Judge: William D. Claster, Case: 22-01251774, Date: 2022-11-04 Tentative Ruling
Defendant VARIS, LLC's Notice of Demurrer and Demurrer to First Amended Complaint ROA 76
Varis, LLC’s demurrer to the first amended complaint (FAC) of the Plaintiff Prime Hospitals is OVERRULED. Varis shall file an answer to the FAC on or before November 18, 2022.
I. Factual and Procedural Background
Plaintiffs are the Prime Hospitals, four hospitals that provide medical services to patients in Orange County, including Medi-Cal enrollees served by defendant CalOptima. These patients usually present to the Prime Hospitals as emergency patients, so federal law requires the Prime Hospitals to treat them. The Prime Hospitals then bill CalOptima for treatment.
Varis is a billing auditor retained by CalOptima to help reduce its spending. Broadly speaking, the Prime Hospitals allege that after they submit bills to CalOptima for treatment of Medi-Cal patients, Varis reviews the bills and “downcodes” them as part of an effort to systematically underpay the Prime Hospitals for treatment the Prime Hospitals cannot legally decline. As relevant to this demurrer, the Prime Hospitals allege in their fifth cause of action that Varis has tortiously interfered with the contract between the Prime Hospitals and CalOptima.
Varis demurred to the tortious interference claim in the Prime Hospitals’ original complaint on the grounds that the complaint alleged Varis was CalOptima’s agent, and an agent cannot tortiously interfere with its principal’s contracts. (See, e.g., Mintz v. Blue Cross of California (2009) 172 Cal.App.4th 1594, 1607.) In opposition, the Prime Hospitals argued the tortious interference claim was pled in the alternative. That is, it provided an avenue for recovery if Varis was found not to be CalOptima’s agent. Because the complaint had no allegations suggesting the claim was pled in the alternative, Judge Wilson sustained the demurrer with leave to amend.
The Prime Hospitals then filed the operative FAC, and Varis has once again demurred to the tortious interference claim.
II. Standard of Review
In reviewing the sufficiency of a complaint against a demurrer for failure to state facts sufficient to state a cause of action, the Court is guided by long-settled rules. The Court “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Serrano v. Priest (1971) 5 Cal.3d 584, 591.) “The complaint must be construed liberally by drawing reasonable inferences from the facts pleaded.” (Rodas v. Spiegel (2001) 87 Cal.App.4th 513, 517.) “Further, [the Court] gives the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.)
III. Discussion
A. Agency Allegations
Varis is still alleged to be CalOptima’s agent. (FAC ¶ 12.) Varis contends that if it is CalOptima’s agent as alleged, it cannot be liable for tortious interference. In opposition, the Prime Hospitals point out this claim is expressly drafted in the alternative: “The Prime Hospitals bring this cause of action in the alternative to the extent that Varis is determined not to be acting as agent of CalOptima in conducting the reviews and down coding and denying the Prime Hospitals’ bills as set forth herein.” (FAC ¶ 121.)
While Varis may well have strong evidence supporting its ultimate position, Prime Hospitals have the better argument as to this demurrer. “[W]hen for any reason the pleader thinks it desirable so to do, as where the exact nature of the facts is in doubt, or where the exact legal nature of plaintiff’s right and defendant’s liability depend on facts not well known to the plaintiff, his pleading may set forth the same cause of action in varied and inconsistent counts with strict legal propriety.” (4 Witkin, Cal. Procedure (6th ed. 2022) Pleading § 416 [quoting Tanforan v. Tanforan (1916) 173 Cal. 270, 273].) If facts developed in discovery establish that Varis is indeed CalOptima’s agent, Varis will be free to move for summary adjudication of the fifth cause of action.
B. “Stranger to the Contract”
The FAC alleges “Varis is contracted by CalOptima to review the Prime Hospitals’ bills.” (FAC ¶ 124.) To the extent this allegation does not imply an agency relationship, Varis contends it still bars a tortious interference claim. Varis relies on Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503. That case explains:
California recognizes a cause of action against noncontracting parties who interfere with the performance of a contract. “It has long been held that a stranger to a contract may be liable in tort for intentionally interfering with the performance of the contract.” [Citations.]
