In the United States Court of Federal Claims

No. 12-364C

(Filed: February 25, 2013)

* * * * * * * * * * * * * * * * * * * * * *

NICHOLE MEDICAL EQUIPMENT &

SUPPLY, INC. and DOMINIC ROTELLA,

Plaintiffs,

v.

THE UNITED STATES,

Defendant.

* * * * * * * * * * * * * * * * * * * * * *

M e d i c a r e e q u ipme n t

s u p p li e r; s e t tl e m e n t

agre ement; wa rranty;

covenant of good faith and

fair dealing; motion to

dismiss.

David M. Hollar, Conshohocken, PA, for plaintiffs.

Jeremiah M. Luongo, United States Department ofJustice, Commercial

Litigation Branch, Washington, DC, with whom was Stuart F. Delery,

Assistant Attorney General, Jeanne E. Davidson, Director, and Steven J.

Gillingham, Assistant Director, for defendant.

OPINION

BRUGGINK, Judge.

On January 27, 2006, Nichole Medical Equipment & Supply, Inc.

(“Nichole Medical”) and its owner Mr. Dominic Rotella (collectively,

“plaintiffs”) entered into a settlement agreement with the United States and the

Commonwealth of Pennsylvania. Plaintiffs agreed to pay the United States

$750,000 to resolve allegations that they were liable for violations of the False

Claims Act, fraud, and unjust enrichment, all arising out of asserted improper

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Medicare and Medicaid reimbursement claims. Plaintiffs now contend that the

United States breached that agreement. Pending is defendant’s motion to

See 31 U.S.C. §§ 3729-3733 (2006) amended by Fraud Enforcement and

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Recovery Act of 2009, Pub. L. No. 111-21, § 4, 123 Stat. 1617, 1621 (2009).
dismiss for failure to state a claim upon which relief may be granted. We held

oral argument on January 3, 2013. The matter is fully briefed. For the reasons

set forth below, we grant the government’s motion.

BACKGROUND

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Nichole Medical was a durable medical equipment supplier under the

Medicare Act until it ceased operations in October 2007. After receiving a

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“tip from a disgruntled former employee,” Compl. ¶ 10, the Federal Bureau of

Investigation searched Nichole Medical’s records in 1998 and February 2000,

which culminated in a grand jury proceeding in July 2000. The grand jury did

not return an indictment, but further investigations would follow.

In 2002, a program safeguard contractor (“PSC”) for the Centers for

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Medicaid & Medicare Services (“CMS”) conducted a search of Nichole

Medical’s Medicare records. Plaintiffs state that the PSC, TriCenturion, made

an “unannounced, unauthorized and illegal search and seizure of Nichole

Medical’s Medicare records on or about May 20, 2002.” Compl. ¶ 24.

TriCenturion submitted information to the Department of Justice (“DOJ”) for

a possible fraud claim, which DOJ declined to pursue. Under TriCenturion’s

powers as a PSC, however, it could find that the contractor payment

Unless otherwise noted, the facts are drawn from the complaint and are

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presumed to be correct.

Medicare reimburses a supplier after it provides equipment to one or more

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beneficiaries. See generally 42 U.S.C. § 1395m(a) (2006) (providing for

payment on durable medical equipment); 42 C.F.R. § 414.210 (2012) (stating

payment rules). In order to be reimbursed, the supplier sends a certificate of

medical necessity to a Medicare contractor. See United States v. Isiwele, 635

F.3d 196, 198 (5th Cir. 2011).

A PSC is one of several entities that contract with the government under the

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Medicare Integrity Program. See 42 U.S.C. § 1395ddd(a) (2006) (describing

the program); 42 C.F.R. § 405.370 (2012) (listing program safeguard

contractors as a type of medicare contractor). Program activities include

reviewing the reimbursement claims of Medicare suppliers. See 42 U.S.C. §

1395ddd(b) (listing the activities); 42 C.F.R. § 405.371 (stating enforcement

powers of medicare contractors).

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intermediary had overpaid Nichole Medical for reimbursement claims. On

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June 29, 2004, TriCenturion sent Nichole Medical a notice of overpayment.

