A New York law that requires advance warning before enforcing automatic renewal provisions of many contracts applies to a doctor’s contract with a company for billing and other services, a state appeals panel has ruled, reversing a lower court judge.
The unanimous Appellate Division, First Department panel ruled Tuesday in Healthcare IQ LLC v. Chao, 108230/10, that the contract, between doctor Tsai Chung Chao and healthcare data management company Healthcare IQ, falls under General Obligations Law §5-903 because it involves “personal property” in the form of patient records.
That law says that to enforce an automatic renewal provision in a contract, a party must call attention to the automatic renewal provision at least 15 days before it takes effect. The law applies only to contracts relating to services “to or for … personal property.”
Tristan Loanzon of Loanzon LLP, who represents Chao, said the decision could be important in the healthcare and finance fields, where billing, consulting and software license agreements often contain similar renewal clauses.
“It’s a very common practice to have automatic renewal,” he said. “It’s the first time the First Department has actually pronounced what the scope of the General Obligation Law is.”
Justice Judith Gische (See Profile) wrote the decision, joined by Justices Angela Mazzarelli (See Profile), John Sweeny (See Profile), Leland DeGrasse (See Profile) and Sallie Manzanet Daniels (See Profile). It reversed a September decision by Justice Eileen Bransten (See Profile), who found that §5-903 did not apply because the contract was only for consulting services.
Gische also ruled that Bransten had wrongly sanctioned Chao for filing two summary judgment motions making the same legal argument.
Healthcare IQ’s attorney, Charles Manuel, Jr. of Manuel & Associates, could not be reached for comment.
Chao had entered a $14,000-per-month contract with Healthcare IQ to license proprietary office software on his office’s computers for three years. Healthcare IQ also agreed to provide coding, billing, collection and other services to Chao.
The agreement included a provision saying it would be renewed automatically for 18-month intervals if neither party said otherwise.
At the end of the three-year contract, Chao stopped paying Healthcare IQ but continued to use the software because it was the only way he could access patients’ medical records that had already been turned over to Healthcare IQ. He last used the program in June 2010, according to the decision. At that point, Healthcare IQ sued Chao, claiming he owed $525,000.
Chao did not assert §5-903 as a defense, but he moved for summary judgment based on that law. Bransten denied the motion because it was based on an unpleaded defense.
Healthcare IQ then filed an amended complaint, and Chao again moved for summary judgment on the basis of §5-903. Bransten denied the motion and sanctioned him for filing successive summary judgment motions on the same grounds. Though she denied the motion on procedural grounds, she also addressed its merits, finding that the contract was not one for service of personal property and therefore was not covered by §5-903.
Gische, in Tuesday’s decision, said that Chao should not have been sanctioned. Once an amended complaint was filed, she said, it was “as though the original pleading had never been served,” citing the First Department’s 2012 decision in Plaza PH2001 LLC v. Plaza Residential Owner LP, 98 AD3d 89.
Gische also said that §5-903 did apply because the services Healthcare IQ provided “were directly and inextricably related to the billing and medical records of the practice, which are personal property.”
She noted that the First Department had applied §5-903 to intellectual, as well as tangible, property before, in Ovitz v. Bloomberg L.P., 77 AD3d 515 (2010), which was affirmed by the Court of Appeals in 2012. That case involved a license for Bloomberg L.P.’s terminals and their software.
“We reject [Healthcare IQ]‘s characterization of its services as being merely of a consulting, analytical or administrative nature rendering the statute inapplicable,” she wrote.
“Here the agreement provided for [Healthcare IQ] to take dominion over the records, and to maintain and organize them on an ongoing basis for billing and reimbursement purposes,” Gische continued. “This was not merely incidental access to the records in the context of administrative or consulting services.”
The panel therefore ruled that Chao’s summary judgment motion should be granted.
In addition to Loanzon, Chao is represented by Robert Tils, a partner at Moritt Hock & Hamroff.