However, consistent with its underlying policy of protecting the expectations of contracting parties against frustration by outsiders who have no legitimate social or economic interest in the contractual relationship, the tort cause of action for interference with contract does not lie against a party to the contract. [Citations.] (Id., at pp. 513-514 [emphasis original].)
Varis argues that because it has a contract with CalOptima to review the Prime Hospitals’ bills, it cannot be liable for tortious interference. Either Varis is CalOptima’s agent (in which case liability is barred under Mintz), or it is acting under its contract with CalOptima to assist in CalOptima’s performance of the contract with the Prime Hospitals, in which case it isn’t a “stranger to the contract” as required by Applied Equipment.
In opposition, the Prime Hospitals contend Varis misreads Applied Equipment. The Court agrees.
In Applied Equipment, Applied contracted with Litton to procure parts for Litton. Applied was to be paid on a commission basis: it would receive a markup on the price of parts it procured for Litton. Applied issued a purchase order to another party, Varian, to manufacture parts for Litton. Under the terms of its contract with Litton, Applied was to earn a $190,000 markup on the sale of the parts purchased from Varian. Litton’s finance department found this far too expensive, and it recommended seeing if there was a way to avoid paying the markup. Litton directly negotiated with Varian for a considerably lower price, then presented that price to Applied as a fait accompli. (Applied Equipment, supra, 7 Cal.4th at p. 508.)
Applied sued both Litton and Varian for breach of contract, tortious interference with contract, and conspiracy to tortiously interfere with contractual relations. There was confusion at trial about the exact nature of Applied’s conspiracy and tortious interference claims. Accordingly, the trial court “submitted five claims to the jury: (1) breach of the purchase order by Varian; (2) interference with the purchase order by Litton; (3) breach of the subcontract by Litton; (4) interference with the subcontract by Varian; and (5) conspiracy to interfere with undifferentiated ‘contractual relations.’” (Id., at p. 509.)
Applied prevailed at trial on the breach of contract claims and the conspiracy claim. On appeal, regarding the conspiracy claim, Varian argued that it could not conspire to tortiously interfere in its own contract with Applied (i.e., the purchase order). The Court of Appeal rejected this argument, and the Supreme Court granted review to decide: “Can a contracting party be held liable in tort for conspiracy to interfere with its own contract?” (Id., at p. 507.) In part for the reasons quoted above about “strangers to the contract,” the answer was “no.”
What the Supreme Court did not decide was whether Litton could be held liable for tortiously interfering with the contract between Applied and Varian. Or, in terms of this case: under Applied Equipment, CalOptima can’t tortiously interfere with the Prime Hospitals-CalOptima contract. But Applied Equipment didn’t decide whether Varis can tortiously interfere with the Prime Hospitals-CalOptima contract. Applied Equipment, the sole authority relied on by Varis for this point, is inapposite.
Varis next suggests a parade of horribles would result if this lawsuit is allowed to continue. For example, if a company retains an auditor to look over its books, and the auditor finds evidence that an employee embezzled company funds, could the employee sue the auditor for intentional interference with the employment contract? If a buyer’s home inspector finds evidence of termite damage, could the seller sue the inspector for intentional interference if the buyer walks away from the sale?
The Court is not persuaded by these examples. The elements of tortious interference are “(1) a valid contract between plaintiff and another party; (2) defendant’s knowledge of the contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.” (Applied Equipment, supra, 7 Cal.4th at p. 514 fn. 5.) Presumably an auditor who simply reviews the books or an inspector who simply performs a home inspection could never satisfy the third element.
But what if the company hired the auditor to contrive a reason to fire the employee, or the buyer hired the inspector to contrive a reason to get out of a binding contract of sale? In that case, why would a tortious interference claim be inappropriate? After all, the auditor’s intent is to find some reason to fire the employee, and the inspector’s intent is to find some reason to get out of the contract of sale.
Put another way, the defendant’s intent is a question of fact not suited to resolution on demurrer. In this regard, the Court notes that ¶ 127 of the FAC expressly alleges Varis’s intent to disrupt the Prime Hospitals-CalOptima contract.
For these reasons, the demurrer is overruled.