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Yorktowne Urology, P.C v. Neuisys

August 30, 2011

YORKTOWNE UROLOGY, P.C., PLAINTIFF
v.
NEUISYS, LLC. DEFENDANT



The opinion of the court was delivered by: William W. Caldwell United States District Judge

MEMORANDUM

I. Introduction and Procedural History

Plaintiff is Yorktowne Urology, P.C., a Pennsylvania medical practice providing urological services, and defendant is Neuisys, LCC, a North Carolina company. We are considering Defendant's motion for summary judgment.

Yorktowne acquired a CT scanner from Neuisys. The scanner was to be used to diagnose kidney, ureter and bladder disorders by making so-called KUBS scans (for kidney, ureter, bladder). Plaintiff filed suit in state court, alleging, among other things, that the scanner failed to produce scans of the quality necessary for medical diagnoses. The scanner could produce usable scans, but it had to use a level of radiation that was unsafe for patients. Plaintiff presented seven causes of action: (1) in Count I, a fraudulent inducement claim, alleging that Defendant knowingly made false representations to induce Plaintiff to purchase the scanner; (2) in Count II, a claim for promissory and equitable estoppel; (3) in Count III, a claim for breach of contract, asserting a material breach of the agreement and that Defendant refused to recognize Plaintiff's rejection of the scanner or, in the alternative, its revocation of the contract; (4) in Count IV, a claim for breach of express warranty, invoking the Pennsylvania Uniform Commercial Code; (5) in Count V, a claim for a breach of the implied warranty of merchantability under the Pennsylvania Uniform Commercial Code; (6) in Count VI, a claim for strict liability under the Restatement (Second) of Torts § 402A; and (7) in Count VII, a claim for a breach of the duty of good faith and fair dealing.

Invoking our diversity jurisdiction, see 28 U.S.C. § 1332(a), Defendant removed the action here and filed a motion to dismiss under Fed. R. Civ. P. 12(b)(6). In ruling on the motion, we dismissed Count II (promissory and equitable estoppel), Count IV (express warranty), and Count VI (strict liability). See 2010 WL 3328067 (M.D. Pa. Aug. 23, 2010). On Defendant's motion for reconsideration, we dismissed Count V, the claim for a breach of implied warranties of merchantability and fitness. See 2010 WL 4054178 (M.D. Pa. Oct. 14, 2010).

The parties undertook discovery, and Defendant has now moved for summary judgment on the remaining claims, Count I, fraudulent inducement, Count III, breach of contract, and Count VII, breach of the contractual duty of good faith and fair dealing. North Carolina law applies to all three claims.

II. Standard of Review

Under Fed. R. Civ. P. 56, summary judgment should be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). In pertinent part, parties moving for, or opposing, summary judgment must support their position by "citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for the purposes of the motion only), admissions, interrogatory answers, or other materials." Fed. R. Civ. P. 56(c)(1)(A). In deciding a motion for summary judgment, "[t]he court need consider only the cited materials, but it may consider other materials in the record." Fed. R. Civ. P. 56(c)(3). "'The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.'" Colwell v. Rite-Aid Corp., 602 F.3d 495, 501 (3d Cir. 2010) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).

III. Background

Based on the parties' evidentiary submissions, Defendant's statement of material fact (SMF) and Plaintiff's response thereto, the summary-judgment record is as follows. We sometimes borrow the parties' language without attribution.*fn1

Plaintiff is a medical practice that specializes in urology. In or around 2007, plaintiff began investigating the possibility of acquiring a CAT Scan machine for in-office use. Plaintiff contacted Neuisys and other sellers of CT equipment to investigate their products. In mid-December 2007, plaintiff signed a "Sales Agreement" with Neuisys to acquire a NeuViz Dual CT Scanner for a total payment of $340,000. (Doc. 1-5, Compl., Ex. B). The Sales Agreement contained an integration clause, which read as follows: "These terms and conditions, including any attachments or other documents incorporated by reference herein, constitute the entire agreement and the complete and exclusive statement with respect to the subject matter hereof, and supersede any and all prior agreements, understandings, and communications between the parties with respect to the Products." (Doc. 1--5, Agreement ¶ 20, CM/ECF p. 5).

