National Union Fire Insurance Company of Pittsburgh v. Surgalign Spine…

Background

National Union brought a subrogation and assignment action against Surgalign Spine Technologies, Inc. and Organogenesis, Inc. National Union alleged that both defendants marketed and sold products used in spinal surgeries to Montefiore Medical Center. According to the amended complaint, the products were supplied on consignment and Montefiore paid for products after matching supplier invoices with purchase orders based on operating-room implant records.

National Union alleged that, between at least 2015 and 2020, Rosemarie Mastrandrea served as a sales representative for the defendants. It alleged that Mastrandrea and Rowena Dellosa, a Montefiore nurse manager, created false entries in Montefiore’s Implant Tracking Logs, used serialized product stickers to support those entries, and caused Montefiore to pay invoices for products that had not been used. National Union alleged that Mastrandrea paid Dellosa kickbacks. Montefiore allegedly paid more than $3 million for unused products, submitted an insurance claim, and received $3,627,986 from National Union. Montefiore assigned its claims against the defendants to National Union.

National Union’s amended complaint asserted New York-law claims for common-law fraud, unjust enrichment, aiding and abetting a breach of fiduciary duty, and negligent supervision. Organogenesis moved to dismiss the claims against it. Surgalign also moved to dismiss, but Surgalign filed for Chapter 11 bankruptcy, triggering an automatic stay of the claims against it. The court therefore held Surgalign’s motion in abeyance while the bankruptcy proceedings remained pending.

Legal standards

The court applied Federal Rule of Civil Procedure 12(b)(6), which requires a complaint to allege enough facts to make a claim plausible rather than merely possible. Because the fraud-based claims required allegations of fraud, the court also applied Rule 9(b), which requires the circumstances of fraud to be stated with particularity. The court explained that this generally requires identifying the allegedly fraudulent statements, who made them, when and where they were made, and why they were fraudulent.

Fraud

The court held that National Union failed to plead the allegedly fraudulent statements with the specificity required by Rule 9(b). National Union referred generally to fraudulent invoices for unspecified products, issued on unspecified dates between at least 2015 and 2020, for unspecified amounts. The amended complaint did not identify a specific Organogenesis invoice or provide another example or identifying information that would allow Organogenesis to determine which invoices were allegedly fraudulent and compare them with its own records.

The court nevertheless found that National Union adequately alleged how the scheme operated and when it occurred. The amended complaint described false Implant Tracking Log entries, invoices for products not used in surgery, purchase orders based on those entries, and payments after Montefiore compared the invoices with the purchase orders. The court also rejected Organogenesis’s argument that National Union improperly grouped the defendants together, finding that the amended complaint gave Organogenesis fair notice of its alleged role.

Vicarious liability

The court rejected National Union’s agency theory. National Union alleged that the defendants represented Mastrandrea as their agent and that she acted within apparent authority, but it did not describe specific words or conduct by Organogenesis that created the appearance that Mastrandrea had authority to sell Organogenesis’s products. The court therefore found that National Union had not adequately pleaded an agency relationship between Organogenesis and Mastrandrea.

The court reached a different conclusion concerning respondeat superior, a doctrine that can make an employer legally responsible for an employee’s torts committed in furtherance of the employer’s business and within the scope of employment. National Union alleged that Organogenesis retained Mastrandrea as a sales representative, that she marketed the defendants’ products, tracked and stored them, moved them into Montefiore’s operating rooms, invoiced Montefiore, and received commissions for Organogenesis’s products. The court held that these allegations plausibly supported an employment relationship at the pleading stage. Whether Mastrandrea was an employee or an independent contractor was premature to decide on a motion to dismiss.

Unjust enrichment

The court dismissed the unjust-enrichment claim against Organogenesis because it also sounded in fraud and therefore had to satisfy Rule 9(b). For the same reasons stated in connection with the fraud claim, the amended complaint did not identify the allegedly fraudulent transactions with enough particularity.

Aiding and abetting a breach of fiduciary duty

The court dismissed this claim because National Union did not adequately allege the first required element: that Dellosa owed Montefiore a fiduciary duty. The amended complaint identified Dellosa as a Montefiore nurse manager but did not provide details showing that Montefiore placed confidence in her and reasonably relied on her superior expertise or knowledge. The court stated that an employment relationship alone does not create a fiduciary relationship.

Negligent supervision

The court applied the ordinary pleading standard to the negligent-supervision claim because Organogenesis did not press its argument that the heightened fraud standard applied. Although the court found that National Union plausibly alleged an employment relationship between Organogenesis and Mastrandrea, it found no factual allegations showing that Organogenesis knew or should have known, before the injury occurred, that Mastrandrea had a propensity for the conduct that caused the alleged loss. The court therefore dismissed the negligent-supervision claim.

Disposition

Judge Jennifer L. Rochon granted Organogenesis’s motion to dismiss. The court dismissed National Union’s amended complaint with leave to amend to the extent National Union could cure the identified pleading deficiencies. National Union was ordered to file a second amended complaint within 30 days. The court held Surgalign’s motion to dismiss in abeyance pending resolution of Surgalign’s bankruptcy proceeding. The court also ordered National Union and Organogenesis to appear for an initial pretrial conference on April 3, 2024, and to submit a proposed case-management plan and scheduling order no later than 10 days before that conference.