Law360 (August 3, 2020, 6:27 PM EDT) -- A medical lab and a clinical infection control company filed suit in Maryland federal court against their former business partners in a venture to provide respiratory and COVID-19 testing for nursing homes, saying the former partners held test results hostage in order to steal away business.
AMSOnSite Inc. and its laboratory company Coastal Laboratories Inc. said their former business partners attempted to strong-arm them out of their COVID-19 testing business and steal their nursing home clients by locking them out of the test results, according to the Friday complaint.
The suit includes claims of tortious interference with prospective business relations, tortious interference with economic relations and civil conspiracy. The plaintiffs are seeking punitive and actual damages, costs and attorney fees.
AMS administers an infection control management program, Sterisis, designed specifically for nursing homes that helps facilities create protocols, training and other measures to prevent and control the spread of infection, including routine noninvasive respiratory testing, according to the complaint.
In 2017, AMS was looking to partner with a laboratory that would allow it to test and analyze the samples collected through the Sterisis program, and eventually began talking to a lab in Tennessee, according to the suit. When those talks fell through, AMS said it eventually formed Coastal and put in to buy two labs in Arizona.
While negotiating the sale of the labs, the coronavirus pandemic broke out, creating the immediate need for labs to test individuals for the deadly virus, AMS said. On Feb. 29, the first U.S. death from the virus was reported at a nursing home in Kirkland, Washington, according to the suit.
"Nursing homes were, and remain, among the most in need of immediate COVID-19 testing because their residents are the highest risk population for serious illness or death if they contract the virus," AMS said. "Coastal and AMS immediately recognized that the COVID-19 pandemic could ravage nursing homes and thus began efforts to expand services to meet anticipated nationwide need to control the spread of the infection."
During the negotiations to buy the Arizona labs, AMS and Coastal said they were assured that the labs were properly equipped to handle current non-COVID-19 testing volume, but were told to take certain steps to keep up with COVID-19 testing. That advice included adding lab equipment, gaining regulatory approval and improving reporting and billing systems and software, according to the suit.
Z DiagnostiX LLC, a company hired to help AMS and Coastal get the labs ready for COVID-19 testing, assured the companies that it could obtain the necessary regulatory approvals to make sure AMS and Coastal could quickly begin COVID-19 testing, according to the suit.
But ZDX never performed any of the work it said it would, AMS and Coastal said, despite being paid $90,000 per month before the companies fired it in May.
On March 18, Coastal bought the Arizona labs for $3 million, according to the complaint.
Satisfied that everything was running smoothly, AMS and Coastal immediately began contacting their nursing home clients to offer the COVID-19 testing service, according to the complaint, and entered into contracts with dozens of facilities.
As all of this was going on, however, some of the individuals facilitating the lab sales to AMS and Coastal — defendants Tarun Jolly, James F. Silliman, David J. Vigerust and Benjamin Williamson — created their own company called Sensiva Health LLC to administer their own COVID-19 testing, according to the complaint.
Unbeknownst to AMS and Coastal, ZDX redirected some of its personnel from the labs in Arizona to Cormeum Lab Services, the defendants' laboratory in New Orleans, and even charged Coastal for their hotel rooms, according to the suit. This meant that the defendants' business received the U.S. Food and Drug Administration's emergency go-ahead for COVID-19 testing, while Coastal did not, the plaintiffs said.
The very next day, Silliman told Coastal that it could send all of its COVID-19 test samples to Cormeum while it waited for FDA approval, according to the complaint, and all Coastal had to do was pay $87 per test.
So, AMS sent its samples to Cormeum, but because the samples also had to be tested for other respiratory pathogens, Cormeum would test for COVID-19 and then send the samples back to Coastal for further testing, according to the suit.
"Defendants created this cumbersome, inefficient process for the purpose of cutting Coastal out of the COVID-19 testing business that the defendants purportedly were assisting Coastal to operate at the Arizona labs," AMS and Coastal said.
In July, Cormeum began making aggressive demands for payment of invoices prior to the agreed due dates and lied about Coastal being behind on its payments, according to the complaint. Coastal said it had paid Cormeum more than $1.7 million.
A few days later, Cormeum's attorney emailed Coastal a proposed settlement agreement in which Coastal's alleged "past due" invoices would be forgiven if Coastal forfeited to Cormeum the equipment and supplies it had loaned to Cormeum to facilitate the COVID-19 testing, assigned to Cormeum all of its claims for Medicare reimbursement for COVID-19 testing and formally introduced and referred to Cormeum its current and prospective third party customers.
"Defendants' scheme at this point was quite clear," AMS and Coastal said. "In essence, Cormeum now insisted that Coastal surrender its entire business at a time when Coastal had not committed any default of any then-existing agreement with Cormeum."
After sending the proposed "settlement," Cormeum suddenly blocked AMS and Coastal from access to the web portal where test results were to be reported, according to the complaint. AMS' nursing home customers were also cut off from accessing the portal, the company said.
"This act was especially egregious because defendants knew that nursing homes were required to provide daily test results to state health departments," AMS and Coastal said. "By cutting off nursing homes' ability to comply with state authorities' reporting requirements, defendants created an unreasonable risk to public health and intentionally put thousands of lives at risk by preventing the nursing homes and the states from monitoring and adjusting to the deadly COVID-19 threat."
Sensiva Health and counsel for the plaintiffs did not immediately respond to requests for comment Monday. Contact information for Z DiagnostiX LLC, Cormeum Lab Services and the individual defendants was not immediately available.
Coastal Laboratories and AMSOnSite Inc. are represented by Andrew C. White, Steven N. Leitess and William N. Sinclair of Silverman Thompson Slutkin & White LLC.
Counsel for the defendants was not immediately available.
The suit is Coastal Laboratories Inc. et al. v. Jolly et al., case number 1:20-cv-02227, in the U.S. District Court for the District of Maryland.
--Editing by Jay Jackson Jr.
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