The notice alleged that 39 of Nichole Medical’s past claims for reimbursement

did not meet program requirements. These claims included payment for the

supply of 19 motorized wheelchairs and 20 electric hospital beds. Compl. Ex.

C at 6. In order to account for the alleged overpayments, TriCenturion

directed the contractor payment intermediary, Healthnow, to impose an offset

against future reimbursements owed to Nichole Medical. In September 2004,

Healthnow imposed the offset but immediately stayed it.

A year before the wheelchair/bed offset was stayed, the United States

and the Commonwealth of Pennsylvania filed a civil action on March 3, 2003,

regarding other reimbursement claimsin the U.S. District Court for the Eastern

District of Pennsylvania against Nichole Medical, Mr. Rotella, and other

persons. Compl. Ex. A at 2. That complaint, according to plaintiffs here,

“focused exclusively on Nichole Medical’s billing for incontinence supplies”

and alleged violations of the False Claims Act and other statutes. Compl. ¶ 12.

This civil action was resolved when the parties signed the settlement

agreement at issue in this case, which was effective on January 27, 2006. By

this time the wheelchair/bed offset had been stayed since September 2004.

Plaintiffs allege that, “Rotella, as President of Nichole Medical, understood

[his] problems with CMS, Medicare and Medicaid had been brought to an

end.” Compl. ¶ 20.

The settlement agreement (hereinafter “SA”) is attached to the

complaint as Exhibit A. The SA has three sections, entitled “Parties,”

“Preamble,” and “Terms and Conditions.” The Parties section lists as

participants the United States, acting through DOJ and the Office of Inspector

General of the Department of Health and Human Services (“OIG-HHS”), the

Commonwealth of Pennsylvania, and plaintiffs here, along with two other

persons who were defendants in the district court action.

Under the 2003 amendments to Medicare, the general term for a payment

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intermediary is a “medicare administrative contractor.” Medicare Prescription

Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, §

911(a)(1), 117 Stat. 2066 (2003) (codified at 42 U.S.C. 1395kk-1 (2006)); see

also Nichole Med. Equip. & Supply Inc. v. United States, 694 F.3d 340, 342 &

n.3 (3d Cir. 2012).

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The Preamble explains Nichole Medical’s billing history, stating that

the company supplied durable medical equipment for personal care homes in

Pennsylvania, beginning in June 1986. Paragraph 3 states in detail the

allegations made by the United States and Pennsylvania in the civil action:

In the Complaint the United States and the

Commonwealth contended that defendants Nichole Medical’s,

Rotella’s, Tresca’s, and Oliveras’ submission of certain

Medicare and Medicaid claims for incontinence supplies during

the period from January 1996 to February 2000 rendered those

defendants liable: (i) under the civil False Claims Act; and/or

(ii) the common law theories of fraud, unjust

enrichment/restitution, and breach of contract. This conduct,

relating to Medicaid and Medicare claims between 1996 and

2000 as described in the Complaint, will be referred to

collectively as the “Covered Conduct.”

SA § II.3. In addition, the Preamble states in Paragraph 4 that “[t]he United

States contends also that it has certain administrative claims against Nichole

Medical, Tresca, and Rotella for engaging in the Covered Conduct.” SA §

II.4.

The Covered Conduct, in short, relates only to plaintiffs’ submission of

allegedly false claims with respect to incontinence supplies between 1996 and

2000. It does not relate to other reimbursement claims, for example, claims

related to the stayed offset, which concerned reimbursement for wheelchairs

and hospital beds. This opinion will hereinafter refer to that offset, and all

actions taken pursuant to it, as the “wheelchair/bed action.”

The United States’ waiver of claims, in Paragraph 5 of Section III, is

specifically limited to the “Covered Conduct”:

Subject to the exceptions in Paragraph 9 below . . . the

United States (on behalf of itself, its officers, agents, agencies,

and departments) agrees to release Nichole Medical, Rotella,

Tresca, and/or Oliveras as appropriate from any civil or

administrative monetary claim the United States has or may

have under the False Claims Act; the Civil Monetary Penalties

Law; the Program Fraud Civil Remedies Act; or the common

law theories of unjust enrichment/restitution, breach of contract

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and fraud, for the Covered Conduct.

