Corporate & Securities Law

Revising Your Contracts to Reflect Changed Circumstances

By Ken Adams

Reader Melvin told me about this item on Lexology by Jeffrey P. Drummond of Jackson Walker LLP. It’s about how the Third Circuit Court of Appeals reversed the lower court in a qui tam action brought by a doctor against a hospital under the False Claims Act.

At issue was the relationship between the hospital and an anesthesiology group that under a 1992 contract provided services to the hospital. In 1998 the hospital opened a clinic three miles away and engaged the anesthesiology group to provide services to the clinic too, but the 1992 contract was never revised to include the clinic.

The plaintiff doctor claimed that the hospital provided benefits to the anesthesiology group in the form of free rent and services and that the relationship did not meet the requirements of the personal services exception under the Stark Law. The trial court found for the hospital, as it saw the relationship between the anesthesiology group and the hospital as a continuation of the 1992 contract.

I’ll let Mr. Drummond recount the rest:

However, the Circuit Court reversed that decision, explicitly stating that the failure to update a long-standing contract between a hospital and its anesthesiology group or enter into a new agreement that covered the pain clinic meant that there was no “written agreement” as required to meet the exceptions to the Stark Law and the safe harbor to the Anti-Kickback Statute. The Circuit Court also implied that because there was no renegotiation of the terms of the underlying contract (i.e., the provision by the hospital of space, equipment, and personnel in exchange for the full coverage by Blue Mountain), the hospital could not prove that the exchange was fair market value.

The circumstances of this case were obviously specialized, but the message applies more broadly: Whenever the scope of a business relationship changes in any significant way?the territory changes, a product line is discontinued, what have you?someone might end up unhappy if the contract governing that relationship isn’t revised to reflect the change.

Full post as published by AdamsDrafting on February 04, 2009 (boomark / email).