Judge Unlikely To Toss Fight Over COVID-19 Biz's Soured Deal

By Christopher Cole
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Law360 (November 18, 2020, 6:52 PM EST) -- A Maryland federal judge said Wednesday he was leaning against throwing out a wide-ranging suit accusing several interconnected laboratories and individuals of plotting to shut down an emerging COVID-19 testing business and steal its customers.

The suit brought by Annapolis-based Coastal Laboratories Inc. against four lab service corporations, a New Orleans doctor and four other people claims that after Coastal reached a deal to obtain coronavirus testing services, the defendants pulled the rug out from under it by cutting off an online test portal and contending it still owed money under the agreement.

But the real goal, according to the suit, was to snatch away Coastal's business — customers such as Maryland nursing homes — by inviting them to instead sign up for COVID-19 tests with the defendants' labs, including Louisiana-based Cormeum Lab Services LLC.

The contract disagreements between Coastal and the various companies and individuals led to two tracks of litigation this summer: the Maryland tortious interference case brought by Coastal and a separate breach of contract suit against Coastal in New Orleans federal court.

But Cormeum and its co-defendants in Maryland urged the judge in a dismissal hearing Wednesday to jettison Coastal's complaint and instead allow the Louisiana court to resolve the fight in the interests of "judicial economy," since the two disputes are largely parallel.

U.S. District Judge Richard D. Bennett was disinclined to do so and all but explicitly said he will reject the dismissal motion in an opinion issued by Friday. In a lengthy hearing that he said covered so many bases it could be worth "half a semester" of law school, the judge said there are big differences between the suits, not least of which, the case in his court involves seven more parties.

"I have a far bigger case with far more defendants," he said. "This case is much larger, more intertwined."

Judge Bennett said he wanted to get his opinion written in short order so that U.S. District Judge Susie Morgan in New Orleans would know his views that "weigh against" the Louisiana court proceeding with the separate suit.

At the heart of the Maryland tort suit is an agreement reached by Coastal to buy two Arizona labs. They would provide lab services to support an infection control and prevention program run by Annapolis-based AMSOnSite Inc., which formed Coastal to make the purchase, according to court records.

While the deal was in negotiation, "the deadly COVID-19 pandemic broke out and caused the immediate need for laboratories to test individuals for infection by the virus," the complaint said.

AMS "had a substantial number of then-existing and valuable contractual relationships with nursing homes for which AMS provided the infection control and prevention services," according to the complaint. "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."

The complaint describes a complex web of events following the negotiation of the lab purchase by Coastal involving various companies in Annapolis, New Orleans and Charleston, South Carolina, and several contracts including a technology transfer agreement — all of which are now part of the ongoing legal battle.

Key to the labs' expansion into COVID-19 testing was obtaining an emergency use authorization, or EUA, a regulatory step necessary to conduct and bill for tests. Rather than obtaining an EUA to conduct its own testing through the Arizona labs, which was becoming increasingly critical as COVID-19 spread, Coastal was eventually forced to use one of the defendant's labs, 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 equip and operate at the Arizona labs," the suit said.

According to the legal action, the defendants also denied Maryland Coastal customers' COVID-19 test results "by maliciously blocking access to a web portal" and "then used that denial of access as means to coerce [them] into terminating their relationships with [us] and contracting directly with defendants."

One of Coastal's lawyers said in court Wednesday that the defendants then tried to justify their refusal to grant access to the portal by claiming Coastal was overdue on payments required under the original purchase deal.

The remote hearing focused on four main issues: which among the variety of contracts has a binding forum selection clause; whether the "first to file" rule meant that the Maryland suit could be tossed; the court's jurisdiction; and whether Coastal had failed to state a claim. Judge Bennett signaled he was leaning toward the plaintiffs on each of those factors, though some, such as jurisdiction, could still be argued down the road.

Tarak Anada of Jones Walker LLP, representing the defendants, told the judge that a laboratory service contract — not the original purchase deal — was the common thread through all of the related disputes, and it's the one with a New Orleans forum selection clause.

But the judge questioned how he could "sever out" the lab services agreement from the rest of the web of contracts at issue and use that as a basis for sending the whole case to New Orleans. "I don't know how it would be workable, quite frankly."

Judge Bennett cited the presumption in favor of plaintiffs at the dismissal stage in saying he would likely keep the litigation afloat, though he has yet to formally write an opinion.

The plaintiffs are represented by Andrew C. White, Steven N. Leitess and William N. Sinclair of Silverman Thompson Slutkin White LLC.

The defendants are represented by Tarak Anada and Taylor Wimberly of Jones Walker LLP and Phillip Chalker of The Law Office of Phillip E. Chalker.

The case 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.

--Additional reporting by Lauren Berg. Editing by Orlando Lorenzo.

For a reprint of this article, please contact reprints@law360.com.

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Case Information

Case Title

Coastal Laboratories, Inc. et al v. Jolly et al


Case Number

1:20-cv-02227

Court

Maryland

Nature of Suit

Contract: Other

Judge

Richard D. Bennett

Date Filed

July 31, 2020

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