SA § III.5 (emphasis added) (citations omitted). In Paragraph 14, plaintiffs

waive claims that they may have against the United States, “related to the

Covered Conduct and the United States’ . . . investigation and prosecution

thereof.” SA § III.14.

In Paragraph 7, the United States waives administrative action, by

agreeing that it will not rely on the Covered Conduct in order to exclude

Nichole Medical from healthcare programs:

OIG-HHS agrees to release and refrain from instituting,

directing or maintaining any administrative action seeking

exclusion from the Medicare, Medicaid, or other Federal health

care programs (as defined in 42 U.S.C. § 1320a-7b(f)) against

Nichole Medical or Rotella under 42 U.S.C. § 1320a-7a (Civil

Monetary Penalties Law) or 42 U.S.C. § 1320a-7(b)(7)

(permissive exclusion for fraud, kickbacks, and other prohibited

activities), for the Covered Conduct, except as reserved in

Paragraph 9, below, and as reserved in this Paragraph.

SA § III.7. The provision concluded that, “Nothing in this Paragraph

precludes the OIG-HHS from taking action against entities or persons, or for

conduct and practices, for which claims have been reserved in Paragraph[s] 8

and 9, below.” Id.

Paragraph 9, referred to in Paragraphs 5 and 7 above, specifically

reserves from the government’s waiver everything other than the Covered

Conduct (the billing for incontinence supplies between 1996 and 2000):

Notwithstanding any term of this Agreement,specifically

reserved and excluded from the scope and terms of this

Agreement as to any entity or person (including Nichole

Medical, Rotella, Tresca, and Oliveras) are the following:

. . . .

d. Any liability to the United States or the

Commonwealth (or their agencies) for any conduct other than

the Covered Conduct . . . .

SA § III.9(d).

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In exchange for waiver by the United States and Pennsylvania of claims

arising out of the Covered Conduct, plaintiffs agreed to pay the United States

$750,000. SA § III.1. This consisted of an initial payment of $150,000,

followed by monthly payments. Section III, Paragraph 21 states that Nichole

Medical will be in default if it fails to make payment within five days of the

due date.

Upon plaintiffs’ failure to cure a default in payment, the United States

has specific rights. The government may “offset the remaining unpaid balance

from any amounts due and owing to defendant [Nichole Medical] by any

department, agency, or agent of the United States or Commonwealth at the

time of the Default.” SA § III.21. Nichole Medical and Mr. Rotella agree that

they will not “contest any offset imposed . . . either administratively or in any

state or federal court.” Id.

The SA went into effect on January 27, 2006. Nichole Medical made

the initial payment of $150,000 and made two monthly payments of

$11,322.74, leaving a balance of $577,354.52. It is uncontested that the

government received no further payments.

Plaintiffs allege that they are not liable because TriCenturion and a

government contractor payment intermediary, National Heritage Insurance

Company (“NHIC”), breached the SA by reactivating the wheelchair/bed

action. In July 2006, NHIC replaced Healthnow as the intermediary for

Nichole Medical’s supply region. As explained above, Healthnow had

imposed but then stayed an offset in September 2004, against payments owed

to Nichole Medical. TriCenturion alleged the offset accounted for

overpayments on claims for motorized wheelchairs and electric hospital beds.

NHIC re-instituted that offset when it became the carrier, thereby intercepting

payments which plaintiffs otherwise would have received as reimbursement

for supplies unrelated to either the Covered Conduct or the wheelchair/bed

claims. Plaintiffs allege that reimposition of the wheelchair/bed offset caused

plaintiffs to be unable to pay the SA balance, leading to its cessation of

operations in January 2007. See Compl. ¶ 35.

Plaintiffs disputed the wheelchair/bed offset in the Office of Medicare

Hearings and Appeals. On February 12, 2007, an administrative law judge

(“ALJ”) issued an opinion. He explained that TriCenturion deemed 39

Medicare claims to be overpayments. See Compl. Ex. C at 6. According to

the ALJ, TriCenturion treated these 39 claims as a sample on which it based

6
an additional offset against Nichole Medical beyond just those 39 items. The

claims were “part of [a] statistical formula involving 467 claims which

resulted in an extrapolated overpayment of $485,374.54.” Id. at 7.

