Opinion
No. 92 C 5302.
August 17, 1994
MEMORANDUM OPINION
This matter is before the Court on the plaintiff's objections to the magistrate judge's Report and Recommendation on cross motions for summary judgment. For the reasons that follow, we overrule the objections and accept the magistrate judge's recommendation.
BACKGROUND
This case concerns an alleged breach of a contract between the plaintiff, Modern Medical Laboratories, Inc. ("MML"), and the defendant, Smith-Kline Beecham Clinical Laboratories, Inc. ("Smith-Kline"). The contract was called a Co-operative Management Agreement ("the Agreement") and provided that a division of ICL would market, manage, and operate MML's laboratory business and facilities in exchange for 90% of the revenue generated from MML's customers and territory. MML was to receive 10% of the revenue.
The contract was between MML and a division of International Clinical Laboratories, Inc. ("ICL"). ICL was acquired by Smith-Kline in a hostile takeover in 1988. Smith-Kline assumed the rights and obligations of ICL in the MML-ICL contract.
Work was performed and payments were made according to the terms of the contract for some time. MML asserts that the ICL division committed certain breaches of the Agreement that are not relevant to our discussion here. Upon Smith-Kline's takeover of ICL, Smith-Kline advised MML that it would not make further payments under the Agreement because it believed the Agreement could be illegal under the Medicare-Medicaid Anti-Fraud and Abuse Amendments ("the Act"), 42 U.S.C. § 1320a-7b.
MML brought this action, which is essentially a breach of contract action. The Second Amended Complaint contains a count seeking a declaration that the Agreement does not violate the Act, a count alleging that the Act is unconstitutional, and a breach of contract count. Smith-Kline filed a counterclaim, seeking payment by MML of $85,000, plus interest, due under the Agreement, and additionally or alternatively, a declaration that the Agreement was void for illegality.
MML filed a motion for partial summary judgment on its declaratory judgment count. Smith-Kline responded with a cross-motion for summary judgment on all counts of the Second Amended Complaint. We referred the motion to Magistrate Judge Lefkow. She prepared a Report and Recommendation recommending that Smith-Kline's motion be granted and that MML's motion be denied. MML has filed objections to the Report and Recommendation, which we now review.
LEGAL STANDARD
The United States Magistrates Act, as amended, allows district court judges to refer pre-trial motions to magistrate judges, who read the submissions of the parties, hold hearings if necessary, and prepare reports and recommendations. See 28 U.S.C. § 631 et seq. Our standard of review of the magistrate judge's recommendation is defined by 28 U.S.C. § 636(b)(1). For dispositive motions, the statute requires that the district court judge "make a de novo determination of those portions of the [magistrate judge's] . . . recommendations to which objection is made." 28 U.S.C. § 636(b)(1). "A district judge may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate." Id.
Referring motions to magistrate judges is intended to help ease the heavy workloads of the district courts and to aid in the efficient resolution of the disputes. Anna Ready Mix, Inc. v. N.E. Pierson Constr. Co., 747 F. Supp. 1299, 1302-03 (S.D.Ill. 1990). Efficiency in judicial administration requires that all arguments be presented to the magistrate judge in the first instance. Anna Ready Mix, 747 F. Supp. at 1303. Absent compelling circumstances, the review procedure is not an opportunity to present new arguments not raised before the magistrate judge. Id. at 1303. It is with these principles in mind that we review the objections before us.
DISCUSSION
The cross motions for summary judgment center around the legality of the Agreement in light of the Medicare-Medicaid Anti-Fraud and Abuse Amendments, 42 U.S.C. § 1320a-7b. The magistrate judge determined that future performance of the Agreement would be illegal and thus, found that failure to perform the Agreement was excusable. MML makes three objections to the magistrate judge's report. First, MML challenges the magistrate judge's interpretation of the Act. Second, MML objects that the magistrate judge went beyond the evidence and speculated that the Agreement could result in higher prices being charged for laboratory work. Finally, MML asserts that the magistrate judge should have granted it some relief even if future performance of the Agreement is illegal.
We begin with the first objection. The Act provides in relevant part as follows:
(1) whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind —
(A) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under subchapter XVIII of this chapter or a State health care program, or
(B) in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under subchapter XVIII of this chapter or a State health care program, shall be guilty of a felony . . .42 U.S.C. § 1320a-7b(b).
