The Third Circuit affirmed the dismissal of litigation alleging that a medical device manufacturer was liable for a physician’s FCA settlement. The plaintiff alleged the defendants provided incorrect information about how to bill Medicare for reimbursement for services involving their equipment, and therefore should reimburse him the amount he had to pay the government to settle claims of false billing. However, the district and circuit courts agreed that the complaint failed to allege who had provided this false information and when. The courts also held that the breach of contract claim was barred by Article 2’s four-year statute of limitations, because the primary purpose of the contract was the purchase of goods, not the provision of training services.
Appellant Labib Riachi sued the Prometheus Group and First Choice for Continence Inc., two companies that provided his medical practice with equipment and training. Riachi alleged the defendants improperly trained him and his staff on the use of their equipment, which resulted in Riachi falsely certifying compliance with Medicare rules and subsequent liability under the False Claims Act.
In 2005, Riachi purchased therapy equipment from Prometheus, which provided training on the equipment through third-party vendor First Choice. The training showed Riachi and his staff how to treat patients with the equipment as well as how to bill Medicare for this treatment.
In 2010, Riachi was investigated for making false claims to Medicare and was later subject to litigation by the government, which alleged that Riachi billed for treatment that his unqualified staff—not he—had performed. Riachi settled the suit for $5.25 million.
In 2017, Riachi sued Prometheus, alleging that it had wrongly advised him that he need not personally perform or directly supervise his practice’s performance of therapeutic services using the equipment he had purchased. Riachi asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of New Jersey’s Consumer Fraud Act, common-law fraud, negligent misrepresentation, negligence, and unjust enrichment. After most of his claims were dismissed, Riachi added First Choice as a defendant. The final claim was resolved when the district court granted summary judgment in favor of Prometheus.
The circuit court addressed each claim in turn, starting with the claim against Prometheus for breach of the implied covenant of good faith and fair dealing. The district court dismissed this claim for failing to allege Prometheus acted with bad faith. The appeals court affirmed. Riachi argued he need not allege bad faith or motive, but the court found that it settled that he did.
Next, the district court found that Riachi’s claims against both Prometheus and First Choice for common-law fraud, fraud in violation of the New Jersey Consumer Fraud Act, and negligent misrepresentation each failed for lack of allegations meeting the heightened pleading standard for fraud claims under Rule 9(b). The circuit court agreed that the amended complaint failed to meet this standard. For example, while Riachi argued that Prometheus stated Riachi did not have to personally perform or oversee certain procedures, he only vaguely alleged who made the representations and when. While he named some individuals who allegedly made the representations, he did not state who made the statements or when they did so over the seven year period when training was provided.
Next, the district court held that Riachi’s negligence claims against Prometheus and First Choice were barred by the economic loss doctrine, which bars the recovery of purely economic loss in tort. Under this doctrine, a plaintiff may not assert a negligence claim for a purely economic loss he suffered as a result of the defendant’s deficient performance of its contractual duties. The appeals court affirmed.
The district court also concluded that the existence of a contract between Riachi and Prometheus barred Riachi’s unjust enrichment claim, and the Third Circuit agreed, explaining that a plaintiff may not maintain an action for unjust enrichment based on deficient performance of a contract, the validity of which is undisputed. Because Prometheus did not dispute the existence of a valid contract, the district court properly dismissed Riachi’s unjust enrichment claim.
Finally, the appeals panel considered the district court’s grant of summary judgment for Prometheus on Riachi’s breach-of-contract claim. The district court concluded that the breach-of-contract claim was government by Article 2 of the Uniform Commercial Code and was thus barred by Article 2’s four-year statute of limitations. Riachi argued that Article 2 did not apply, and that his breach-of-contract claim is thus timely under New Jersey’s six-year statute of limitations for breach-of-contract claims.
Article 2 applies to contracts for the sale of goods, not services, but in cases where both are procured, a court must determine which aspect of the contract is predominating. The appeals court agreed with the district court’s conclusion that the contract was for the sale of goods and that the training services were only incidental to the purchase of the equipment. The court noted that for each equipment purchase of $11,000, Riachi purchased only $3,500 in training services, and that the training was provided by a third party.
Riachi did not dispute this finding, but instead argued that because the equipment was completely new in the field, the training services were the most important component of the contract. However, the court was not convinced, finding that one party’s subjective view could not create a genuine issue of fact. The court found it clear from the relative value placed on the goods and services which was the more important. Thus the district court correctly concluded that the 4-year statute of limitations applied.
Riachi also argued that even if the four-year bar applied, his claim was still timely because it did not accrue until he discovered that he had suffered damages—in 2016, when he was forced to settle with the government. However, the court explained that Article 2 provides that a claim accrues when a breach occurs, regardless of the plaintiff’s knowledge of the breach. Thus, the claim accrued, at the latest, in 2010, the last date First Choice was obliged to provide training, while Riachi did not file his suit until 2017, well outside the four-year statute of limitations.