The ALJ addressed each of the 39 sample claims to determine whether

Medicare was properly charged. He concluded that 17 of the claims met the

requirements for reimbursement and were not overpayments. See id. at 6.

Moreover, the larger offset inferred from the sample was invalid, according to

the ALJ, because of procedural errors committed by TriCenturion and NHIC

in taking the sample and applying the results. See id. at 26-27. Then-current

Medicare regulations required that Nichole Medical receive written notice if

its past claims for reimbursement were to be reopened. 42 C.F.R. § 405.842(a)

(2007). Nichole Medical did not receive such a notice. Id. at 22. The ALJ

further held that, according to redetermination rules, 42 C.F.R. § 405.841

(2007), most of the 39 sample items could not be reopened by CMS. Id. at

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24-25. This lack of compliance with regulations and failure to explain the

methodology for the extrapolation caused the ALJ to throw out the larger

offset.

On April 12, 2007, the Medicare Appeals Council (“Council”) notified

Nichole Medical that it would, “on its own motion,” conduct a review of the

ALJ’s decision. Compl. Ex. B at 1. On January 31, 2008, the Council also

found that TriCenturion and NHIC failed to comply with Medicare regulations.

Id. at 7. According to the Council, however, the ALJ should not have analyzed

each of the 39 claims for coverage. He should have instead deemed all items

incapable of reopening by Medicare. See id. at 6-7 (citing 42 C.F.R. § 405.841

(2007)). The result was the entire July 2006 offset was improper and that

Nichole Medical should be reimbursed, not just for 17 of the 39 claims, but all

claims. Plaintiffs allege here that “approximately $101,201.44 should have

been paid to Nichole Medical” in order to reverse the effects of that July 2006

offset. Compl. ¶ 41.

Plaintiffs, nonetheless, were still in apparent default on the SA. On

An initial payment decision may be reopened “[w]ithin 12 months from the

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date of the notice” of that payment decision, or if good cause is shown, after

those 12 months “but within 4 years” of the decision. 42 C.F.R. § 405.841(a)-

(b) (2007). When evidence of fraud exists, the contractor may reopen a claim

for review at any time. 42 C.F.R. § 405.841(c).

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April 1, 2009, the United States made a motion to enforce the agreement in the

U.S. District Court for the Eastern District of Pennsylvania. The United States

made this motion in the original civil action, then-closed, which had led to the

SA. The government intended to declare the $101,201.44 pending from CMS

as applied against the balance still owed by plaintiffs. The district court denied

the motion on March 8, 2010, stating that “the proper vehicle for the relief that

the Government seeks is a new action to enforce the agreement, not a motion

in this case.” United States of America v. Rotella, No. 04-946, at 3 (E.D. Pa.

filed Mar. 10, 2010) (unpublished order).

Instead of seeking a new action to enforce the SA, the United States

acted on the default provision without a court order. DOJ and CMS thus

directed the payment intermediary not to reimburse the $101,201.44 to Nichole

Medical.

On August 9, 2012, plaintiffs filed their complaint here, alleging that

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the United States breached the SA through the actions of intermediaries in

rejecting the wheelchair/bed claims. Plaintiffs request that we void the SA,

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require the United States to return all SA payments made by plaintiffs, and

direct CMS to proceed with a $101,201.44 reimbursement for Medicare

claims.

Sometime after the Council’s decision, plaintiffs filed tort claims against

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TriCenturion and NHIC in the U.S. District Court for the Eastern District of

Pennsylvania. See Nichole Med. Equip. & Supply, Inc. v. TriCenturion, Inc.,

No. 10-389, 2011 WL 1162052 (E.D. Pa. Mar. 28, 2011) affirmed by 694 F.3d

340 (3d Cir. 2012). The court held that it lacked subject matter jurisdiction

because Nichole Medical’s claims fell under the jurisdictional bar of 42 U.S.C.

§ 405(h) (2006). Id. at *5. It held, alternatively, that TriCenturion and NHIC

are government contractors with immunity for the alleged misconduct. Id. at

*6-7.

Plaintiffs initially filed this case in the U.S. District Court for the Eastern

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District of Pennsylvania. On March 28, 2012, that court held that the case had

to be transferred here because plaintiffs allege a breach of contract by the

United States and request damages of more than $10,000. Nichole Med.