Rather than pay for the scanner with cash or take out a loan to do so, Yorktowne decided to enter into a finance lease with ACI Financial, Inc. That agreement, executed on December 27, 2007, recites that ACI Financial purchased the scanner from Neuisys, and Yorktowne leased it from ACI. However, ACI may not have entered into a so-called supply contract with Neuisys, a contract by which the entity financing the transaction acquires title to the product involved. Here, Neuisys refers to its Sales Agreement with Plaintiff as the supply contract. In any event, the lease agreement provided that Yorktowne's acceptance of the scanner "shall be irrevocable." (Doc. 36, Ex. B, CM/ECF p. 3). It also provided that if a state has adopted the Uniform Commercial Code, the lease would be considered a "finance lease." (Id.).

"During the discussions between Neuisys and plaintiff before the 'Sales Agreement' was signed, Neuisys told plaintiff that the Scanner would meet plaintiff's needs for in-office CT scanning, that Neuisys offered a "turnkey" solution, and that Neuisys could manage construction, assist with locating a CT Technologist to operate the machine, assist with locating a radiology practice that could read the scans produced by the machine, and that it would provide service and support for the machine after it was installed." (Doc. 33, Def.'s SMF ¶ 5 and Pl.'s response). Plaintiff elected not to have Neuisys do the construction on the area where the scanner would be located and did that on its own, but Neuisys advised on the physical site requirements. (Id., SMF ¶ 7 and Pl.'s response thereto).

The scanner needed a CT technologist to operate it. (Doc. 33-1, Baselli Dep. at CM/ECF p. 71). According to Defendant, Yorktowne "asked" it "to assist" Yorktowne in locating a CT technologist. Plaintiff admits that it asked Neuisys to find a technologist. (Id., SMF ¶ 8 and Pl.'s response thereto). However, it takes the position that Neuisys had contractually agreed to secure a technologist. (Doc. 33-1, Baselli Dep. at CM/ECF pp. 70-71). Plaintiff bases this position on Defendant's offer to "help find us a tech by placing ads," (id. at p. 71), or "assist us . . . through the process of hiring" a tech. (Doc. 33-8, Roggenbaum Dep. at CM/ECF pp. 31-32).*fn2 Plaintiff needed this assistance as it had never hired a CT technologist before. (Id., CM/ECF p. 32). Plaintiff also asserts that Defendant had contractually agreed to provide a temporary technologist if Plaintiff could not find one. (Doc. 33-1 Baselli Dep. at CM/ECF p. 76; doc. 33-8, Roggenbaum Dep. at CM/ECF p. 33). Dr. Baselli, Plaintiff's president, said that this temporary technologist would be supplied by the time Yorktowne had received the scanner if a technologist had not yet been hired. (Doc. 33-1 Baselli Dep. at CM/ECF pp. 70-71).

Neuisys did try to find a technologist. They placed ads, and they were in communication with Yorktowne about getting one. (Doc. 33-1, Baselli Dep. at CM/ECF p. 71). Londa Marks, a Neuisys employee, "searched for resumes, screened potential candidates, and referred potential candidates to plaintiff for consideration." (Doc. 33, Def.'s SMF ¶ 9 and Pl.'s response thereto). The main problem appeared to be that the salary Defendant was advertising was too low for central Pennsylvania. (Doc. 33-1 Baselli Dep. at CM/ECF p. 76; doc. 37-6, August 6, 2008, e-mails between Londa Marks and Kim Russell). According to Marks's e-mails, there was also difficulty with the commute. (Doc. 37-6, August 6, 2008, e-mails between Londa Marks and Kim Russell).

Neuisys delivered the scanner on July 28, 2008. (Doc. 33, Def.'s SMF ¶ 10 and Pl.'s response thereto). "In August 2008, Neuisys service engineers traveled to York and installed and calibrated the scanner so that it could be used for patients. (Id. ¶ 12 and Pl.'s response thereto). On September 9, 2008, Dr. Baselli signed a "Product Turnover Certificate," acknowledging that the scanner had "been installed and calibrated and [was] ready for patient use." (Id. ¶ 13 and Pl.'s response thereto; doc. 33-6, the certificate).

As of September 9, 2008, Yorktowne had not yet hired a CT technologist, (id. ¶ 15 and Pl.'s response thereto), and Neuisys knew this. (Doc. 37-5, Whelan Dep. at CM/ECF p. 47). Consequently, through the fall of 2008, the scanner was not used.

