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FCE Benefit Administrators, Inc. v. George Washington University

June 11, 2002


The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge


This is a breach of contract action brought by FCE Benefit Administrators, Inc. ("FCE") against Patterson/Smith Associates ("PSA"). *fn1 FCE is a California corporation that designs and administers health insurance benefit plans, including plans for employers with government contracts. PSA is an insurance agent licensed in Virginia to sell, inter alia, health insurance and employee benefits coverage. Plaintiff alleges that defendant breached the Agent Fee Agreement, which prohibited PSA from diverting, soliciting or disclosing information about any of FCE's existing customers. FCE seeks damages, plus injunctive and declaratory relief.

The case was bifurcated for trial, and the issue of liability was tried before this Court on March 18-19 and April 8, 2002. The witnesses at trial were: 1) Steve Porter, the executive vice president of FCE; 2) Renie Fellers, the benefits manager for Melwood Horticultural Training Center ("Melwood"); 3) Diane Lapin, the director of managed care for FCE; 4) Holly Miller, a senior vice president of PSA; 5) Eileen Wilson, the former vice president of sales, customer service, and product development with the George Washington University Health Plan ("GWUHP"); and 6) Gary Beckman, the president and chief executive officer of FCE. Based on the testimony and the sixty exhibits admitted at trial, the Proposed Findings of Fact and Conclusions of Law submitted by the parties, and the applicable case law, the Court makes the following Findings of Fact and Conclusions of Law.


I. The Relationship Between FCE and PSA

1. On April 9, 1992, PSA and FCE *fn2 entered into an Agent Fee Agreement (the "Agreement"). This Agreement, which was signed by Porter and Daniel Frakes, who was the vice president of group health at PSA (Beckman Test. at 25:23-25), authorized PSA to be FCE's "Agent" and to represent FCE to eligible firms for participation in FCE-administered plans. Paragraph 5 of the Agreement provides:

Agent promises and agrees not to engage in any unfair competition with FCE. Agents shall not divert or attempt to divert any of FCE's business either to itself or to any other person, firm or company. Agent shall not either directly or indirectly (a) make known to any person, firm, or corporation the names or addresses of any of FCE's customers or potential customers, or any other information pertaining to them; [or] (b) call on, solicit, take away, or attempt to call on, solicit, or take away any of FCE's customers either on its behalf or that of any other person, firm, or corporation either during the term of this Agreement and for a period of two years after the termination of this Agreement . . . . (Pl. Ex. 1, ¶ 5.

2. Paragraph 4 of the Agreement originally provided that the "Agent hereby agrees not to sell or act as agent for any other health and welfare benefit plan, which is a direct competitor of FCE so long as this Agreement is in effect." (Pl. Ex. 1, ¶ 4.

3. The Agreement was amended by a letter from Beckman to Frakes dated September 4, 1994, "to delete the condition preventing P/SA from representing other Service Contract Industry and/or Davis Bacon Industry benefit providers." *fn3 (Pl. Ex. 2.) The Agent Agreement as amended is still in effect. However, Frakes left FCE after the Agreement was amended, and Steve Smith has been the head of PSA's employee benefits division since October 1998. (Trial Trans. at Vol. 2, 80:3-12.) II. The Relationship Between FCE and Melwood

4. On January 14, 1997, FCE entered into a trust agreement (the "Trust Agreement") for the health and welfare plan of Melwood (the "Plan"), a nonprofit corporation that employs developmentally disabled and mentally challenged individuals as federal contract workers. (Pl. Ex. 4.) Melwood has two distinct categories of employees who are served by two different health care plans. The staff of Melwood are members of one plan, which is not at issue in this case. The federal contract employees at Melwood are members of a second plan, and the terms of their employment are regulated by the Service Contract Act, 41 U.S.C. § 351, et seq. FCE administered the health plan of these contract employees beginning in 1997.

A. Fellers Arrives at Melwood

5. Fellers became the benefits manager at Melwood on March 16, 1998. (Fellers Test. at 115:10-11.) Prior to working at Melwood, Fellers was a group benefits broker for six years with Benecor Associates ("Benecor"), an organization that was "very similar" to PSA. (Fellers Test. at 184:3-5.

6. In her time at Benecor, Fellers brokered a number of health care plans for organizations with developmentally disabled employees. For this particular type of population, it was her experience that a Health Maintenance Organization ("HMO") "would be a very popular choice from the standpoint of plan design and cost." (Fellers Test. at 184:11-16.