Equip. & Supply, Inc. v. United States, No. 11-1107, 2012 WL 1033525, at *3-

4 (E.D. Pa. Mar. 28, 2012).

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Defendant filed a motion to dismiss under 12(b)(6) of the Rules of the

Court of Federal Claims for failure to state a claim upon which relief may be

granted. It contends that the SA does not contain the warranty that was

allegedly breached and that plaintiffs seek to impose duties upon the

government that do not exist.

DISCUSSION

The complaint alleges that the United States agreed in the SA “to

conduct business with Nichole Medical within the applicable legal and

regulatory structure.” Compl. ¶ 49. The support for this plaintiffs find in

Section III, Paragraph 25 of the SA, which provides that the “Agreement is

governed by the laws of the United States.” The United States breached this

alleged warranty, plaintiffs assert, when TriCenturion and NHIC reopened the

wheelchair/bed action, imposed an offset against payments owed Nichole

Medical, and in the process did not follow Medicare regulations. As explained

above, that reopening foundered when the ALJ and Medicare Appeals Council

held that the intermediaries failed to comply with 42 C.F.R. sections 405.841

and 405.842(a). Plaintiffs claim that the United States pursued the offset

through its contractors, thereby violating Paragraph 25 and voiding the SA.

A warranty is “an assurance by one party to an agreement of the

existence of a fact upon which the other party may rely.” Dale Const. Co. v.

United States, 168 Ct. Cl. 692, 699 (1964). There was certainly no explicit

warranty made by the government in the SA. The source of the terms alleged

by plaintiffs is the contract itself. Plaintiffs concede that the SA does not

explicitly incorporate 42 C.F.R.sections 405.841 and 405.842(a), but maintain

that the government and its contractors had a duty to follow these rules

because the SA “is governed by the laws of the United States.” SA § III.25.

This common phraseology is merely a choice of law provision, however. It

does no more than select the law by which the agreement will be enforced.

Paragraph 25 says nothing about how the government or its contractors will

conduct future dealings with plaintiffs. See Precision Pine & Timber, Inc. v.

United States, 596 F.3d 817, 826 (Fed. Cir. 2010) (requiring that contracts

explicitly incorporate, by an integration clause, statutes that are to be terms of

the contract). Even if it did state the obvious–that the government and its

intermediaries are obligated to follow applicable Medicare laws and

regulations in the future–such an assurance would do no more than the law

would require without being incorporated into the agreement. The government

and its Medicare intermediaries must comply with the law. The remedy when

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they do not is an administrative challenge. That is precisely what occurred in

the Office of Medicare Hearings and Appeals, and plaintiffs received their

relief. But a good faith failure by government employees or agents to comply

with the cat’s cradle of regulations implementing Medicare does not entitle

plaintiffs to absolution of their independent legal obligations. Paragraph 25

does not constitute an explicit warranty of any kind, much less a warranty that

government intermediaries will punctiliously adhere to applicable Medicare

regulations, and if they do not, that plaintiffs’ obligations under the SA are

voided or that the United States will reimburse plaintiffs for any unintended

financial consequences.

It would be no answer to say that what occurred here was not a good

faith failure to adhere to the law. If the Medicare intermediaries intentionally

failed to comply with the law in order to hurt plaintiffs, that conduct would not

be a breach of contract but a tort and not, in any event, actionable here, or even

in district court, under the Federal Tort Claims Act (“FTCA”), 28 U.S.C. §

1346 (2006).

9

Thus, while a warranty could, in theory, be implied in fact, there are no

facts from which the necessary warranty could be implied. The only implied

warranties between contractors and the federal government with which the

court is familiar are those which arise when the United States specifies in

Unless the United States controls the contractor’s operations, the contractor

9

is not a government employee through which the FTCA imposes liability on

the United States. See United States v. Orleans, 425 U.S. 807, 813-14 (1976);

see also 28 U.S.C. § 2671 (2006) (defining government employee). In

addition, the United States would seem to be immune because of the operation

of one or more exceptions to the FTCA. See 28 U.S.C. § 2680(a) (excluding

claims based on government acts taken while “exercising due care, in the

execution of a statute or regulation” or while “perform[ing] a discretionary

function . . . whether or not the discretion involved be abused”); id. § 2680(h)

(excepting claims that arise from “malicious prosecution, abuse of process,

libel, slander, misrepresentation, deceit, or interference with contract rights”);

cf. Nichole Med. Equip. & Supply, Inc. v. United States, 694 F.3d 340, 351 (3d

Cir. 2012) (holding that immunity from state tort claims applied to the

contractors here because of their “discretionary conduct that falls within the

outer perimeter of their official duties”). 

