Premier, Inc. v. Peterson

NO. COA13-344

NORTH CAROLINA COURT OF APPEALS

Filed: 4 March 2014

PREMIER, INC.,

Plaintiff,

v. Mecklenburg County

No. 11 CVS 1054

DAN PETERSON; OPTUM COMPUTING

SOLUTIONS, INC.; HITSCHLER-CERA,

LLC; DONALD BAUMAN; MICHAEL

HELD; THE HELD FAMILY LIMITED

PARTNERSHIP; ROBERT WAGNER;

ALEK BEYNENSON; I-GRANT

INVESTMENTS, LLC; JAMES MUNTER;

GAIL SHENK; STEVEN E. DAVIS;

CHARLES W. LEONARD, III and JOHN

DOES 1-10,

Defendants.

Appeal by defendants from order entered 11 December 2012 by

Judge Calvin E. Murphy in Mecklenburg County Superior Court.

Heard in the Court of Appeals 29 August 2013.

Moore & Van Allen, PLLC, by J. Mark Wilson, Kathryn G.

Cole, and Benjamin R. Huber, for plaintiff-appellee.

Williams Mullen, by Christopher G. Browning, Jr. and

Garrick A. Sevilla, for defendants-appellants.

DAVIS, Judge.

Dr. Dan Peterson (“Dr. Peterson”); Optum Computing

Solutions, Inc.; Hitschler-Cera, LLC; Donald Bauman; Michael

-2-

Held; the Held Family Limited Partnership; Robert Wagner; Alek

Beynenson; I-Grant Investments, LLC; James Munter; Gail Shenk;

Steven E. Davis; Charles W. Leonard, III; and John Does 1-10

(collectively “Defendants”) appeal from the trial court’s 11

December 2012 order granting summary judgment in favor of

Plaintiff Premier, Inc. (“Premier”) on (1) its claim for a

declaratory judgment that it did not breach its contract with

Defendants; and (2) Defendants’ counterclaims for breach of

contract, attorneys’ fees, and recovery of audit expenses.

After careful review, we vacate the trial court’s order granting

summary judgment and remand for further proceedings.

Factual Background

On 29 September 2006, Premier acquired Cereplex, Inc.

(“Cereplex”) by entering into a Stock Purchase Agreement (the

“Agreement”) with Defendants, the former shareholders and

stakeholders of Cereplex. Cereplex developed and designed web-

based surveillance and analytic services to healthcare providers

through its software products, Setnet and PharmWatch. Setnet

was designed to assist healthcare providers in detecting,

responding to, and preventing healthcare-associated infections

(“HAIs”). HAIs are infections that patients acquire during

their course of treatment in a healthcare facility or setting.

-3-

The Setnet program provided various alerts, reports, and other

monitoring and surveillance functions regarding the possible

presence of HAIs in healthcare providers’ patient population.

PharmWatch was a program designed to optimize treatment,

curb resistance to antibiotics, and prevent unnecessary use or

overuse of antibiotics. The PharmWatch product provided

automated surveillance and monitoring by generating alerts to

notify a healthcare provider of a potential problem in the

provision and dosage of antibiotics to a particular patient.

After acquiring Cereplex, Premier developed

SafetySurveillor, a successor product that combined the

functionalities of Setnet and PharmWatch into one software

program. SafetySurveillor, like its predecessors, generates

automated alerts to notify the user of potential problems that

require attention. SafetySurveillor’s key features relate to

its ability to (1) facilitate infection prevention by firing

alerts to infection control professionals regarding the

potential existence of clusters or outbreaks of HAIs; and (2)

provide configurable pharmacological-related alerts based on set

variables, including high-cost medication, drug combinations,

length of therapy, lab results, and other factors.

Pursuant to the Agreement, Defendants were entitled to

-4-

receive an annual earnout payment (the “Earnout Amount”) from

Premier for five years following the date of the Agreement. The

Earnout Amount provision of the Agreement states, in pertinent

part, as follows:

(iii) Earnout. On each of the dates that

are the first five (5) anniversaries of the

Closing Date, the Earnout Amount earned

during the preceding twelve (12) months

shall be determined by the Buyer in good

faith (the “Yearly Earnout”). . . . “Earnout

Amount” shall mean an amount equal to

$12,500 for each Hospital Site where a

Product Implementation occurs during the

applicable 12-month period; excluding the

first fifty (50) Hospital Sites where a

Product Implementation occurs . . . . For

the avoidance of doubt the first fifty (50)

Hospital Site threshold is a one-time

threshold, not an annual threshold.