Eventually, in January 2009, Yorktowne hired Anita D. Wilkie to be the CT technologist. (Doc. 37-7, Wilkie Aff. ¶ 15). Wilkie had responded in December 2008 to an ad on monster.com. (Id. ¶ 7). Londa Marks did conduct some initial interviewing of Wilkie at the request of Sue Roggenbaum, Plaintiff's office manager, but cannot recall if she referred Wilkie to Roggenbaum or if Roggenbaum had made the initial contact with Wilkie. (Doc. 37-3, Marks Dep. at CM/ECF pp. 29-30).

After she was hired, Wilkie contacted the Pennsylvania Department of Environmental Protection (DEP) to inspect the machine and facility to approve it for patient use. (Doc. 33, Def.'s SMF ¶ 18 and Pl.'s response thereto; doc. 37-7, Wilkie Aff. ¶ 19). "DEP inspector Howard Sher came to the facility, tested the machine, and determined that it operated within the guidelines established by the Commonwealth, and that it was safe to operate." (Doc. 33, Def.'s SMF ¶ 19 and Pl.'s response thereto).

Plaintiff needed a radiologist to read the scans produced by the scanner. Neuisys recommended radiology practices, but Plaintiff rejected those suggestions and elected instead to contract with the Cleveland Clinic to read scans. (Id. ¶ 20 and Pl.'s response thereto).

"When the Scanner was delivered, the KUB software, known as 'UroCare,' was pending FDA Approval." (Id. ¶ 21 and Pl.'s response thereto). Neuisys knew that the software was not FDA approved, (doc. 37-2, Royal Dep. at CM/ECF p. 13), but told Yorktowne that the scanner would perform KUBS upon delivery and installation. (Doc. 33-1, Baselli Dep. at CM/ECF p. 35; doc. 33-8 Roggenbaum Dep. at CM/ECF p. 27). "A KUB is a plain abdominal X-ray. The KUB software was an add-on capability for the Scanner to manipulate a CT Scan to reproduce a plain abdominal X-ray from the CT Scan." (Doc. 33, Def.'s SMF ¶ 22 and Pl.'s response thereto). Billing for KUBS scans would add to the revenue stream from the scanner. (Doc. 33-1, Baselli Dep. at CM/ECF p. 35). "The KUB Software received FDA Approval in March 2009 -- approximately one month after plaintiff began scanning patients." (Doc. 33, Def.'s SMF ¶ 26 and Pl.'s response thereto). Dr. Baselli would have ordered the scanner even if he had known that FDA approval was pending. (Doc. 33-1 Baselli Dep. CM/ECF pp. 127, 129). However, his "partners," the other physician members in Yorktowne Urology also "had a decision on whether the scanner . . . was purchased . . . ." (Id., CM/ECF p. 148).

Neuisys charged Yorktowne $10,000 for the KUBS software. (Doc. 33, Def.'s SMF ¶ 27 and Pl.'s response thereto). The initial price, given verbally, was for $55,000. (Doc. 33-8, Roggenbaum Dep. at CM/ECF p. 68). However, the actual invoice sent was for $10,000. (Id.). An e-mail from Londa Marks, dated June 22, 2009, stated that it was a one-time licensing fee and much lower than the list price as Yorktowne was an existing customer. (Doc. 33-9, Marks e-mail). If Dr. Baselli had known about the one-time $10,000 fee, he would still have bought the scanner, but altered how he negotiated for it. (Doc. 33-1, Baselli Dep. at CM/ECF p. 129).

Yorktowne hired three physicists to examine the scanner. The first examination was on February 4, 2009, by Douglas E. Heim, and the second about three weeks later on February 26, 2009, by Jane R. Fisher.*fn3 Both Heim and Fisher "determined that the machine was operating within the DEP regulations, that it did not emit dangerous or illegal levels of radiation, and that it could perform proper scans." (Doc. 33, Def.'s SMF ¶ 28 and Pl.'s response thereto).

"Yorktowne began scanning patients with the Scanner on or around February 9, 2009." (Id. ¶ 29 and Pl.'s response thereto). "Yorktowne could only bill for scans that produced diagnostic quality images." (Id. ¶ 30 and Pl.'s response thereto). Over the next 101/2 months, Yorktowne performed 2173 scans (services) on 925 patients. (Id. ¶ 29 and Pl.'s response thereto; doc. 33-13, Ex. M (filed under seal)). This was a scan rate of four to five scans per day, five days per week, for the entire ten and a half months the scanner was in service. (Doc. 33-1, Baselli Dep. at CM/ECF pp. 130-31). Yorktowne submitted invoices totaling $541,946.25 for these scans, and for which patients, insurers and Medicare paid Yorktowne $387,602.74." (Def.'s SMF ¶ 29 and Pl.'s response thereto; doc. 33-13, Ex. M (filed under seal)). These amounts did not represent profits to Yorktowne. It's "before anyone's paid." (Doc. 33-1, Baselli Dep. at CM/ECF pp. 134-35).