7. In the spring of 1998, shortly after beginning work at Melwood, Fellers contacted Miller in connection with the staff benefits plan. *fn4 (Fellers Test. at 123:24-124:4.) Miller, who had been recommended to Fellers by another official at Melwood, provided quotes for alternative staff health insurance plans. (Miller Test. at 5:20-6:13.) Although Melwood ultimately decided to remain with its existing staff plan, it did hire PSA as the broker for that plan. (Miller Test. at 8:19-21.

8. In July 1998, the FCE Plan was amended at Melwood's request. The new Plan was the FCE Preferred Provider Organization ("PPO"), which reduced the number of hospitals available to Plan members to two from between six and eight. (Lapin Test. at 195:24-196:4; 207:11-208:14.

9. Fellers did not recall that more than two hospitals were available before the switch (Fellers Test. at 119:12-16), and testified that "[t]he most significant unresolved dissatisfaction [with the FCE Plan] was that the Plan allowed only for one hospital and one children's hospital for non-emergency care." (Fellers Test. at 120:16-19.

B. Melwood Expresses Concerns with the FCE Plan

10. On July 27, 1998, Fellers sent a letter to Beckman regarding "Major Medical Issues," in which she raised a number of concerns or "issues" surrounding FCE's administration of the Plan. (Pl. Ex. 16 at 1, 5.) Although these issues were primarily administrative, Fellers also asked questions about coverage for Melwood employees who worked less than 30 hours per week, and sought clarification on deductibles. (Id. at 4-5.) The letter noted, "I hope that these issues are received in the manner I intend - not as complaints," and concluded, "I'm committed to making this plan work smoothly and need you and your staff's help to make that happen." (Id. at 1, 5.

11. Beckman responded to Fellers by phone immediately after he received her letter, and memorialized their conversation in a July 31 letter to Fellers. He did not hear back from her again about those particular issues. (Pl. Ex. 15; Beckman Test. at 29:25-30:21.

12. In late August 1998, Fellers, Frank Herron, *fn5 and other Melwood officials met with representatives of FCE, including Beckman and Lapin, to discuss additional issues that Fellers had not raised in her July letter. (Fellers Test. at 141:7-14.) In particular, the Melwood representatives explained that they were concerned about delays that their contract employees were experiencing in receiving their Plan identification cards and prescription drug benefits. (Id.

13. According to Beckman, the delays in the processing of ID cards were not FCE's fault, but were attributable to FCE's difficulty in receiving timely information from Melwood about its employees. (Beckman Test. at 32:15-17.) Nonetheless, in order to address Melwood's concerns, FCE set up a "fast fax" system so that Melwood could send information to FCE about its employees as soon as they began work. (Beckman Test. at 33:5-8; Porter Test. at 89:22-90:1.) FCE also implemented an 800 number so that the health care providers of Melwood contract employees who did not have an ID card at the time they sought treatment could call and confirm coverage. (Beckman Test. at 34:3-15.

14. The problems in the timely provision of prescription drug services occurred after FCE switched to a new provider, EBRX. As Beckman testified, against the advice of FCE, "Melwood insisted on being the very first client to go through the shake-out period with EBRX. And without any surprises there were some shake-out issues, as we anticipated." (Beckman Test. at 35:1-36:2.

15. Whether her frustrations were justified, Fellers continued to express dissatisfaction with the FCE plan, and in particular with FCE's handling of ID cards and prescription drugs. On October 6, 1998, Jeff Ramsey, who was the broker for the Melwood account, *fn6 wrote to Beckman to convey Fellers' feeling that "things have not improved," and that "[t]hese problems have caused considerable frustration on Melwood's part and Melwood is approaching the saturation point." Ramsey detailed the problems, many of which had been discussed at the August meeting, and warned Beckman to "develop a 'red alert' plan of action and get back to me quickly with a permanent resolution for these problems." This letter was cc'd to Melwood employees Herron, Fellers, and Betsy Bruno, and to FCE's Porter. (Def. Ex. 3.

C. Melwood Explores Alternative Health Care Plans

16. In August 1998, Fellers contacted Miller regarding health insurance for Melwood's contract employees. This was the first discussion between the two individuals - or between any representatives of Melwood and PSA - regarding the contract employees' health plan. (Fellers Test. at 145:16-146:11.) At all relevant times, Miller was unaware of the contract between FCE and PSA, and she had not been told ...

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