"Hospital Site" shall mean an individual

hospital, nursing home, care center or

similar facility (and for the avoidance of

doubt a single health care company or

hospital group may consist of multiple

Hospital Sites). “Product Implementation”

means a Hospital Site that has (A)

subscribed to or licensed the Company's

Setnet or PharmWatch product (or any

derivative thereof, successor product, or

new product that substantially replaces the

functionality of either product), whether

such product is provided, sold or licensed

(for a charge or at no charge, or provided

on a stand-alone basis or bundled with other

products and/or services) to the applicable

Hospital Site by Company (or its successor

in interest), any affiliate of the Company

or any reseller authorized by the Company,

and (B) completed any applicable

implementation, configuration and testing of

-5-

the product so that the product is ready for

production use by the Hospital Site.

Together with the delivery of each Yearly

Earnout, the Buyer shall provide the

Sellers' Representative with a written

report listing the names and addresses of

the Hospital Sites covered by the applicable

Yearly Earnout payment.

The Agreement provided that Defendants were authorized to

conduct an annual audit to verify that Premier was paying out

the correct Earnout Amount to Defendants. Defendants were

responsible for paying the expenses associated with the audit

unless the audit revealed that Premier had underpaid the Earnout

Amount by more than 5%. If the applicable Earnout Amount was in

dispute, Premier would not have any obligation to pay the costs

and expenses of the audit “unless a final, nonappealable order

of a court or an arbitrator that is binding on [Premier] finds

that the Audit findings are correct.”

From May 2010 to September 2010, Dr. Peterson, the co-

founder and former Chief Executive Officer of Cereplex,

conducted a pilot audit on Defendants’ behalf regarding

Premier’s compliance with the Agreement. Dr. Peterson testified

by affidavit that in determining the appropriate Earnout Amount

that Defendants were due, his audit “reported on the occurrence

of single-event alerts as a simple and sure way to identify

-6-

Product Implementations of SafetySurveillor1 for the Audit.” A

single-event alert refers to the notification the

SafetySurveillor program dispatches to infection control

professionals or other designated medical personnel to identify

either (1) the potential presence of an HAI in a patient who was

discharged from a hospital and later sought medical attention

from another healthcare facility; or (2) a possible problem with

the antibiotic therapy prescribed to a patient.

Dr. Peterson examined Premier’s databases and discovered

over 1,000 healthcare facilities from which an alert had been

fired. His affidavit states that “[e]ach alert relates to an

individual patient and is specific to the facility at which that

patient was seen, and each alert was sent to at least one

clinician who had chosen to be alerted about the event.” He

also explained that in order for an alert to be fired from a

facility, the SafetySurveillor program must have acquired access

to the facility’s patient data.

The conclusion reached by Dr. Peterson from his audit was

that Premier had provided SafetySurveillor to over 1,000

facilities yet had only recognized 263 Hospital Sites for

1

SafetySurveillor, the successor product of Setnet and

PharmWatch, replaced those two software programs and was the

only relevant product for purposes of Product Implementation in

2010.

-7-

purposes of the Product Implementation provision of the

Agreement. Based on Dr. Peterson’s audit, Defendants informed

Premier that they intended to initiate litigation against

Premier for miscalculating the Earnout Amount and violating the

terms of the Agreement.

On 19 January 2011, Premier filed an action in Mecklenburg

County Superior Court seeking a declaratory judgment that it had

not breached the Agreement. On 27 April 2011, Defendants filed

an answer and counterclaims. Defendants alleged that Premier

had, in fact, breached its contract with Defendants and sought

damages as well as the recovery of audit expenses and attorneys’

fees. The matter was designated a complex business case and

assigned to the Honorable Calvin E. Murphy.

On 29 July 2011, the trial court entered a case management

order giving the parties until 30 April 2012 to complete fact

discovery and until 31 July 2012 to complete all discovery. On

30 August 2011, approximately 40 days after the entry of the

case management order, Premier filed a motion for judgment on

the pleadings pursuant to Rule 12(c) of the North Carolina Rules

of Civil Procedure or, in the alternative, a motion for summary

judgment pursuant to Rule 56.

