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October 28, 1983



The opinion of the court was delivered by: SAND



 The plaintiff, Dr. Lawrence J. Deutsch, has brought this action for breach of contract and misrepresentation in connection with a contract he entered into with defendant Health Insurance Plan of Greater New York ("HIP"), under which he was to provide defendant with medical testing services. Defendant has moved pursuant to Fed.R.Civ.P. 56 for summary judgment, or, in the alternative, partial summary judgment. Plaintiff has cross moved for partial summary judgment with respect to those issues that defendant has raised in its motion and the first two affirmative defenses asserted in defendant's amended answer.

 For the reasons stated herein, defendant's motion for summary judgment is denied and its motion for partial summary judgment is granted with respect to plaintiff's claim for misrepresentation arising out of events occurring after July 1, 1982. As to all other issues, plaintiff's cross motion for partial summary judgment is granted.

 We also hold that Dr. Deutsch's recovery for breach of contract should not be diminished by the amount of the patient fees he would have had to pay to his medical partners.


 The following facts are treated as undisputed for purposes of this motion, except where otherwise noted. Defendant HIP is a "health maintenance organization" that provides medical services to subscribers in the Greater New York area. HIP subscribers remit a periodic premium to HIP in exchange for which they are entitled to health care at one of HIP's "medical groups" -- "independent" *fn1" physician partnerships and professional corporations under contract with HIP. When specialized treatment is required that cannot be provided by the subscriber's regular medical group, the subscriber is referred to an outside specialist approved by HIP's Medical Control Board.

 The plaintiff has been an audiologist *fn2" for the last twenty years. Audiology testing is one of the services for which HIP retains specialists outside of its regular medical groups. On June 4, 1980, Dr. Deutsch entered into a contract with HIP under which he was granted "the exclusive right" (subject to one limited exception) *fn3" "to furnish to it all audiological services which it may require." (P 1). In exchange for his services, Dr. Deutsch was to receive a fee of $ 32.00 per patient.

 The agreement was to run from July 1, 1980 to June 30, 1982. However, it was subject to automatic renewal for an additional two-year period unless HIP notified Dr. Deutsch in writing at least sixty days prior to the termination date that it did not wish to continue. HIP also had the ability to terminate the contract at any time if its Medical Control Board determined that Dr. Deutsch's services were "professionally substandard." *fn4" Dr. Deutsch was empowered to cancel the agreement at any time on sixty days' notice. The contract also provided for the renegotiation of the patient fees at the time of renewal. *fn5"

 Plaintiff alleges that in May of 1980, prior to the signing of the contract, representatives of the East Nassau Medical Group, a HIP affiliate, learned of its provisions and objected to the requirement that they send their audiology patients to Dr. Deutsch. East Nassau apparently had been utilizing another audiologist for some time, and did not wish to change allegiance. Dr. Deutsch alleges that these objections were not disclosed to him prior to the signing of the contract, although he did, of course, learn of them shortly thereafter. Initial efforts to resolve this dispute proved unavailing, and Dr. Deutsch commenced performance of the contract without receiving any referrals from the East Nassau Group. *fn6"

 At various times in the months that followed, Dr. Deutsch complained to HIP that he was not receiving all of the referrals he had been promised. However, he did not bring or specifically threaten a lawsuit. The parties have advanced two different reasons for this forebearance: first, that Dr. Deutsch believed that he could work out matters amicably with HIP, and, second, that he did not want to jeopardize the renewal of the contract. *fn7"

 Neither Dr. Deutsch nor HIP took any action to prevent the automatic renewal of the agreement on July 1, 1982. Nor did the parties seek renegotiation of the patient referral fees at that time, as they were contractually empowered to do. Dr. Deutsch continued to receive HIP patients and $ 32.00 fees after the renewal date, although not, of course, from the East Nassau Group.

 This action was brought in February, 1983. The amended complaint asserts two causes of action. The first seeks contractual damages for the fees that Dr. Deutsch did not receive with respect to the audiology patients from the East Nassau Medical Group. The second claim sounds in fraud. Plaintiff asserts that, as the result of defendant's allegedly knowing misrepresentation that he would receive all of HIP's audiology patients, he agreed to accept a lower per-patient fee and expended funds for office space in Brooklyn and Great Neck, New York that he would not otherwise have needed. Plaintiff has also asserted a claim for punitive damages based upon this alleged fraud.


 Defendant has asserted five grounds in support of its motion. One would dispose of the plaintiff's entire claim. Three would prevent him from recovering any damages for the renewal term of the contract (after July 1, 1982). The fifth would strike only his misrepresentation claim for the renewal term of the contract. We treat these arguments in the order outlined above.

 1. HIP's right to terminate the contract at will.

 HIP's first argument is that its contract with Dr. Deutsch was terminable at will as a matter of public policy. This conclusion rests by analogy upon the law of attorney-client relationships under which a client may terminate a retainer agreement at any time without cause. E.g., Demov, Morris, Levin & Shawin v. Glantz, 53 N.Y.2d 553, 556, 428 N.E.2d 387, 389, 444 N.Y.S.2d 55, 57 (1981).

 Although no New York case supports the view, HIP reasons that a similar principle must obtain with respect to the physician-patient relationship. Moreover, the argument continues, where one physician contracts to make referrals to another, the same policy considerations would make that agreement freely terminable as well. Therefore, HIP concludes, the East Nassau Medical Group had an absolute right not to refer patients to Dr. Deutsch despite the contractual provisions to the contrary. *fn8"

 Although, as noted, no New York case addresses this question, a line of authority from other jurisdictions contradicts defendant's position. In Cobb County-Kennestone Hospital Authority v. Prince, 242 Ga. 139, 249 S.E.2d 581, S.E.2d 581 (1978), the Supreme Court of Georgia upheld hospital regulations limiting the staff physicians' selection as to the equipment on which certain diagnostic tests could be performed. Other cases *fn9" have upheld similar regulations restricting the use of hospital equipment to an individual physician or group of physicians to the exclusion of the rest of the hospital staff. The effect of such regulations is to require that certain tests, if they are to be performed at all in the hospital, must be performed by the designated ...

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