Kolbe & Kolbe Health and Welfa, et al v. Medical College of Wisconsin,, et al
Filing
Filed opinion of the court by Judge Posner. AFFIRMED. Richard A. Posner, Circuit Judge; Joel M. Flaum, Circuit Judge and Ann Claire Williams, Circuit Judge. [6550132-1] [6550132] [12-3837, 12-3929]
Case: 12-3837
Document: 31
Filed: 02/05/2014
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In the
United States Court of Appeals
For the Seventh Circuit
________________________
Nos. 12‐3837 & 12‐3929
KOLBE & KOLBE HEALTH AND WELFARE BENEFIT PLAN and
KOLBE & KOLBE MILLWORK CO., INC.,
Plaintiffs‐Appellants / Cross‐Appellees,
v.
MEDICAL COLLEGE OF WISCONSIN, INC. and CHILDREN’S
HOSPITAL OF WISCONSIN, INC.,
Defendants‐Appellees / Cross‐Appellants.
__________________________
Appeals from the United States District Court for the
Western District of Wisconsin.
No. 3:09‐cv‐00205‐bbc — Barbara B. Crabb, Judge.
__________________________
ARGUED OCTOBER 3, 2013 — DECIDED FEBRUARY 5, 2014
__________________________
Before POSNER, FLAUM, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. These cross‐appeals present issues
concerning ERISA, Wisconsin law, and Rule 11 sanctions.
The plaintiffs are an employee benefit plan and the employ‐
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Nos. 12‐3837 & 12‐3929
er; we’ll refer to them jointly as “the plan.” The defendants
are two Wisconsin medical institutions, one a medical col‐
lege that also provides patient care in clinics and hospitals,
the other a children’s hospital. See “About MCW: Facts
2013,” www.mcw.edu/MCWfacts.htm (visited Feb. 4, 2014).
The institutions are affiliated and we’ll pretend they’re one,
which we’ll call “the hospital.”
In a series of rulings in 2009 and 2010, the district judge
dismissed the plan’s claims, which were both for ERISA vio‐
lations and for breach of contract under Wisconsin law.
Eventually she dismissed the entire suit, and awarded attor‐
neys’ fees to the hospital as a sanction for the plan’s having
filed, in the judge’s view, frivolous claims. The plan ap‐
pealed. We affirmed the dismissal of the ERISA claims but
reversed the dismissal of the breach of contract claim be‐
cause we disagreed with the district judge’s ground for the
dismissal, which was that the claim was preempted by
ERISA. We also reversed the imposition of sanctions, on the
ground that the plan’s claims were colorable and had been
made in good faith. 657 F.3d 496 (7th Cir. 2011).
The only issue for the district court on remand was
whether there had been a breach of contract under Wiscon‐
sin law. The court could have relinquished jurisdiction over
that claim, since it was just a supplemental claim, see 28
U.S.C. § 1367(c)(3), but it didn’t have to, decided not to, and
went on to grant summary judgment in favor of the hospital.
The plan again appeals. The hospital cross‐appeals, com‐
plaining about the district judge’s refusal to sanction the
plan under Rule 11 for its pressing ahead with its breach of
contract claim after the hospital showed (the hospital con‐
tends) that the claim was preempted by ERISA. We had held
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in our first decision that ERISA did not preempt the contract
claim, but the hospital argues that evidence presented in the
summary judgment proceeding on remand established
preemption.
The hospital had entered into what is called a “provider
agreement” (or alternatively a “physician agreement”) with
North Central Health Care Alliance and Bowers & Associ‐
ates—firms that act as middlemen between hospitals and
ERISA health plans. The agreement requires the health plan
to reimburse any hospital designated in the agreement for
services that the hospital renders to a plan beneficiary, de‐
fined as anyone who is “eligible to have their medical ser‐
vices paid for” by the plan.
Kolbe’s health plan covers dependents of employees as
well as the employees themselves. On August 2, 2007, an
employee of the Kolbe company reported that his newly
born daughter had a serious medical condition. He asked the
plan to cover her treatment expenses. Not until August 20,
however, did he submit the form that required him to an‐
swer questions germane to whether the child’s expenses
were covered, such as whether he provided at least 50 per‐
cent of the dependent’s support. He answered neither that
question nor two other questions, about the child’s residence
and status as a dependent for federal income tax purposes,
questions also intended to elicit answers that would deter‐
mine whether the child’s medical expenses were covered.
Protracted efforts by the health plan to determine coverage
followed, until on June 24, 2008, the plan informed the em‐
ployee that the child was not covered. That ended the plan’s
payments to the hospital—but it had already paid the hospi‐
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tal almost $1.7 million, and it demanded that the money be
refunded. The hospital refused.
