Somnia, Inc. v. Change Healthcare Technology Enabled Services, LLC

Background

Somnia, Inc. brought a breach-of-contract action against Change Healthcare Technology Enabled Services, LLC (CHT), described as the successor in interest to PST Services, Inc., and PST. The case was initially filed in New York State Supreme Court and was later removed to the federal court. Somnia filed a First Amended Complaint asserting two claims: breach of contract and fraud in the inducement.

Somnia alleged that it outsourced revenue-cycle management, quality-management, and related services to PST after PST made various representations about its capabilities, personnel, software, experience, and resources. The parties entered into a Master Services Agreement on December 23, 2013. Somnia alleged that PST breached the agreement in several ways, including deficient performance and conduct that undermined Somnia’s relationships with its clients. Somnia sought damages for alleged lost revenues, lost reputation and goodwill, expenses, reduced valuation, and other losses.

Motion and Legal Standards

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal for failure to state a legally sufficient claim, and Rule 9(b), which requires fraud to be pleaded with particular details. The court accepted well-pleaded factual allegations as true for purposes of the motion and considered whether they plausibly supported relief.

Under New York law, a breach-of-contract claim requires an agreement, the plaintiff’s performance, the defendant’s breach, and damages. The implied covenant of good faith and fair dealing is an obligation recognized in every contract. It cannot be used simply to repeat a claim that the defendant violated an express contract term, but it may apply to conduct that undermines the contract’s central purpose or the other party’s contractual rights.

Breach-of-Contract Claim

The court denied the motion to dismiss the implied-covenant theory insofar as it concerned PST’s alleged stealing of Somnia’s clients and undermining of Somnia’s customer relationships. The court concluded that these allegations described conduct separate from simply failing to perform the MSA’s express terms and could constitute a breach of the implied covenant.

The court dismissed the remainder of Somnia’s implied-covenant theories. Those theories alleged that PST hid its noncompliance with the MSA, failed to fulfill its contractual obligations, and billed for claims that could not be collected. The court found that these allegations merely repeated the alleged breaches of the written agreement.

The court also denied the motion to dismiss the breach-of-contract claim for failure to connect particular breaches to particular damages. Although Somnia’s damages allegations were speculative, the court found them sufficient at the pleading stage. The court did not address the defendants’ arguments concerning whether particular damages were unavailable under the MSA or exceeded its liability cap, explaining that those arguments concerned forms of damages rather than dismissal of a claim.

Fraud in the Inducement

The court dismissed Somnia’s fraud-in-the-inducement claim because it duplicated the breach-of-contract claim. Somnia alleged that PST misrepresented its capabilities, resources, personnel, infrastructure, and experience before the parties entered the MSA.

The court explained that a fraud claim based on inducing a contract is generally duplicative unless the plaintiff identifies a duty separate from the contract, a misrepresentation collateral or extraneous to the contract, or special damages. The court found that Somnia had not identified a separate duty or connected special damages to the alleged misrepresentations. It also found that the alleged representations were addressed in the request-for-proposals response, which was incorporated into the MSA, rather than being collateral to the contract. The court therefore dismissed the fraud-in-the-inducement claim. It did not reach the defendants’ alternative grounds for dismissing that claim.

Disposition

The court granted the defendants’ motion to dismiss in part. The second claim, fraud in the inducement, was dismissed. The first claim, breach of contract, as modified regarding the implied covenant of good faith and fair dealing, was allowed to proceed to discovery. The defendants were directed to answer the First Amended Complaint within fourteen days. Judge Philip M. Halpern entered the Memorandum Opinion and Order.