Trinity Med. Servs., L.L.C. v. Merge Healthcare Sols., Inc.

TRINITY MEDICAL SERVICES, L.L.C., ET AL. v. MERGE HEALTHCARE SOLUTIONS, INC.

CIVIL ACTION NO. 17-592-JWD-EWD

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF LOUISIANA

July 18, 2019

RULING AND ORDER

This matter comes before the Court on Merge Healthcare Solutions, Inc's ("Merge" or "Defendant") Motion to Dismiss Claims Brought by Plaintiffs Performance Labs, LLC and Prestige Healthcare Solutions, LLC (Doc. 39) ("MTD II"). Plaintiffs Performance Labs, LLC ("Performance"), and Prestige Worldwide Leasing, LLC ("Prestige"), two of the three plaintiffs in this suit, oppose the motion.¹ (Doc. 41.) Defendant has filed a reply. (Doc. 43.) Plaintiffs have submitted a supplemental opposition. (Doc. 71.) Defendant has filed a supplemental reply. (Doc. 74.) Oral argument is not necessary.

The Court has carefully considered the law, facts in the record, and arguments and submissions of the parties and is prepared to rule. For the following reasons, the Defendant's motion is granted in part and denied in part. First, Performance and Prestige's claims for redhibition and rescission of contract for fraud are dismissed. Neither Plaintiff alleged a contract for sale or any obligation independent of the January 11, 2016 Sales Order. On its face, the Sales Order is exclusively between Trinity and Merge, so Performance and Prestige cannot recover under it. Second, Performance and Prestige's tort claims (negligence, negligentmisrepresentation and unfair trade practices) may proceed as Plaintiffs have sufficiently alleged that Merge had a duty to all Plaintiffs. And third, Performance and Prestige cannot recover as third party beneficiaries under the January 11, 2016 Sales Order because the contract unambiguously precludes any non-party from claiming such status.

I. Relevant Factual Background

The relevant factual allegations are taken from Plaintiffs' Second Amended Petition (Doc. 38) ("SAP"). All allegations are assumed to be true for purposes of this motion and construed in a light most favorable to Plaintiff. Thompson v. City of Waco, Tex., 764 F.3d 500, 502-03 (5th Cir. 2014). The allegations are also taken from the January 11, 2016 Sales Order (Doc. 39-2) attached to Defendant's MTD II, as it is referenced in the SAP and central to Plaintiffs' claims.² See In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007) (citing Causey v. Seweel Cadillac-Chevrolet Inc., 394 F.3d 285, 288 (5th Cir. 2004)).

This suit arises out of an alleged software defect in an operating system sold and installed by Defendant. Trinity, Performance, and Prestige (collectively, "Plaintiffs") all performed toxicology testing services and related services in Louisiana. (SAP ¶¶ 1-3, Doc. 38.) Trinity operated a clinical laboratory in Mandeville, Louisiana, which specialized in clinical medication monitoring through toxicology testing. (Id. ¶ 1.) Performance is owned by Trinity and provided medication monitoring for patients using toxicology testing. (Id. ¶ 2.) Trinity also owned Prestige, which provided employee leasing services and laboratory management services to clinical and toxicology laboratories located in Louisiana and Mississippi. (Id. ¶ 3.)

The toxicology testing performed at these laboratories involved collecting biological samples from medical patients and testing those samples for chemicals, drugs (legal and illegal),and toxins, which could affect those patients' medical treatment options. (Id. ¶ 8.) Since patient outcomes are highly regulated by both industry regulations as well as federal and state laws and regulations, (SAP ¶ 11, Doc. 38), toxicology laboratories are concerned with using programs and operating systems that will meet the requirements to protect patient safety and data security. (Id. ¶ 13.)

Merge is a developer and manufacturer of clinical laboratory software systems, including the Merge LIS^TM software at issue in this case. (Id. ¶¶ 18-23.) Plaintiffs allege that they expressly communicated to Merge that they required operating software that met the industry and legal requirements, which Merge allegedly confirmed its LIS^TM software would provide. (Id. ¶¶ 26-28.) Plaintiffs claim that Merge's representations about the software's reliability and security substantially influenced their decision to select Merge as their new operating platform provider. (Id. ¶ 32.)

Plaintiffs contend that, when Merge was marketing its software, Merge knew and intended that its product would be used by and for the benefit of all Plaintiffs. (Id. ¶ 33.) Before the purchase could be perfected, Plaintiffs had to submit to a credit check through Byline Financial Group ("Byline"), Merge's preferred financing company. (SAP ¶ 39, Doc. 38.) In response, Trinity's Chief Operating Officer submitted credit applications for both Performance and Trinity. (Id. ¶ 40.) The Chief Operating Officer explained he submitted two credit checks to provide "a more accurate financial representation," as Trinity's activity occurs through Performance and Prestige. (Id.) Thereafter, Plaintiffs contend, emails from Byline refer to Trinity and Performance as "Co-lessee's" [sic]. (Id. ¶¶ 43-44.) Additionally, Plaintiffs allege that Merge knew that Performance was a "smaller lab" where Merge LIS^TM would be installed. (Id. ¶¶ 45-49.)