The trial court conducted a hearing on 14 December 2011 and

-8-

entered its order and opinion on 11 December 2012 granting

summary judgment in Premier’s favor on its declaratory judgment

claim as well as on Defendants’ counterclaims for breach of

contract, attorneys’ fees, and recovery of audit expenses.2

Defendants appealed to this Court.

Analysis

On an appeal from an order granting summary judgment, this

Court reviews the trial court’s decision de novo. Shroyer v.

Cty. of Mecklenburg, 154 N.C. App. 163, 167, 571 S.E.2d 849, 851

(2002). Summary judgment is appropriate if “the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that any party is

entitled to a judgment as a matter of law.” Dockery v. Quality

Plastic Custom Molding, Inc., 144 N.C. App. 419, 421, 547 S.E.2d

850, 852 (2001).

In a contract dispute between two parties, the trial court

may interpret a plain and unambiguous contract as a matter of

law if there are no genuine issues of material fact. See

McKinnon v. CV Indus., Inc., 213 N.C. App. 328, 333, 713 S.E.2d

2

The trial court granted summary judgment in favor of Defendants

on Premier’s claim for attorneys’ fees after concluding that

there was no statutory basis for an award of attorneys’ fees in

Premier’s favor.

-9-

495, 500 (“Courts may enter summary judgment in contract

disputes because they have the power to interpret the terms of

contracts.”), disc. review denied, 365 N.C. 353, 718 S.E.2d 376

(2011); Metcalf v. Black Dog Realty, LLC, 200 N.C. App. 619,

633, 684 S.E.2d 709, 719 (2009) (“[W]hen the language of a

contract is not ambiguous, no factual issue appears and only a

question of law which is appropriate for summary judgment is

presented to the court.”).

“Whenever a court is called upon to interpret a contract

its primary purpose is to ascertain the intention of the parties

at the moment of its execution.” Lane v. Scarborough, 284 N.C.

407, 409-10, 200 S.E.2d 622, 624 (1973). In determining the

parties’ intent, the court must construe the contract “in a

manner that gives effect to all of its provisions, if the court

is reasonably able to do so.” Johnston Cty. v. R.N. Rouse &

Co., 331 N.C. 88, 94, 414 S.E.2d 30, 34 (1992).

The key language in the Agreement that lies at the heart of

this dispute states as follows:

“Product Implementation” means a Hospital

Site that has (A) subscribed to or licensed

the Company's Setnet or PharmWatch product

(or any derivative thereof, successor

product, or new product that substantially

replaces the functionality of either

product), whether such product is provided,

sold or licensed (for a charge or at no

-10-

charge, or provided on a stand-alone basis

or bundled with other products and/or

services) to the applicable Hospital Site by

Company (or its successor in interest), any

affiliate of the Company or any reseller

authorized by the Company . . . .

(Emphasis added.)

The parties offer different views on how the italicized

language quoted above should be interpreted. Relying on the

“subscribed to or licensed” phrase, Premier contends that in

order for Product Implementation to occur, a Hospital Site must

affirmatively take steps to subscribe to or license the

SafetySurveillor product. Based on this interpretation, Premier

claims that it fully satisfied its obligations under the

Agreement by making Earnout payments for 213 of the 263 Hospital

Sites that had formal written subscription agreements with

Premier.3

Defendants, conversely, assert that Premier’s

interpretation of Product Implementation is too narrow. They

argue that the “whether such product is provided, sold or

licensed” phrase broadens the circumstances under which an

annual Earnout payment can accrue. As such, Defendants contend

3

Pursuant to the Agreement, the first 50 Hospital Sites where

Product Implementation occurs are excluded when calculating the

appropriate Earnout Amount total. Thus, payment was made for

only 213 of these 263 Hospital Sites.

-11-

that the “subscribed to or licensed” component of Product

Implementation is satisfied simply by virtue of Premier’s

provision of the SafetySurveillor product to a facility. Based

on this reasoning, Defendants contend that Premier was not

entitled to summary judgment because the results of Dr.

Peterson’s audit — specifically the data showing the numerous

facilities from which single-event alerts were fired — indicated

that Premier had “provided” the SafetySurveillor program to over

1,000 facilities, thereby causing Product Implementation to

occur regardless of whether those facilities had actually taken

steps to subscribe to or license the product.

Premier responds by arguing that Defendants’ interpretation

of Product Implementation reads the “subscribed to or licensed”

language out of the Agreement. Defendants’ interpretation,

according to Premier, treats the “subscribed to or licensed”

phrase as having been effectively superseded by the “whether

such product is provided, sold or licensed” phrase.

