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U.S. Court In California Finds That � 501(c)(3) Does Not Contain Implied Right Of Action

 
 

HLD, v. 33, n. 1 (January 2005)

U.S. Court In California Finds That � 501(c)(3) Does Not Contain Implied Right Of Action

Named plaintiffs in these consolidated class actions against Sutter Health (defendant) received treatment for various injuries at the Alta Bates Summit Medical Center, a Sutter hospital. They also received corresponding bills for their treatment and were uninsured at the time of treatment. They sued in the U.S. District Court for the Northern District of California, alleging eight claims: (1) that they were the third-party beneficiaries of an agreement between defendant and the United States government pursuant to � 501(c)(3), that, in return for a substantial federal income tax exemption, defendant agreed to "(a) operate exclusively for charitable purposes; (b) provide affordable medical care to plaintiffs and the class; and (c) not pursue outstanding medical debt from plaintiffs and the class by engaging in aggressive, abusive, and humiliating collections practices" (First Amended Compl. � 60), and that defendant breached that contract by "(a) charging Plaintiffs and the Class the highest and full undiscounted cost of medical care; (b) charging Plaintiffs and the Class significantly more than its insured patients for the same medical services; (c) failing to use its net assets and revenues in the billions of dollars to provide affordable medical care to the Plaintiffs and the Class; and (d) utilizing aggressive, abusive and humiliating collection practices such as lawsuits, liens, and garnishments to collect such inflated and unreasonable medical debt from Plaintiffs and the Class" (id.); (2) that, "by 'admitting Plaintiffs and the Class into its hospitals for medical care, Defendant Sutter undertook an express and/or implied contractual obligation to charge Plaintiffs and the Class no more than a fair and reasonable charge for such medical care' (id., � 65)" and "that defendant breached its contract 'by charging Plaintiffs and the Class the highest and full undiscounted cost for medical care' (id., � 66)"; (3) that defendant violated the Fair Debt Collection Practices Act (FDCPA) because "Sutter's and the collection agencies' conduct constitute aggressive, abusive and humiliating and unfair collection practices"; (4) that plaintiffs entered into a contractual relationship with defendant and that defendant breached its duty of good faith and fair dealing by "(a) charging Plaintiffs and the Class the highest and full discounted cost of medical care; (b) charging Plaintiffs and the Class a higher amount for medical services than it charged its insured patients for the same services; (c) charging Plaintiffs and the Class unreasonable charges for medical care; and (d) utilizing aggressive, abusive, and harassing collection practices such as collection lawsuits, liens, and garnishments to collect such outstanding grossly-inflated medical debt from Plaintiffs and the Class"; (5) that defendant breached "a charitable trust allegedly created when defendant accepted federal tax-exemptions under � 501(c)(3) (id., � 79)"; (6) that defendant violated � 17200 of the California Business and Professions Code, realleging their preceding claims and adding that "defendant's conduct constitutes fraudulent business practices insofar as plaintiffs 'are likely to be deceived by Sutter's advertising tag line that it is "Community Based. Not for Profit"' (id., � 88)"; (7) that defendants violated the Consumers Legal Remedies Act (CLRA) by engaging in various deceptive practices; (8) that defendant has been unjustly enriched at the expense of plaintiffs by failing "to provide affordable medical care to Plaintiffs and the Class despite receiving millions of dollars in federal tax exemptions for such purpose" and, despite its charitable, non-profit, tax-exempt status, failing "to use its substantial assets and revenues to provide affordable medical care to Plaintiffs'(id., � 99)." In short, plaintiffs alleged that defendant's � 501(c)(3) tax-exempt status created a contract for the benefit of the medically indigent and that defendant breached the terms of that contract by charging uninsured patients allegedly inflated rates for medical services. Defendant moved to dismiss.

The U.S. District Court for the Northern District of California found that plaintiffs had failed to show that � 501(c)(3) included a right of action. Plaintiffs acknowledged that the statute contained no express right of action but contended that the statute contained an implied right of action by arguing that � 501(c)(3) provided for the creation of contracts with the government. The court noted, however, that "a presumption exists against construing a statute as creating or authorizing a contract, Nat'l R. R. Passenger Corp. v. Atchison, Topeka and Santa Fe Ry. Co., 470 U.S. 451, 465-66 (1985)," and that a "party who asserts a contractual right must 'overcome this well-founded presumption,' and must do so by 'identifying a contract within the language of the regulatory statute and [by] defining the contours of any contractual obligation.'" Id. The court found that plaintiffs had failed to make this showing because they did not point to any contractual provisions appearing within � 501(c)(3) or to any language within the statute that defined the contours of a contractual obligation.

The court also explained that the "decisions cited by plaintiffs only serve to demonstrate the difficulty of establishing standing under a third-party beneficiary theory." The court also found that plaintiffs' complaint failed to state an FDCPA claim because defendant was a creditor and not a debt collector and thus was not governed by the FDCPA. In noting that the U.S. Supreme Court has indicated that "'[i]n the usual case in which all federal-law claims are eliminated before trial, the balance of the factors to be considered under the pendent jurisdiction doctrine--judicial economy, convenience, fairness, and comity--will point toward declining to exercise jurisdiction over the remaining state-law claims,'" Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 n. 7 (1998), the court declined to exercise jurisdiction over plaintiffs' state law claims under 28 U.S.C. 1367(c)(3), stating that, other than ruling on the federal claims, the court had "invested no time on the case" and that there would therefore be "no duplication of effort to remit the remaining claims to state court."

Accordingly, "convinced that any stab at amendment of the federal claims would be futile," the court denied leave to amend and, because supplemental jurisdiction would not be exercised, entered final judgment dismissing plaintiffs' federal claims and dismissing plaintiffs' state law claims without prejudice to refile in state court.

Darr v. Sutter Health, No. C 04-02624 WHA, consolidated with Muhammad v. Sutter Health, No. C 04-02837 WHA (N.D. Cal. Nov. 30, 2004).

Health Lawyers thanks Jesse A. Witten, of Jones Day, in Washington, DC for sending us a copy of this decision.

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