The provider agreement says nothing about refunds. Yet
the hospital concedes that had it made a mistake and over‐
charged the plan, the plan would be entitled to a refund, be‐
cause the overcharge would be a breach of the agreement,
and a refund of the amount overcharged would equal the
compensatory damages owed to the victim of the breach.
But the hospital had made no mistake. The plan had paid the
hospital to treat the child and it had treated her, and there is
no suggestion that there was anything amiss in the treatment
or in the charges for it.
So what could be the source of a legal right to a refund?
The plan points out that the hospital probably can recover
some of the cost of treating the child from Medicaid. See
Wis. Admin. Code §§ DHS 101.01, 106.03(3)(c)(2)(b). But so
what? Generally if a hospital can recover expenses of treat‐
ment from either private insurance or Medicaid, it has to try
to collect from the private insurer first, Medicaid being the
payer of last resort. So if an individual is covered both by
private insurance and Medicaid, the hospital is typically re‐
quired to bill the private insurer before billing Medicaid. See
42 U.S.C. § 1396a(a)(25)(A); Wis. Admin. Code
§§ DHS 106.03(7)(b), (c); Arkansas Department of Health &
Human Services v. Ahlborn, 547 U.S. 268, 291 (2006); Fonseca v.
United States, No. 01‐C‐0544, 2007 WL 601937, at *2 (E.D.
Wis. Feb. 23, 2007); ForwardHealth, “Medicaid as Payer of
Last
Resort,”
www.forwardhealth.wi.gov/WIPortal/
Online%20Handbooks/Display/tabid/152/Default.aspx?ia
=1&p=1&sa=87&s=9&c=54&nt=Medicaid+as+Payer+of+Last+
Resort (visited Feb. 4, 2014).
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The hospital, having been paid in full by the Kolbe health
plan, has no possible claim against Medicaid—especially
since the mistake about coverage was not the hospital’s, but
the plan’s, mistake. The plan took almost eleven months to
determine that the child of its insured was not a plan benefi‐
ciary. It’s one thing for a seller to refund money or take other
reparative measures because of a mistake it’s made, and an‐
other to do so because the buyer has made a mistake. It’s not
as if the hospital has been unjustly enriched by keeping the
money that Kolbe paid it—as we said, there is no suggestion
that it overcharged for the medical services that it provided
the child, or provided inadequate services. Nor has the plan
appealed the district court’s rejection of its claim for unjust
enrichment.
The plan pitches the appeal it has taken on the proposi‐
tion that the provider agreement contains an implicit term
requiring a refund in the circumstances of this case. There is
no novelty in judges’ interpolating terms into contracts. A
famous example is a “best efforts” clause read into an exclu‐
sive dealing contract. The maker of a product who gives a
dealer the exclusive right to sell the product within a desig‐
nated area hands a monopoly to the dealer, enabling him to
minimize expenses on marketing the product. The dealer
will sell less, but (depending on the effect on his sales of
skimping on marketing, in relation to the money he saves by
skimping) may come out ahead; but the producer will be
disserved. Believing that the parties must have tacitly agreed
that the dealer would be required to use his best efforts to
market the product, courts read a best‐efforts commitment
into the contract. E.g., Classic Cheesecake Co. v. JPMorgan
Chase Bank, N.A., 546 F.3d 839, 846 (7th Cir. 2008); Sonoran
Scanners, Inc. v. Perkinelmer, Inc., 585 F.3d 535, 542–43 (1st
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Cir. 2009); Wood v. Duff‐Gordon, 118 N.E. 214, 214 (N.Y. 1917)
(Cardozo, J.).
There are many other examples of the principle that a
contract consists not only of explicit terms but of implicit
ones needed to make the explicit terms conform to the par‐
ties’ reasonably inferable intentions and expectations. See,
e.g., Stolt‐Nielsen S.A. v. AnimalFeeds International Corp., 130
S. Ct. 1758, 1775 (2010); Bidlack v. Wheelabrator Corp., 993 F.2d
603, 607–08 (7th Cir. 1993) (en banc); 2 Restatement (Second) of
Contracts § 204, pp. 96–97 (1981). (This is true by the way of
ERISA plans in their capacity as contracts, see Singer v. Black
& Decker Corp., 964 F.2d 1449, 1452–53 (4th Cir. 1992), though
we are concerned in this case with the interpretation of the
provider agreement, which is not the ERISA plan.) For ex‐
ample, “you cannot prevent the other party to the contract
from fulfilling a condition precedent to your own perfor‐
mance, and then use that failure to justify your nonperfor‐
mance.” Ethyl Corp. v. United Steelworkers of America, 768 F.2d
180, 185 (7th Cir. 1985); see also Spanos v. Skouras Theatres
Corp., 364 F.2d 161, 169 (2d Cir. 1966) (en banc) (Friendly, J.).