An analysis of whether the Agreement violates this portion of the statute requires us to determine what actors are within the reach of the statute and what acts are prohibited. The first question is easy: "whoever" does the prohibited acts is liable. Now we must analyze the prohibited acts. The first portion of the statute quoted above provides that, "whoever (knowingly and willfully) solicits or receives any remuneration . . . in return for referring an individual to a person for the furnishing (or arranging for the furnishing) of any item or service [for which Medicare payments may be made] . . . shall be guilty of a felony." 42 U.S.C. § 1320a-7b(b)(1)(A) (parentheses added for purposes of clarification). The second portion of the statute quoted above makes it a felony to knowingly and willfully receive remuneration "in return for . . . arranging for . . . purchasing . . . any . . . service, or item [for which Medicare payments may be made]." 42 U.S.C. § 1320a-7b(1)(B).
It is established that MML receives remuneration and that Medicare payments may be made for laboratory work; thus, these elements of both subsections of the statute are met. We will set aside the scienter question for a moment to focus on whether the remuneration is in return for referring an individual to a person for the furnishing of any item or service, or in return for arranging for the purchasing of any service.
MML urges, and the magistrate judge rejected, the proposition that MML did not violate subsection (A) of the statute because it did not refer an individual to a person for the furnishing of laboratory service. MML argues that only physicians (and in some instances, law enforcement personnel) can lawfully order medical testing and thus, that MML is without power to refer individuals to the other laboratory for testing. The magistrate judge rejected this proposition because she found that sending individuals' test specimens to another lab was analogous to referring individuals to persons for the furnishing of services, which is prohibited under the statute. MML objects to this analogy.
While we find that the analogy is supportable under the case law and legislative history cited by the parties and analyzed by the magistrate judge, we find that it is not necessary to employ an analogy to find a violation of the Act. Specifically, subsection (B) prohibits receiving remuneration in return for arranging for the purchasing of any Medicaid-reimbursable service. As we read this subsection, it criminalizes broker-style arrangements whereby one entity receives remuneration for placing business with another entity. Under this subsection, it is irrelevant that a physician made the initial decision to purchase certain testing services. As we read it, this subsection reaches activity whereby one entity receives remuneration for essentially taking the physician's "order" for laboratory tests and arranging for another entity to perform the work. In this case, MML arranged for laboratory testing services to be purchased from ICL, and MML received remuneration for that. This arrangement, we find, falls within the activity prohibited by subsection (B).
We now briefly examine the legislative history and purpose of the Act and the decisions of other courts that have confronted the question. There is no binding authority for us to follow. However, Smith-Kline cited several cases which the magistrate judge analyzed in her report. The magistrate judge noted that MML did not cite any cases expressing support for its interpretation of the statute; instead, MML sought to distinguish the cases cited by Smith-Kline. MML does not cite any cases in its objections, either.
The magistrate judge wrote a thorough analysis of the cases and based on our own careful reading of the cases, we agree with her analysis. In U.S. v. Bay State Ambulance Hospital Rental Service, 874 F.2d 20 (1st Cir. 1989), the person receiving remuneration was not a physician, or at least was not working with patients. Instead, he was the director of training for a city hospital and a member of the bid committee for the procurement of ambulance services. He did not receive remuneration by referring patients to the ambulance service, but rather received cars and cash from the ambulance service for using his position on the bid committee to award the city ambulance contract to Bay State. Some of the ambulance runs would be paid for by Medicare or Medicaid. A jury convicted Bay State Ambulance and the individual defendant, John Felci, under the Fraud and Abuse Act.
MML, like Felci, was in a position to determine that one lab and not another would perform the tests on samples sent to MML, and MML received remuneration for referring work to that lab. This, we believe, supports the conclusion that the Agreement was not legal under the Act. See infra; 42 U.S.C. § 1320a-7b(1)(B).
Further support for that conclusion comes from U.S. v. Kats, 871 F.2d 105 (9th Cir. 1989). In Kats, one lab collected samples from doctors' offices and billed Medicare and Medi-Cal (a state program) for testing on those samples. However, the first lab performed no testing; instead, it sent the samples to a second lab and paid that lab 50% of the amount it received from Medicare and Medi-Cal. The appellant in Kats owned an interest in the second lab. The Ninth Circuit Court of Appeals affirmed the appellant's conviction under section 1320a-7b. The underlying factual situation is quite similar to the facts here, and the fact of conviction lends support to the notion that not only physician-lab arrangements but also lab-lab arrangements can be violative of the Act. We note, though, that the Ninth Circuit was not presented with the interpretive question that we face here.
