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Cerner, Trinity reach $106M settlement in software dispute


By Joseph Conn
Posted: March 7, 2014 - 2:15 pm ET
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Cerner Corp. has settled a dispute with a North Dakota hospital over allegations of defective financial software with an arbitration settlement of more than $106 million, according to the company's Securities and Exchange Commission filings.

The dispute was between the Kansas City, Mo.-based software developer and Trinity Health, named in SEC filings as Trinity Medical Center, in Minot. With 584 staffed beds, Trinity operates the largest hospital in North Dakota, according to the American Hospital Association directory.

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The SEC filing, Cerner's 10-K annual report filed with the SEC on Feb. 5, said that in April 2012, Trinity informed the company it was “transitioning away from Cerner's patient accounting software solution and certain IT services provided by Cerner, alleging that the patient accounting solution purchased in 2008 was defective and did not deliver the promised benefits.” The SEC statement also said, “Cerner disputed the allegations.”

The 10-K also said the parties agreed to arbitrate the dispute, a hearing began Oct. 9, 2013, and on Dec. 10, “Cerner received an interim ruling on the arbitration awarding Trinity damages and awarding Cerner part of its counterclaim to collect accounts receivable.” Cerner reportedly “recognized a gross pre-tax charge of $106.2 million in the fourth quarter of 2013, which is included in the general and administrative expense in our consolidated statement of operation,” its 10-K said.

As of Dec. 28, “this matter has been resolved and paid,” according to the Cerner statement. Meanwhile, Trinity “is continuing as a client of Cerner for its clinical solutions,” it said.

An earlier Cerner SEC filing, an 8-K filed Dec. 12, 2013, referenced the arbitration as “pending,” and said an “interim award ruling” had been made. It said, “Cerner strongly disagrees with the award,” but anticipates taking a charge against its fourth-quarter earnings of 18 cents to 19 cents per share.

An even earlier SEC filing, a 10-Q quarterly report filed Oct. 25, 2013, said Trinity was claiming damages —supported by an expert witness—totaling $240 million, but Cerner's expert witness estimated Trinity's total damages “assuming any liability by Cerner” as ranging “up to $4 million.”

Trinity Vice President Randy Schwan confirmed a settlement had been reached and other facts as stated in Cerner's SEC filings but declined further comment on the case. Cerner spokeswoman Megan Moriarty said, since the arbitration was confidential, “We cannot share further details beyond what was included in the filing.” However, Moriarty added, “We shared this six months ago about a matter that dates back to 2008, and remain confident in our patient accounting solution, which is in place at 935 facilities worldwide, and take pride in helping our clients achieve successful clinical and financial outcomes.”

Nashville lawyer Michael Dagley of Bass, Berry & Sims, represented the hospital. Dagley, who has more than 30 years' experience in commercial litigation, said he was unable to discuss specifics of the case, but said the relationships between provider organizations and health information technology companies are unusual.

“Of all the different kind of commercial relationships I've seen, I've never seen anything like what I've seen with healthcare and IT vendors,” Dagley said. “I've never seen—so uniformly across all the vendors—(vendors) overpromise and under deliver. The other thing is the seeming lack of concern of the consequences. It's really remarkable.”

Typically, Dagley said, IT contracts are written by the vendor and contain clauses to eliminate “consequential damages.” Under such contract terms, “The damages are limited till you get your money back for the product,” but that doesn't include money spent on training, the cost of de-installing and converting to another system. “Those are all elements of consequential damages that the contract says the provider can't cover. That's why most hospitals have not sued. They see their legal rights as being confined to the contract.”

Alternative causes of action, Dagley said, can be found under state and common law provisions of consumer fraud, that is, representations of product capabilities and benefits that don't pan out in actual usage. Under the law, a manufacturer—including software developers—cannot contract around misrepresentations, he said.

As a result, healthcare organizations should keep all sales materials and bless those employees Dagley referred to “the pack rats.” Every organization has a few people “who save everything,” including meeting notes when sales pitches, product demonstrations and subsequent question-and-answer sessions are being held with vendors before any contract to purchase is signed. In preparing a consumer law case, everyone who has heard a sales pitch is interviewed and their notes and materials are gathered. In essence, “You try to recreate the meeting,” where the pitches were made, Dagley said.

“Courts have held companies' feet to the fire about functionality,” he said. “The cases are very favorable to consumers.”

Follow Joseph Conn on Twitter: @MHJConn


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