"In February 2009, before plaintiff began scanning patients with the Scanner, Neuisys sent Londa Marks, its CT Applications Specialist, to York to train [Anita Wilkie] the new CT Technologist on operation of the machine, and to ensure that the Scanner was operating properly and according to the manufacturer's specifications." (Doc. 33, Def.'s SMF ¶ 25 and Pl.'s response thereto; doc. 37-7, Wilkie Aff. ¶ 21). Wilkie set the scanner at the protocols Londa Marks gave her, 120 kVp and 250 MAs. (Doc. 37-7, Wilkie Aff. ¶ 30).

On her first day of training, Wilkie, the only CT technologist to operate the scanner, noticed that the scanner experienced tube arcing when both phantom image scans and initial patient scans were conducted. (Doc. 37-7 Wilkie Aff. ¶¶ 22, 24). When tube arcing occurred in the middle of a scan, the scanner stopped functioning during the middle of a scanning sequence. (Id. ¶ 23). When that occurred, Wilkie "had to reset the scanner and restart the scanning sequence." (Id. ¶¶ 25, 40). If a scanning sequence had to be restarted, "the patient received more radiation than they would receive if the initial scan was completed without interruption." (Id. ¶ 41). She "continued to operate the Scanner because" Marks and Craig Whelan, a service engineer for Defendant, told her "the tube arcing would stop once the Scanner was put into regular use and enough tube conditions were performed on the Scanner to de-gas the Scanner tubes." (Id. ¶ 26).

On February 20, Dr. William Davros of the Cleveland Clinic indicated to [Wilkie] that the Cleveland Clinic had concerns with image quality and radiation output from the Scanner." (Id. ¶ 32). In response to these concerns, Wilkie obtained the services of Fisher in February 2009, who issued the report mentioned above, and who also recommended new protocols "of 140 kVp and 150-185 MAs at a 1 second rotation with a breath hold of 58 seconds to obtain clearer scans." (Id. ¶ 35). Wilkie used these protocols because the Cleveland Clinic "indicated to [Wilkie] that the new images produced at the new protocols were better than the images produced at the manufacturer protocols." (Id. ¶ 36).

"The Scanner continued to experience tube arcing at the end of February 2009." (Id. ¶ 38). Wilkie contacted Neuisys, (id. ¶ 39), and Defendant requested that the scanner be left "on overnight so that engineers could conduct tube conditioning" on it. (Id. ¶ 42). "Despite site visits and remote tube conditioning*fn4 conducted by Neuisys service engineers, during the entire period of time [Wilkie] operated the Scanner at Yorktowne, the Scanner experienced tube arcing at least two to five times per week depending on Yorktowne's patient load." (Id. ¶ 44). "The Scanner experienced tube arcing more frequently than any other scanner [Wilkie] operated." (Id. ¶ 45).*fn5 According to Dr. Baselli, someone at Neuisys suggested to someone at Yorktowne that "there was something not right with the tube," that they "had some issues," but that Neuisys would "make it right." (Doc. 33-1, Baselli Dep. at CM/ECF p. 112).

"While he was still employed by Neuisys, Craig Whelan told [her] that the generator for the NeuViz dual scanner did not have enough power to operate the scanner" and that Neuisys knew that the generator "was not powerful enough . . . ." (Doc. 37-7, Wilkie Aff. ¶¶ 47, 48).

"On August 24, 2009, former Neuisys service engineer Robert Ritterbeck made a service call at Yorktowne for scheduled maintenance," (id. ¶ 49), and performed tube conditioning. (Id. ¶ 52). The scanner still continued to experience tube arcing. (Id. ¶ 53). "After working on the Scanner in 2009, Robert Ritterbeck told [Wilkie] that the image quality of the images produced by the Scanner was grainy." (Id. ¶ 50).

To obtain ACR accreditation, Wilkie hired physicist Anthony D. Montagnese to inspect the scanner.*fn6 In his report of December 3, 2009, Montagnese said the following. First, as to state regulatory compliance, there were "no instances of non-compliance with State Bureau of Radiation Protection rules ...


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