Still another example, one closer to this case but not close
enough to carry the day for the Kolbe plan, is a refusal to ac‐
cept the return of a product that had a defect the buyer
hadn’t noticed at the time of purchase but discovered within
a reasonable time. Northrop Corp. v. Litronic Industries, 29
F.3d 1173, 1176 (7th Cir. 1994); Deere & Co. v. Johnson, 271
F.3d 613, 620 (5th Cir. 2001); Miron v. Yonkers Raceway, Inc.,
400 F.2d 112, 119–20 (2d Cir. 1968); UCC § 2‐608(1)(b).
But the plan doesn’t invoke the principle that the cases
we’ve cited illustrate—call it “the efficacy principle,” that a
court will interpolate terms when necessary to make a con‐
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tract work. Instead the plan invokes custom. It argues that it
is customary in the dealings between hospitals and health
plans for a hospital to refund payments received from an
employer health plan should the employer discover, after
beginning to pay the hospital, that the patient being treated
by the hospital is not a plan beneficiary.
Refunds by hospitals to health plans are indeed common,
just as refunds by retailers are common, and generally for
the same reasons: either that the plan overpaid or that the
plan is a good customer of the hospital, and good customers
receive favored treatment because the seller doesn’t want by
annoying them to lose them—although in the latter case the
customer dissatisfied with his purchase at least returns it
(with very rare exceptions, as we’re about to see), and the
seller can resell it.
But to infer a contractual obligation to refund a purchase
price when the seller is faultless and the buyer does not re‐
turn the purchase is to infer absurdity. Suppose a person
buys a Rolex watch, retailing for several thousand dollars.
Walking from the store to his office, he removes the watch
from his wrist and holds it in front of his eyes, the better to
revel in its opulence. A thief chances by, snatches the watch,
and runs off. The watch is never seen again. Does Rolex have
a legal duty to refund the purchase price? No—and still no
even if it had made comparable refunds in similar circum‐
stances to Bill Gates, Warren Buffett, Carlos Slim, and Chris‐
ty Walton. Far from being necessary to make the provider
agreement effective, interpolating an obligation to make a
refund when the seller is faultless and the buyer is asking to
be compensated for his own mistake would make the con‐
tract fail by reducing the buyer’s incentive to exercise proper
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care in determining the eligibility of presumed plan benefi‐
ciaries. The seller (the hospital) would demand compensa‐
tion to assume liability for the buyer’s errors—compensation
in other words for assuming a “moral hazard,” the sort of
risk that impels a fire‐insurance company to insist that an
insured install a sprinkler system. The “insurance” against
its own mistakes that the Kolbe plan insists the hospital
agreed to provide could induce the plan to invest less care
than it should in making a prompt determination of eligibil‐
ity.
The plan points out that the hospital has sometimes pro‐
vided refunds to the Kolbe plan or other third‐party benefi‐
ciaries of provider agreements in some cases in which the
plan had mistakenly believed that the hospital’s patient was
a plan beneficiary. There was a refund of more than $250,000
involving such a patient. But the motives for making refunds
are various, as illustrated by our Rolex example, and the fact
that the hospital may on occasion have made refunds in cir‐
cumstances similar or even identical to this case neither es‐
tablishes a contractual obligation on the hospital’s part to
make such refunds, nor could have lulled the Kolbe plan in‐
to thinking it took no risk in conducting a dilatory investiga‐
tion of the eligibility of a child with a very serious medical
condition bound to cost a great deal to treat.
So there is no merit to the plan’s challenge to the district
court’s interpretation of the contract. But there is equally no
merit to the hospital’s contention that Kolbe’s state‐law
claim is so clearly preempted by ERISA that Kolbe should be
punished for having made it.
A contract dispute that requires for its resolution an in‐
terpretation of an ERISA plan can be resolved only in ac‐
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cordance with ERISA, which in the case of a dispute such as
this would mean in accordance with a federal common law
of contracts, tailored to the policies of ERISA, since ERISA,
while preempting state law regulating employee benefit
plans, does not set forth any contract principles. In our first
decision in this litigation we held that no interpretation of
the plan was required, only of the provider agreement. 657
F.3d at 504–05. On this second appeal, however, the hospital
points us to evidence presented on remand that the child
may have been a beneficiary of the Kolbe health plan after
all, a determination that the hospital contends requires in‐
terpretation of the plan, for it is the plan that determines
who its beneficiaries are.
But whether the hospital is right or wrong about the
child’s status, it hasn’t shown that the plan’s refusal to admit
that the child is a beneficiary is frivolous, or otherwise war‐
rants sanctions. Moreover, we said in our first decision that
preemption would not be an issue on remand—that there
was no preemption and therefore the only issue on remand
would be breach of contract. 657 F.3d at 507. That was this
court’s mandate, and the law of the case. The hospital defied
us. It is the hospital that is lucky to escape being sanctioned.
AFFIRMED.
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