In its order and opinion, the trial court agreed with

Premier’s interpretation of the Agreement, ruling that a

Hospital Site was required to subscribe to or license the

product in order for Product Implementation to occur. The trial

court harmonized the “subscribed to or licensed” phrase with the

-12-

“whether such product is provided, sold or licensed” phrase by

determining that “while it does not matter who provides the

product to the Hospital Site or whether the Hospital Site is

charged, the Hospital Site still must subscribe to or license

the product in order for ‘Product Implementation’ to occur.”

(Emphasis added.)

The trial court, therefore, rejected Defendants’ contention

that they would be entitled to an Earnout payment any time

SafetySurveillor was “merely provided” to a Hospital Site

because that interpretation “unreasonably construes the

otherwise unambiguous language of the contract that requires a

license or subscription.” Based on its interpretation of the

Product Implementation definition in the Agreement, the trial

court concluded that summary judgment in favor of Premier was

appropriate.

We agree with the trial court that Defendants’

interpretation would impermissibly read the phrase “subscribed

to or licensed” out of the Agreement. See Singleton v. Haywood

Elec. Membership Corp., 357 N.C. 623, 629, 588 S.E.2d 871, 875

(2003) (explaining that when interpreting a contract “[t]he

various terms of the contract are to be harmoniously construed,

and if possible, every word and every provision is to be given

-13-

effect” (citation and brackets omitted)). Defendants’ argument

hinges on the notion that Product Implementation can occur

simply by virtue of a facility’s receipt of the SafetySurveillor

product. However, the unmistakable meaning of the language the

parties agreed upon in drafting the Agreement is that some

affirmative act on the part of the Hospital Site is required.

Defendants simply cannot escape the fact that the definition of

Product Implementation makes clear that it is the Hospital Site

that must “subscribe[] to or license[]” the product. Thus,

contrary to Defendants’ proffered interpretation, the mere

receipt of SafetySurveillor by a facility is, standing alone,

insufficient to trigger an Earnout payment under the Agreement.

However, our adoption of this interpretation of the Product

Implementation definition does not resolve the case. To hold,

as we do, that a Hospital Site must subscribe to or license the

product in order for Product Implementation to occur is to raise

the question of whether the additional facilities that

Defendants contend qualify as Hospital Sites at which Product

Implementation has occurred have, in fact, affirmatively

undertaken steps to subscribe to or license the SafetySurveillor

product.

It is well established that in construing contract

-14-

provisions, “[w]here a contract defines a term, that definition

is to be used. If no definition is given, non-technical words

are to be given their meaning in ordinary speech, unless the

context clearly indicates another meaning was intended.” Reaves

v. Hayes, 174 N.C. App. 341, 345, 620 S.E.2d 726, 729 (2005)

(citation and quotation marks omitted). As neither “subscribed”

nor “licensed” is defined in the Agreement, it is appropriate to

examine the ordinary and plain meaning of these terms.

“Subscribe” means “to agree to receive and pay for a

periodical, service, etc.” Webster’s New World Dictionary 588

(1995). The most applicable dictionary definition of the word

“license” is “official or legal permission to do or own a

specified thing.” American Heritage College Dictionary 782 (3d

ed. 1993). Both definitions connote an affirmative act by the

recipient prior to receipt of the product or service — be it the

act of agreeing to receive the product or service or the act of

obtaining permission to use the product or service. Applying

these definitions here, we believe that the Agreement

contemplates a mutual arrangement between Premier and the

Hospital Site whereby Premier agrees to provide the

SafetySurveillor product and the Hospital Site agrees to accept

-15-

it and utilize its services.4

While the trial court correctly interpreted the Agreement

as requiring the Hospital Site to take some action to subscribe

to or license SafetySurveillor, we cannot agree with the trial

court’s conclusion that summary judgment was appropriate at this

stage in the litigation. Defendants submitted evidence,

consisting primarily of the affidavit of Dr. Peterson,

suggesting that Premier provided SafetySurveillor to numerous

additional facilities (beyond the 263 Hospital Sites

acknowledged by Premier in its calculation of the Earnout

Amount) for which no payment was made. Premier does not dispute

Defendants’ contention that alerts were fired from these

facilities but claims that (1) there is no evidence that any of

the facilities identified have subscribed to or licensed

SafetySurveillor; and (2) evidence of the firing of alerts is

not relevant to the issue of whether a facility has subscribed

to or licensed SafetySurveillor.