We are also mindful of the Congressional intent underlying the statute. MML's revenue-sharing arrangement clearly seems to be the type of activity that Congress intended to criminalize, because such arrangements have the tendency to increase the prices charged to Medicare and Medicaid. See Greber, 760 F.2d at 71 (expressing concern over the "potential for unnecessary drain on the Medicare system"). In its second objection, MML complains that the magistrate judge improperly theorized that such an arrangement could drive up prices charged for laboratory work. We recognize that there was no evidence on this point. However, such a result is certainly not unlikely. Further, we note that price inflation is not an element that needs to be proven to establish a violation; thus, the magistrate judge's discussion (and our discussion here) of potential price effects is not part of the resolution of the question of illegality.
For the reasons just discussed, we conclude that the Agreement had all of the elements of being violative of the Act, except the scienter element may or may not have been present. However, performance of the contract after this ruling would definitely constitute a knowing and willful violation and thus, future performance would be illegal.
Should we leave the parties where we found them, since we have determined they are parties to a contract for an illegal purpose? In its third objection to the Report and Recommendation, MML suggests several alternative remedies. MML's position is that it was damaged by ICL's actions of taking over its customers and allowing its laboratory lease to expire, and that it is entitled to equitable relief. Smith-Kline objects to the suggested remedies, arguing that they were not raised before the magistrate judge. It is true that all relevant arguments are to be raised before the magistrate judge in the first instance. Anna Ready Mix, 747 F. Supp. at 1302-03. That requirement was met here, in that MML addressed remedies to some degree in its summary judgment memoranda.
The magistrate judge implicitly recommended leaving the parties where we found them. This is in accordance with the general rule that the courts will not assist either party to an illegal contract. E.g., Manning v. Metal Stamping Corp., 396 F. Supp. 1376, 1378 (N.D.Ill. 1975) ( citing Smythe v. Evans, 209 Ill. 376, 70 N.E. 906 (1904)), aff'd without op., 530 F.2d 980 (7th Cir. 1976). We will follow the general rule here. We will not order MML to repay the $85,000 advance it received from ICL under the Agreement, nor will we order Smith-Kline to pay any damages to MML. Smith-Kline was a latecomer to this arrangement and had no part in its making. Thus, we do not find that it would be equitable to exact damages from Smith-Kline to benefit MML, which was a party to the contract. Likewise, we do not find that the equitable relief of an injunction against Smith-Kline, prohibiting it from soliciting or servicing any of MML's clients, is appropriate here. MML has no laboratory or employees to perform testing for these clients, so it would gain nothing from such an injunction.
Of course, some exceptions to the general rule of non-interference by the courts exist. Williston has recognized that a party to a contract that does not necessarily involve an illegal act, but which results in a slight violation of the law, may recover on the contract, if the violation does not seriously offend public policy or seriously injure the public welfare. 6 Williston, Contracts § 1767 (Rev. ed. 1938), as cited in Amoco Oil Co. v. Toppert, 56 Ill. App.3d 595, 598, 371 N.E.2d 1294, 1297 (Ill.App.Ct. 1978). Here, Congress has found Medicare and Medicaid fraud and abuse to be such a serious concern that it has made it a felony. In light of this policy determination, we conclude that the above-noted exception cannot apply here. Accordingly, we will leave the parties in their present statures.
Our decision that the Agreement was prohibited by the Act makes appropriate the entry of summary judgment against MML on Count I of the Second Amended Complaint. Smith-Kline's Counterclaim was the converse of Count I. The Counterclaim sought a declaration that future performance of the Agreement would be illegal. Flowing from our disposition of Count I above, summary judgment in Smith-Kline's favor on the Counterclaim is appropriate. Our decision here also forecloses MML from succeeding on Counts II and III of its Second Amended Complaint, so we enter summary judgment for Smith-Kline on those counts as well.
CONCLUSION
For the reasons stated above, we approve and adopt the magistrate judge's recommendation. Accordingly, we grant the defendant's motion for summary judgment and deny the plaintiff's motion for partial summary judgment.