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Deutsch v. Health Insurance Plan of Greater New York

decided: December 11, 1984.


Appeal and cross-appeal from a final judgment of the United States District Court for the Southern District of New York, Leonard B. Sand, Judge, awarding plaintiff $138,015.92 in damages and prejudgment interest for breach of contract.

Oakes and Winter, Circuit Judges, and Clarie, District Judge.*fn*

Author: Oakes

OAKES, Circuit Judge:

This breach of contract case has resulted in three opinions handed down before trial, a bench trial with resultant findings of fact and conclusions of law*fn1 and comes to us with only five hotly contested issues from the United States District Court for the Southern District of New York, Leonard B. Sand, Judge. A contract between Health Insurance Plan of Greater New York (HIP) and Dr. Lawrence J. Deutsch was undeniably breached by HIP. The extent of the breach as well as the amount of damages are presently in dispute. We affirm.


HIP is a nonprofit "health maintenance organization" providing medical services to subscribers in Greater New York. In exchange for premiums, subscribers are entitled to medical care at one of HIP's groups, which are independent physician partnerships and professional corporations under contract with HIP. When specialized treatment, such as audiology testing, is required, the subscriber is referred to an outside specialist approved by HIP's Medical Control Board.

Dr. Deutsch, a Connecticut audiologist, and HIP -- through Dr. Earl Harris, the chairman of HIP's Special Services Fund -- entered into a contract in 1980 whereby Dr. Deutsch agreed to perform audiological evaluations and hearing aid consultations for HIP subscribers for $32 per patient visit, subject to certain limitations irrelevant here. In turn, HIP granted Dr. Deutsch the exclusive right to referral for all audiological evaluations and hearing aid consultations for the period from July 1, 1980, to June 30, 1982, subject to the exception that Edna Dvosin, with whom HIP was doing business with and was permitted to perform the same number of audiologist exams during each of the two years of the agreement as she had performed in the twelve months before the contract. The contract was subject to automatic renewal for an additional two-year period unless HIP gave notice in writing of cancellation at least sixty days' notice by Dr. Deutsch. While not mentioned in the contract, Dr. Deutsch was also told he could expect to perform related procedures, such as electronystagmography (ENG) tests, Brain Stem Evoked Response (BSER) tests, and hearing aid dispensing.

At the time the contract was signed Dr. Deutsch maintained an office as a sole proprietor in Queens, New York, and was a member of partnerships in Manhattan and Great Neck, Long Island, that performed audiological services. Soon after the contract was signed he also became a member of a similar partnership in Brooklyn. Dr. Deutsch was a one-third partner in all but the Brooklyn partnership, in which he had a 30% interest. Because Dr. Deutsch was unable to perform all of the HIP business himself, he arranged to have HIP patients tested at the offices of his partnerships. For audiological evaluations, the partnership would receive $20 of the $32 HIP paid Dr. Deutsch; for ENG tests, $40 of the $45 HIP paid Dr. Deutsch; and for BSER tests, $75 of the $100 HIP paid Dr. Deutsch. Suffice to say, Dr. Deutsch retained the remainder of the HIP fee.

HIP breached the contract's exclusivity provisions. Principally, the breach was attributable to the failure of the East Nassau Medical Group (East Nassau), a HIP affiliate, to refer any of its audiology patients to Dr. Deutsch. These patients would have been tested by Dr. Deutsch's partnership in Great Neck, known as Great Neck Audiology Associates. The district court found that some 3,946 audiological patients were sent by East Nassau to someone other than Dr. Deutsch or his partnership. On December 9, 1982, Dr. Deutsch sold his interest in the Great Neck partnership for $10,000 plus assumption of liabilities and lease of premises because the lack of HIP referrals was causing the business to operate at a loss.*fn2 The buyer, who was the only remaining partner, agreed to make no claim or demand against HIP and waived any share in future payments Dr. Deutsch might receive from HIP.

The district court also found several other breaches. Some 454 audiograms were performed by Ms. Dvosin in breach of the contract provision that limited the number of HIP referrals she could receive. Moreover, 228 other audiograms were performed by various other audiologists after referrals in breach of the contract. Thus, a total of 4,628 audiology patients should have been referred to Dr. Deutsch but were not.

The district court assessed damages by totaling Dr. Deutsch's personal net profit lost and his share of the partnerships' lost profits. The district court found $55,536 damages for the loss of Dr. Deutsch's net fee of $12 per audiological referral. It also found 582 ENG tests performed as a result of referrals outside the contract for which Dr. Deutsch would have received a net fee of $5 per test, or $2,910, as well as 73 BSER tests at $25 per test, or $1,285. Thus, total damages to Dr. Deutsch personally were found to be $60,271 less $3,934 savings in administrative expense, for a net profit lost of $56,337. The district court also awarded Dr. Deutsch, after subtracting the partnerships' expenses, $66,767 -- one-third of the $200,300 in lost partnership revenues -- less $2,400, Dr. Deutsch's share of the savings to one of the partnerships resulting from the breach, or $64,367 for lost partnership profits. Thus the total judgment prior to the award of interest was $56,337 plus $64,367, or a total of $120,704.

The bones of contention on appeal are as follows:

1. HIP claims that, despite the fact that it gave no notice of termination, Dr. Deutsch should not be able to recover damages for the renewal period -- the second two years of the contract -- since he knew full well that HIP was in partial breach and did not intend to send him audiological referrals from East Nassau. The district court awarded damages for the renewal term.

2. HIP claims that Dr. Deutsch is not entitled to recover any damages on behalf of his partnerships for tests that would have been performed. It concedes, however, that he is entitled to the $12 he would have received for each test, even though it was to be performed by a partnership. By contrast, Dr. Deutsch claims that he is entitled to recover the full $20 on behalf of his ...

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