By Mike Costello and Sharon Hamrick
In February 2006, ABC Healthcare signed a contract to outsource to XYZ Company certain “denial management services” for ABC’s five hospitals. That was the beginning of a five-year saga that involved a failed business relationship, a secret marriage, fabricated financial records, alleged damages of $30 million, and a dramatic climax at a default judgment hearing.
The Decosimo Advisory Services litigation support team was hired by ABC to assist in clarifying the accounting, business, and financial issues in the case, and our journey from big boxes of documents to credible expert reports is a great example of how our litigation support team works together to develop and report opinions in complex litigation projects.
The Failed Business Relationship - ABC Healthcare was the defendant in a lawsuit filed by revenue cycle management firm XYZ Billing. XYZ Billing was seeking several million dollars in damages from ABC Healthcare for breaching the exclusivity clause and other aspects of its three-year contract to provide denial management services for ABC’s hospitals.
A Secret Marriage - Central to this case was the internally inconsistent and grammatically incomplete contract provision that read, “Termination. Either Party may terminate this Agreement upon one-hundred twenty (180) days’ prior written notice to the other Party. Should [ABC] terminate this agreement within the initial term, then a lump sum payment of $50,000 and associated software license fee paid by [XYZ] to a third party.”
Most important to the litigation was the phrase regarding the “associated software license fee paid by XYZ to a third party.” The third-party to whom XYZ allegedly paid such fees turned out to be a related company owned by the husband of XYZ’s CEO, and the amount of the fee was far from clear.
Fabricated Financial Records - Subsequent to ABC’s notice of termination of the contract, XYZ billed ABC for $137,500 in license fees paid to a third party. Forensic accountants from Decosimo Advisory Services examined the financial records of XYZ, and there was no evidence supporting the actual payment of these fees. Later, XYZ alleged damages in excess of $1 million for software license fees paid to a third party. Again, analysis of XYZ’s financial records by forensic accountants from the DAS litigation team found no evidence that $1 million in fees had been paid.
In an interesting twist, deposition testimony revealed that at least a portion of the payments to the “third party” were payments on a $600,000 note owed by XYZ that was not recorded on the balance sheet of XYZ. The deponent testified that XYZ did not want to show such a large liability because its bank might stop making loans if the true financial condition of XYZ were known. We agreed with that part of the plaintiff’s testimony.
The husband, who owned the “third party” software company, testified that his company did not bill XYZ for services in a timely manner, because sending bills to XYZ would generate payables that would further compromise XYZ’s ability to borrow.
Mike Costello, the financial and forensic accounting expert from DAS who led the project team for this engagement, was able to address these and other issues with the financial records of XYZ and successfully explain them in a clear and straightforward manner for the court.
Alleged Damages of $30 Million - XYZ later presented calculations presenting financial damages of $30 million resulting from the alleged breach of the contract. This calculation was predicated on the alleged breach of the exclusivity clause for collection efforts of denied claims from non-governmental third party payers as part of supplemental disclosures. The plaintiff’s calculations were not the work of a financial expert and were submitted to the court over two months after the close of fact discovery.
David Cranford, DAS Healthcare Consultant, testified that the exclusivity clause was not breached and that the revenue cycle management for ABC was operating effectively based on healthcare industry standards. He stated, “In my expert opinion, the services provided to ABC by other vendors could not reasonably be viewed as improperly competing or overlapping with those provided by XYZ, in light of the customs and practices of the healthcare industry.”
Costello testified that the lost profits damage calculation was not plausible. He stated, “In sum, calculation of lost profits is not applicable in this case because the parties agreed to a termination fee of $50,000 plus reimbursement for software fees. There are serious issues with the ability to determine the amount, if any, of associated software license fees paid by XYZ to a third party.”
Dramatic Ending - ABC refuted XYZ’s allegations and refused to cave to the plaintiff’s demands for settlement. By the end of the proceedings, ABC was awarded partial summary judgment, and both of the plaintiff’s attorneys were referred to the Board of Professional Responsibility. In addition, lead counsel for the plaintiff was referred to the state bar association for a “psychological and competency evaluation.” Eventually, the defendant, ABC, was awarded $1.5 million in fees.
Morals of the Story -
- First and foremost, capable legal counsel is a must in complex commercial litigation.
- If there are sound reasons to have exclusivity clauses in contracts, companies should have processes to routinely review compliance.
- Before entering a contract for a significant length of time and at a significant potential cost with an unfamiliar vendor, a company would be well-advised to investigate that vendor and to have the contract reviewed by its own legal advisor.
- Before filing litigation alleging lost profits or other financial damages, plaintiffs should consider consulting with a financial damages expert to evaluate the evidence available to substantiate those damages.
- It is not enough to believe you’ve been wronged - Per the judge in this case, “Although your client may have believed…somebody was not being fair to them, it’s one thing to believe and another thing to be able to prove it. And there is no proof.”
- Complicated financial damages such as lost profits damages are most often best calculated by financial experts with the experience and knowledge to make such calculations.
- The legal team and the financial experts should work closely to ensure that all relevant information is communicated in a timely manner.
Please contact DAS when dealing with complex litigation. DAS litigation support professionals can provide the technical skills necessary for successful financial expert testimony.