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Total Renal Care, Inc. v. Western Nephrology, American Renal Associates, Inc., et al.

Breach of Contract; Violation of Colorado Consumer Protection Act; Fraudulent Concealment; and Civil Conspiracy

Total Renal Care, Inc. v. Western Nephrology, American Renal Associates, Inc., et al.
United States District Court for the District of Colorado, Civil Action No. 08-cv-00513-CMA-KMT

Counsel for Plaintiffs: Thomas A. Ryan, Charles E. Weir for McDermott Will & Emery
Expert for Plaintiffs: Marc S. Margulis, C.F.A., A.S.A., M.B.A

In mid-1998, Total Renal Care, Inc., a wholly-owned subsidiary of DaVita, Inc., purchased the stock of a company owned by the Western Nephrology Defendants and simultaneously entered into a medical director agreement (MDA) with those same Defendants to operate kidney dialysis centers in certain sub-markets of the Denver metropolitan area (Centers). The MDA had an initial term of 10 years. Both the Stock Purchase Agreement and the MDA required the parties to negotiate a renewal of the MDA in good faith and to refrain from negotiations with any third party during the term of the MDA. The agreements also contained customary non-competition, non-solicitation and non-disclosure provisions.

Consistent with the parties’ obligations under the agreements, TRC (DaVita) began discussions with Western Nephrology in late 2007 to renew the MDA. It was alleged in the lawsuit that while “negotiating” a renewal, the Western Nephrology Defendants had already formally aligned themselves with American Renal Associates (ARA) to construct and operate five competing centers initially. It was further alleged that the business relationship between these Defendants commenced in early 2007 and was formalized by mid-year 2007.

In early 2008, TRC learned of the alleged wrongful activities of the Defendants and, after requesting clarification, terminated the MDA for cause and filed this lawsuit shortly thereafter.

Federal law requires that dialysis treatment at a dialysis center be overseen by a physician serving as medical director at that center. Consequently, and with consideration of its legal and fiduciary duties to minimize economic damages, Plaintiff sold a non-controlling equity interest in the Centers to another local nephrology medical group in April 2008 at a distressed price and in conjunction therewith entered into a new medical director agreement.

Marc Margulis of Mammoth Advisors, Inc. was retained by Plaintiff as the testifying expert on damages. In conjunction with Plaintiff’s counsel, Mr. Margulis determined that economic damages in this matter were most appropriately measured, not by reference to future lost profits but, by the consolidated value of TRC’s Centers immediately prior to, and without giving effect to, the alleged wrongful actions of the Defendants, net of i) the price actually received by Plaintiff in its subsequent sale of the partial interest in the Centers to another nephrology medical group under adverse marketing conditions, which, more specifically, included the lack of adequate and customary time necessary to expose the property in the marketplace to obtain the highest possible price and ii) the profits that would have hypothetically been retained by Plaintiff, absent the partial Total Renal Care, Inc. v. Western Nephrology, American Renal Associates, Inc., et al. interest sale, between the point in time at which the distressed sale actually occurred and the date on which an orderly sale would have likely occurred. Mr. Margulis’ “but for” value of the Centers considered the impact of hypothetical, but reasonably foreseeable, competition where none had previously existed in the Centers’ service areas following the non-breaching termination of the MDA with the Western Nephrology Defendants in July 2008. The valuation of the fair market value of the Centers under the presumption of impending, natural competition by Western Nephrology, ARA or another provider yielded a value materially lower than one based solely on past performance and the renewal of the MDA with the Western Defendants. Furthermore, Mr. Margulis found no market factor or general economic factor to explain the claimed economic damages other than the Defendants’ alleged wrongful acts, the lack of adequate time due to the alleged wrongful acts to expose the Centers in the marketplace for sale and identify and contract with replacement medical directors, and the impending competition by the Defendants.

This case was settled subsequent to the submission of expert reports and depositions but prior to trial.