However, prior to contracting with Plaintiffs, Merge allegedly became aware of a "software design" defect during or around March 2015. (SAP ¶ 51, Doc. 38.) Plaintiffs claim that the defect resulted in the LIS^TM software creating "duplicate container numbers . . . for patients." (Id.) Plaintiffs assert that the software created duplicate records for a single toxicology test, which eventually could result in the software deleting both entries in error. (Id. ¶ 54.) Plaintiffs claim that this compromised laboratory reliability and testing accuracy because it increased the risk that the testing laboratory would fail to perform the requested toxicology test. (Id.) Plaintiffs allege that Merge never informed them of the software issue, either prior to installing the LIS^TM software or after installation, even though Merge recalled the software. (Id. ¶ 55.)

In January 2016, Trinity contracted with Merge to purchase the LIS^TM software. (Id. ¶¶ 66-68.) The only two parties referenced in the Sales Order are Merge and Trinity. (Doc. 39-2 at 3.) The contract enumerates twenty-four different items that Trinity would purchase, including installation and training under the heading "PROFESSIONAL SERVICES." (Id. at 4-6.) Two provisions of note under the heading "TERMS AND CONDITIONS OF SALES ORDER" are "No Third Party Beneficiaries" and "Governing Law." The former states that "nothing in this Agreement will be construed as giving any right, remedy or claim to an entity other than the Parties..." (Id. at 9.) The latter clause states the Sales Order shall be governed by and construed in accordance with the laws of the State of Delaware. (Id.)

The software was installed at Trinity's toxicology laboratory in April 2016. (SAP ¶¶ 66-68.) Plaintiffs began using the LIS^TM software when it went "live" in late May 2016. (Id. ¶ 74, Doc. 38.) Plaintiffs allege that they "immediately" noticed defects in the software, including the duplicate container defects along with others, which made the software incompatible with meeting the law and regulatory requirements. (Id. ¶ 75.)

Plaintiffs include a list of several alleged defects in the LIS^TM software including (but not limited to): "lack of audit tracking defect," "user manual defect," "illegible comments defect," "incorrect sample date defect," "no rejected samples defect," "re-preparation sample limbo defect," "no disabled users defect," "rejected report defect," and "back-dating defect." (Id. ¶ 76.) Generally, Plaintiffs contend that these defects have the same effect as the duplicate container issue, in that the defects compromise patient safety and data security. In addition, Plaintiffs note that Merge failed to meet industry standards regarding security protocols, resulting in a security defect that "would allow a party to access the user's system and take, corrupt, or destroy the information contained in a customer's database." (Id. ¶ 77.) As to this last issue, Plaintiffs claim that Merge could easily resolve this security defect in a short amount of time, but that Merge failed to correct the purported flaw. (Id.)

Plaintiffs indicate that they notified Merge upon their discovery of the software defects, which Merge was either "incapable of or unwilling" to resolve. (Id. ¶ 80.) As a result, Plaintiffs claim they acted in good faith and at their expense to create software "work-arounds" that would make the LIS^TM software compatible with laws and regulations. (SAP ¶ 81, Doc. 38.) Purportedly, the software defects and the subsequent "work-arounds" proved to be such a financial and labor-intensive expense that Plaintiffs were unable to return their laboratories to full capacity. (Id. ¶¶ 83-84.) Plaintiffs claim that they were eventually "forced" to close their Louisiana laboratories and lost their management contracts for the Mississippi contracts due to the financial issues they faced as a result of the Merge LIS^TM software defects. (Id. ¶¶ 88-90.)

Additionally, Plaintiffs contend that Merge was unable or unwilling to remedy the software defects or collaborate with Plaintiffs to find a solution. (Id. ¶ 92.) Plaintiffs assert that they warned Merge of the risk that the software defects posed to patient safety, but Merge failedto correct the software issues or inform other Merge LIS^TM software users of the deficiencies. (Id.) In May 2017, Merge emailed its customers to announce that they were exiting the laboratory information system market and that they would end support of their current system on December 31, 2018. (Id. ¶ 98.)

II. Rule 12(b)(6) Standard

In Johnson v. City of Shelby, Miss., 135 S. Ct. 346 (2014), the Supreme Court explained "Federal pleading rules call for a 'short and plain statement of the claim...