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detail how a product is to be made or how work is to be performed. See

Spearin v. United States, 248 U.S. 132 (1918). In that circumstance, the

Supreme Court has recognized an implied warranty that following the

specifications will produce the desired result. Id. at 136-37. The present

circumstances are obviously very different.

Plaintiffs’ allegations are similar to those asserted in Hercules Inc. v.

United States, 516 U.S. 417 (1996). There, a chemical company had

manufactured a defoliant for the United States military to use in the Vietnam

War. The company was later sued by third parties for injuries attributed to

exposure to the defoliant. In rejecting an implied warranty against third-party

tort liability, the Court noted, “Itseems more likely that the Government would

avoid such an obligation, because reimbursement through contract would

provide a contractor with what is denied to it through tort law.” Id. at 425.

For the same reason, the present circumstances militate against implying a

warranty. The conduct allegedly warranted against is that of third-party

intermediaries, and, even if such conduct could be attributed to the United

States, it was allegedly tortious.

In any event, a warranty as envisioned by plaintiffs would be

inconsistent with other provisions of the SA. Section III, Paragraph 9(d)

specifically reserved claims of the United States that were based on conduct

other than the Covered Conduct. The contract thus did not shift any risk to the

United States with regard to the wheelchair/bed action, which is by definition

other conduct. Cf. Kolar, Inc. v. United States, 650 F.2d 256, 262 (Ct. Cl.

1981) (“[T]he dangerous property clause indicated the dangers, warned the

contractor, and shifted the risk to the contractor.”).

Plaintiffs also advance a second cause of action, based on an asserted

violation by the United States of the implied covenant of good faith and fair

dealing. They allege that:

the United States, its constituent agencies, departments and

contractors, without reasonable or probable cause, conducted

improper and illegal raids, audits, and/or reopenings of

investigations, violated applicable statutes and regulations, and

improperly suspended and/or setoff payments to Nichole

Medical, all without reasonable or probable cause, and in

violation of the duty of good faith and fair dealing.

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Compl. ¶ 52. This claim thus relies upon the same facts as the warranty claim,

namely, the pursuit of an offset by the fiscal intermediaries arising from the

wheelchair/bed action. This claim fails as well because it assumes duties in

the United States that are not only beyond the agreement’s terms but are

plainly inconsistent with its affirmative terms.

The covenant of good faith and fair dealing exists to impose duties on

one party in order to protect “the reasonable expectations of the other party

regarding the fruits of the contract.” Centex Corp. v. United States, 395 F.3d

1283, 1304 (Fed. Cir. 2005). As noted above, the language in Section III,

Paragraph 9(d) preserves the government’s right to pursue claims arising out

of any of plaintiffs’ Medicare dealings other than the Covered Conduct. In

addition, Paragraph 7 only foreswears government administrative action in

pursuit of the Covered Conduct. Instead, “[n]othing in this Paragraph

precludes the OIG-HHS from taking action against entities or persons, or for

conduct and practices, for which claims have been reserved in Paragraph[s] 8

and 9, below.” SA § III.7. In other words, plaintiffs specifically remained

exposed to potential offsets arising from the wheelchair/bed claims. Because

protections with respect to this other conduct were not part of the SA, no

duties can be inferred with respect to the United States. The requirements of

the covenant “cannot expand a party’s contractual duties beyond those in the

express contract or create duties inconsistent with the contract’s provisions.”

Precision Pine, 596 F.3d at 831. There was no violation of the covenant of

good faith and fair dealing.

CONCLUSION

For the reasons stated above, defendant’s motion to dismiss is granted.

Accordingly, the Clerk of Court is directed to dismiss the complaint with

prejudice. No costs.

s/ Eric G. Bruggink

ERIC G. BRUGGINK

Judge

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