United States District Court, D. Kansas
RADIOLOGIX, INC. and RADIOLOGY AND NUCLEAR MEDICINE IMAGING PARTNERS, INC., Plaintiffs,
RADIOLOGY AND NUCLEAR MEDICINE, LLC, et al., Defendants.
MEMORANDUM AND ORDER
D. CRABTREE, UNITED STATES DISTRICT JUDGE
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
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).
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.
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.
Motion to Strike
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.
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
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.”).
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).
Motions for Summary Judgment
court now turns to the four pending summary judgment motions.
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).
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,
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.
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.
1997 APPI-RNMPA Agreement
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.
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
. . .
(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.
Agreement defined the “Effective Time” in this
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
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.
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).
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
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
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.
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.
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.
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.
Amended Service Agreement
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.
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.
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.
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.
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
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.”
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.
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.
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].”
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.
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.
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.
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.
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
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.
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.
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. 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.
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.
parties operated under this 2002 Amended Service Agreement
until 2015, with defendant RNM paying a Service Fee for
plaintiffs' management and administrative services.
No. 1 to the 2002 Amended Service Agreement
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).
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).
is Acquired by RadNet Management, Inc.
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.
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
(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 ...