While we have rejected Defendants’ contention that evidence

4

However, because the Agreement expressly states that an Earnout

payment can be triggered — assuming the other requirements are

met — regardless of whether the product is provided “for a

charge or at no charge,” payment by the Hospital Site is not

required. Similarly, an Earnout payment can be triggered

whether SafetySurveillor is offered on a stand-alone basis or as

part of a bundle of other products and services.

-16-

of Premier’s mere provision of the SafetySurveillor product to

facilities, without more, automatically triggers Product

Implementation, we believe that such evidence (as shown by the

firing of alerts) and the circumstances under which the product

came to be received by these facilities is probative of the

issue of whether the facilities did, in fact, meet the criteria

for Product Implementation. However, as presently constituted,

the record is devoid of specific evidence on this issue. It may

or may not ultimately be determined that additional facilities

beyond the 263 acknowledged by Premier qualify as Hospital Sites

as to which Product Implementation has occurred; however, on the

present record, we have no way of knowing the answer to this

question.

In its complaint, Premier summarized the relief it was

seeking as follows:

30. Plaintiff is entitled to a judgment

declaring that it has not violated any

purported rights of Defendants pursuant to

the Stock Purchase Agreement or otherwise

under federal, state or common law, and is

not liable to Defendants for any claims,

including any claims concerning the parties’

respective rights or obligations pursuant to

the Stock Purchase Agreement. . . .

As the party seeking summary judgment, Premier bore “the initial

burden of demonstrating the absence of a genuine issue of

-17-

material fact” as to whether it had fully satisfied its payment

obligations under the Agreement. Austin Maint. & Constr., Inc.

v. Crowder Constr. Co., ___ N.C. App. ___, ___, 742 S.E.2d 535,

540 (2012) (citation and quotation marks omitted).

The trial court appears to have reasoned that Premier met

this burden because (1) Product Implementation could only occur

when a Hospital Site entered into a formal written agreement

with Premier; and (2) neither party produced evidence “that

refutes the fact that [Premier] paid Defendant[s] for each

Hospital Site that subscribed to or licensed the product”

through a formal, written subscription or licensing agreement.

However, as explained above, while the Agreement requires some

affirmative act by a Hospital Site to subscribe to or license

the SafetySurveillor product in order for Product Implementation

to occur, the Agreement does not specifically require a formal,

written agreement between Premier and the Hospital Site. The

fact that Product Implementation can occur even when the

SafetySurveillor product is provided to the Hospital Site at no

cost suggests that a more informal process may, in fact, have

existed.

The trial court also concluded that Dr. Peterson’s

affidavit constituted parol evidence that attempted to

-18-

impermissibly add to or revise the unambiguous language of the

Agreement. We agree that Dr. Peterson’s affidavit about the

parties’ intent when negotiating the Agreement should not be

allowed to alter the contractual terms that the parties agreed

upon as contained in the four corners of the Agreement; however,

as explained above, we believe that Dr. Peterson’s affidavit

contained evidence probative on the issue of whether the

additional facilities referenced in his audit may have

subscribed to or licensed SafetySurveillor. Accordingly,

further factual development is necessary to explore what

affirmative acts — if any — were taken by the facilities

identified by Defendants to obtain the SafetySurveillor product

so that any such acts can be evaluated in accordance with our

interpretation of the “subscribed to or licensed” language in

the Agreement.

For these reasons, we conclude that this matter must be

remanded to the trial court for a fuller development of the

factual record. While we do not foreclose the possibility that

summary judgment may ultimately be appropriate in this matter,

we believe that such a determination cannot properly be made at

the present time in light of the incomplete factual record that

currently exists. See Ussery v. Taylor, 156 N.C. App. 684, 686,

-19-

577 S.E.2d 159, 161 (2003) (reversing premature entry of summary

judgment and remanding to give parties “the opportunity to

further develop the facts”). Because we are vacating the entry

of summary judgment and remanding for further proceedings, we

also vacate the trial court’s rulings on both parties’ claims

for attorneys’ fees. We express no opinion as to whether either

party may be entitled to attorneys’ fees once the trial court

has rendered a final judgment in this action on remand.

Conclusion

For the reasons stated above, we vacate the trial court’s

order and opinion and remand for further proceedings consistent

with this opinion.

VACATED AND REMANDED.

Judges CALABRIA and STROUD concur.