior written consent of RNM and the Joint Planning Board contemplated in the Service Agreement . . . .
2.4 Hours. Physician shall be available to render professional services on behalf of RNM at such times as assigned by RNM . . . .
. . .
2.6 Site(s) for Provision of Services. RNM shall make available, at RNM's expense, all facilities, equipment, supplies, non-physician personnel and office space necessary and appropriate for Physician's performance of professional medical services under this Agreement . . . .
. . .
2.8 RNM's Policies and Procedures. RNM shall have the authority to establish from time to time the professional policies and procedures to be followed by Physician in handling each individual patient of RNM. Physician shall abide by all policies and procedures established by RNM relating to the provision of professional medical services, including policies and procedures set forth in any contracts between RNM and third-party payors, including the Medicare and Medicaid Programs.
2.9 Patients and Patient Medical Records . . . All patient records, case histories, x-ray films, and files of any type concerning patients of RNM, or patients consulted, interviewed, or treated and cared for by Physician, shall belong to and remain the property of RNM, notwithstanding the subsequent termination of this agreement.
2.10 Disclosure of Information. During the term of this Agreement, Physician shall notify RNM immediately in writing of (a) any malpractice claim filed against Physician; (b) any compromise, settlement or judg[ ]ment of such a claim and the terms and conditions thereof; (c) any revocation, suspension, modification, restriction or other change in status of Physician's medical staff privileges at any hospital or other health care facility for a medical disciplinary cause or reason; and (d) any investigation of Physician by any governmental agency or board or any medical association relating to a medical disciplinary cause or reason.
2.11 Confidentiality.
(a) RNM's Confidential and Proprietary Information. In the course of Physician's performance under this Agreement, Physician will have access to certain confidential and proprietary information relating to the patients and operations of RNM including, without limitation, patient lists and other trade secrets (“RNM's Confidential and Proprietary Information”). Physician shall maintain all of RNM's Confidential and Proprietary Information in the strictest confidence and shall not directly or indirectly use such information during the term of this Agreement or at any time thereafter, or divulge any of RNM's Confidential and Proprietary Information during or after the term of this Agreement to any third parties, other than RNM or other employees and Members of RNM who have need for such information and who have similarly agreed to hold such information in confidence, without the express prior written consent of RNM, or upon court order to do so . . . .
. . .
2.12 Covenant Not to Compete or Solicit.
(a) Physician acknowledges that, during the term of this Agreement, (i) RNM will introduce Physician to RNM's patients and to the medical community and (ii) Physician will receive substantial direct and indirect benefits from the existence of the Service Agreement, both of which will enable Physician to develop his or her professional reputation in a manner which, if Physician terminates his or her relationship with RNM, could be used to the financial detriment of RNM and [Radiologix]. Accordingly, during the term of this Agreement and for a period of twenty-four (24) months thereafter, Physician covenants as follows:
. . .
(ii) that Physician will not, directly or indirectly, . . . (B) whether for himself or any other person or entity, call upon, solicit, divert or take away, or attempt to solicit, call upon, divert or take away any customers, business or clients of RNM or [Radiologix] (including without limitation, any third party payors); (C) solicit, or induce any party to solicit, any contractors of RNM or [Radiologix] to enter into a contract of the same or a similar type as that to which RNM or [Radiologix] and such contractor are parties; . . . or (E) disrupt, damage[, ] impair or interfere with the business of RNM or [Radiologix].
. . .
3. Compensation. For the professional services provided under this Agreement, RNM shall compensate Member Physicians as determined by the Management Committee, and shall compensate employee Physicians as stated on Exhibit B . . . .
. . .
4.1 Vacation, Professional Meetings, Inability to Work, and Time Off. Physician shall be entitled to vacation time, time off for attendance at professional meetings, inability to work, and other time off as may be granted in accordance with policies established from time to time by RNM's Management Committee. Such policies shall be subject to review, change and elimination from time to time.
4.2 Professional Liability Insurance. RNM, on behalf of Physician, shall obtain and maintain at all times during the term of this Agreement professional liability insurance coverage for errors and omissions resulting, in whole or in part, from the acts of Physician in connection with Physician's practice of medicine in and through RNM . . . .
4.3 Reimbursement of Expenses. RNM shall reimburse Physician for Physician's Reasonable and necessary out-of-pocket expenditures ...

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