March 19, 2015 | Court Rulings
St. Alphonsus Diversified Care, Inc. v. MRI Associates, LLP, 2014 Ida. LEXIS 200 (Aug. 4, 2014)
A recent lost profits case that revolved around a hospital’s breach of a partnership agreement’s noncompete clause raises issues about the right measure of damages and illustrates how an expert’s testimony succeeds in fending off various forms of attack from the opposing party.
In 1985, a hospital entered into a partnership, MRI Associates (MRIA), whose primary purpose was to buy and operate diagnostic and therapeutic equipment, starting with an MRI scanner. Subsequently, MRI Associates formed two limited partnerships. One, MRI Center, was located on the hospital’s campus; the other, MRI Mobile, owned and operated mobile MRI scanners. In 1998, a group of radiologists that had interpreted the scans done at MRI Center formed a competing company, IMI, with an outpatient facility some three miles away from MRI Center. Around the same time, the hospital secretly began to negotiate with IMI against MRI Associates. In 2000, MRI Associates wanted to open another facility about seven miles away from MRI Center, but the hospital, as a partner in the company, opposed the plan. In 2001, the hospital became a member of IMI. There was evidence that it financially assisted IMI in violation of its contract with MRI Associates. In 2002, the hospital supported IMI’s opening a second facility at the very location where MRI Center had wanted to set up another business.
In 2004, the hospital informed MRI Associates that it wanted to dissociate from the partnership effective April 2004. Based on the partnership agreement, it could not compete with MRI Associates for a year. The hospital subsequently sued MRI Associates to recover the value of its partnership interest, and MRI Associates countersued. A jury found against the hospital and awarded MRI Associates $36.3 million. This judgment was nullified on appeal, and a new trial took place in which MRI Associates added MRI Center and MRI Mobile as complainants. The three MRI entities claimed breach of contract, intentional interference with a prospective economic advantage, breach of fiduciary duty, and civil conspiracy.
At trial, the MRI entities offered damages testimony from two experts. The main expert was an accountant who had nearly four decades of experience and who had worked for Arthur Andersen and KPMG. He calculated lost profits from 2001 through 2010, assuming causation. The second expert used the first expert’s computations to project future lost profits to 2015.
‘Massive migration of referrals.’ The first expert determined the profit MRI Center lost by estimating the number of scans it lost to its competitor, IMI, during the period when the hospital was prohibited from competing with MRI Center. He identified all of the doctors who referred patients to MRI Center prior to IMI’s opening its facility and assumed the referrals would have kept up. He also identified the new physicians in the area whose sole affiliation was with the hospital and assumed they would refer patients to the facility on the hospital campus, i.e., MRI Center. Referrals from the two groups made up 42% of the MRI scans performed at IMI’s original facility, he concluded. His estimate of lost scans did not include scans ordered by physicians who could admit patients to the hospital and to another major hospital in the area. Moreover, he excluded scans that were referred to other facilities by physicians who previously had referred patients to MRI Center.
His lost profits calculation for MRI Mobile was based on the profits IMI’s second facility made. He approached this calculation as a business opportunity for MRI Associates that the hospital had usurped. Had the hospital supported MRI Associates when it expressed a desire to open a new facility, in 2000, the latter would have been in the same competitive market as IMI was when it opened its second facility. Further, he assumed that the costs for opening a second facility to MRI Associates were the same as the costs to IMI. He also calculated the annual profit margin for MRI Center and IMI’s second facility and found that the former had a higher profit margin than the latter. For the lost profits calculation, however, he relied on IMI’s financial information.
At trial, the expert also produced a chart showing both the number of scans MRI Center performed each year from 1998 through 2006 and the number of scans IMI performed for much of that time. The chart demonstrated that there was a drop in scans for MRI Center when the hospital partnered with IMI in 2001 and an even more pronounced decrease in the number of scans when the hospital and IMI opened a second facility. At the same time, the number of scans done at IMI increased steadily. The aggregate data supported the conclusion that there was “a massive migration of referrals from MRIA to IMI,” the expert said. He added that he also tried to identify the specific customers MRI Associates lost.
At trial, he was asked repeatedly about changes to his calculation if the hospital were not liable for prior bad acts and competed rightfully after April 2005. He allowed that under that hypothetical the MRI entities would have suffered substantially less damage after that date than claimed and no damage after about 2010. Assuming there were no unlawful diversions, only lawful competition, he said, would require a reduction in his calculation by about $14.4 million. But he emphasized that this reduction only applied if there were no bad acts prior to April 2005.
The jury found the hospital liable for breach of the noncompete and awarded the MRI entities a total of over $52 million. It also awarded the hospital $4.8 million for its partnership interest. The hospital challenged the verdict in a post-trial motion claiming the MRI entities failed to prove that post-April 2005 lost profits were the result of prior bad acts. The trial court denied the motion, finding that the entire theory of the MRI entities was that the hospital’s wrongdoing destroyed their business. If the jury found prior bad acts that made MRI Associates no longer competitive, the jury could infer that the number of scans shown to have gone to IMI would have gone to the MRI entities.
Misstating expert’s testimony. Both sides appealed to the state’s highest court. On appeal, the hospital did not contest the jury’s liability findings but claimed there was insufficient evidence to prove lost profits. It specifically targeted MRI Associates’ principal damages expert. First, it argued that his methodology was flawed because he failed to allow that other factors, besides the hospital’s conduct, could have caused all or part of the claimed business migration from MRI Center to IMI, and, the hospital said, the calculation of the lost scans “was nothing much more than a rough guess.”
The appellate court disagreed. This was a market exclusion case in which the expert’s chart of MRI scans represented the kind of proof case law required. Moreover, the expert tried to show the loss of specific business.
Further, the hospital contended that the expert’s basing damages to MRI Mobile on IMI’s financial data was inappropriate. Under controlling case law, the measure of damages for breaching a noncompete clause is the amount the plaintiff lost due to the breach, not the amount the defendant made in profits, the hospital stated.
The court saw it differently. This was not an instance in which the breach of the noncompete clause created competition between two existing businesses. Instead, here, the hospital, in violation of its partnership agreement with MRIA, deprived MRIA of the opportunity to open a facility away from the hospital campus while actively supporting its competitor IMI in doing just this. In this situation, the court said, “The measure of lost profits would be the net profits of [IMI’s] facility.” It would not make sense to hypothesize about the net profits a hypothetical MRI entity could have made and against which IMI’s facility hypothetically could have competed, the court explained.
Finally, the hospital in various ways tried to argue that the expert conceded that, if one assumed lawful competition after 2005, damages would decrease by about $14.4 million.
The appeals court called that statement “incorrect.” The expert only said that, hypothetically speaking, if there had been no wrongdoing before April 2005 that caused damages after that date, he would exclude that amount from the damages. Since the jury had found prior wrongdoing—a finding that the hospital did not challenge—the expert’s damages model required no change. For all of these reasons, the state high court affirmed the $52 million lost profits award.