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Behavioral Health Industry News, Inc. v. Mental Health Systems, Inc.

United States District Court, M.D. Pennsylvania

May 17, 2018

BEHAVIORAL HEALTH INDUSTRY NEWS, INC., D/B/A/ OPEN MINDS, Plaintiff
v.
MENTAL HEALTH SYSTEMS, INC., Defendant, and Counterclaim Plaintiff,
v.
BEHAVIORAL HEALTH INDUSTRY NEWS, INC., D/B/A OPEN MINDS, MONICA E. OSS, and JOE NAUGHTON-TRAVERS, Counterclaim and Third-Party Defendants

          MEMORANDUM

          Christopher C. Conner, United States District Court Chief Judge

         Plaintiff Open Minds commenced this breach of contract action against defendant Mental Health Systems, Inc. (“MHS”) under Pennsylvania law. MHS asserts counterclaims against Open Minds as well as third-party defendants Monica Oss (“Oss”) and Joe Naughton-Travers (“Naughton-Travers”) (collectively, “the Open Minds defendants”) under Pennsylvania and California law. The Open Minds defendants move for partial dismissal of MHS's counterclaims pursuant to Federal Rule of Civil Procedure 12(b)(6) and to strike paragraph 3 of MHS's counterclaims in part pursuant to Federal Rule of Civil Procedure 12(f). The court will grant in part and deny in part the Open Minds defendants' motion.

         I. Factual Background & Procedural History

          MHS is a nonprofit corporation located in San Diego, California, that provides mental health, drug, and alcohol rehabilitation services to California residents. (Doc. 42 ¶ 1). At all times relevant herein, non-parties Kimberly Bond (“Bond”), her husband David Conn (“Conn”), and Michael Hawkey (“Hawkey”) worked at MHS. (See id. ¶ 7). Bond was MHS's chief executive officer and president, Conn was employed as senior vice president of government relations, and Hawkey was the company's chief financial officer. (Id.) Open Minds is a health care consulting business headquartered in Gettysburg, Pennsylvania, which is owned and run by Oss. (Id. ¶¶ 2-3). Naughton-Travers works at Open Minds as a senior associate. (Id. ¶ 4).

         MHS retained Open Minds in December 2010 to “research, evaluate and assist in selecting a software vendor to provide electronic healthcare record (“EHR”) services.”[1] (Id. ¶ 8; see also Doc. 42-1). Under the terms of their contract (the “2010 Agreement”), Open Minds agreed, inter alia, to provide “objective assistance” to MHS throughout the vendor selection process. (Doc. 42-1 at 4; see also Doc. 42 ¶ 44). Open Minds ultimately identified two possible vendors, and MHS hired one of them. (See Doc. 42 ¶¶ 9-10). MHS contends that Open Minds had a “pre-existing [business] relationship” with this vendor but failed to disclose the relationship to MHS during the selection process. (See id. ¶¶ 9, 35). MHS avers that it would not have selected this vendor, whose services “vastly exceed the needs of MHS's business model, ” but for the advice of Oss and Naughton-Travers. (See Id. ¶¶ 10, 35, 44).

         In early 2012, Oss and Naughton-Travers recommended that MHS form a for-profit subsidiary entitled Novata as a means to acquire the Center for Autism Research Evaluation and Services (“CARES”). (Id. ¶ 13). MHS retained Open Minds to provide “research and consulting services” regarding acquisition of CARES. (Id. ¶ 14; see also Doc. 42-2). MHS also contracted with Open Minds to provide an employee from Open Minds to serve as MHS's interim business development director to assist with the acquisition. (Doc. 42 ¶ 14; see also Doc 42-3). MHS officially acquired CARES in November 2013. (Doc. 42 ¶¶ 15-16). MHS alleges the acquisition put MHS in “serious financial jeopardy” and that Oss and Naughton-Travers realized this sometime before the spring of 2015. (See id. ¶¶ 18, 36). MHS contends that Oss and Naughton-Travers only discussed the true financial state of CARES with Bond and Conn, and presented “inaccurate financial statements” about CARES to the MHS board. (See id. ¶¶ 18-19, 36, 38).

         In February 2016, Hawkey notified the MHS board and San Diego County that he was concerned about the relationship between Open Minds, Bond, and Conn, and that he suspected fraudulent billing by Open Minds. (Id. ¶ 22). The county performed an audit and concluded that Open Minds had billed MHS in the amount of $1.4 million for $145, 000 in expenditures. (Id. ¶ 23). The MHS board, in a separate investigation, discovered that the Open Minds defendants hired Conn in August 2014 as a paid consultant. (Id. ¶¶ 24, 34; see also Doc. 42-4). Under the terms of his employment contract, Conn received commission payments for securing new projects with clients, like MHS. (See Doc. 42-4 at 3-4; Doc. 42 ¶¶ 25, 34). The Open Minds defendants did not disclose that Conn was a paid consultant and instead listed him as an “uncompensated ‘advisory board member'” on the company website. (Doc. 42 ¶ 26). MHS avers that the investigations also revealed that the Open Minds defendants submitted false invoices to MHS for work that was never performed or requested and for travel and meals unrelated to MHS work. (Id. ¶¶ 30-31, 33, 43, 51).

         Open Minds commenced this action in the Court of Common Pleas of Adams County, Pennsylvania, asserting claims for breach of contract and unjust enrichment. MHS timely removed the matter to this court. Following Rule 12 motion practice, MHS asserts four counterclaims against the Open Minds defendants. The Open Minds defendants move to dismiss three of MHS's counterclaims for failure to state a claim upon which relief may be granted and to strike paragraph 3 of MHS's counterclaims in part. The motion is fully briefed and ripe for disposition.

         II. Legal Standard

         Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for the dismissal of complaints that fail to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6). When ruling on a motion to dismiss under Rule 12(b)(6), the court must “accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v. Cty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (quoting Pinker v. Roche Holdings, Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)). In addition to reviewing the facts contained in the complaint, the court may also consider “matters of public record, orders, exhibits attached to the complaint and items appearing in the record of the case.” Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n.2 (3d Cir. 1994); Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993).

         Federal notice and pleading rules require the complaint to provide “the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Phillips, 515 F.3d at 232 (alteration in original) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). To test the sufficiency of the complaint, the court conducts a three-step inquiry. See Santiago v. Warminster Twp., 629 F.3d 121, 130-31 (3d Cir. 2010). In the first step, “the court must ‘tak[e] note of the elements a plaintiff must plead to state a claim.'” Id. at 130 (alteration in original) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 675 (2009)). Next, the factual and legal elements of a claim must be separated; well-pleaded facts are accepted as true, while mere legal conclusions may be disregarded. Id. at 131-32; see Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009). Once the court isolates the well-pleaded factual allegations, it must determine whether they are sufficient to show a “plausible claim for relief.” Iqbal, 556 U.S. at 679 (citing Twombly, 550 U.S. at 556); Twombly, 550 U.S. at 556. A claim is facially plausible when the plaintiff pleads facts “that allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.

         III. Discussion

         MHS asserts counterclaims against the Open Minds defendants for common law fraud, breach of contract, and money had and received. The Open Minds defendants contend that the gist of the action doctrine bars the fraud claim, and that the voluntary payment doctrine bars the breach of contract and money had and received claims. The Open Minds defendants further contend that paragraph 3 of MHS's counterclaims should be stricken in part. We address these arguments seriatim.

         A. ...


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