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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND VIRTUAL PHYSICAL CENTER -, ROCKVILLE, LLC, et al. v. PHILLIPS MEDICAL SYSTEMS NORTH AMERICA, INC., et al. : : : : : Civil Action No. CCB-05-03252 : : ...o0o... MEMORANDUM Plaintiffs Virtual Physical Center - Pikesville, LLC, Virtual Physical Center - Rockville, LLC, and Mid-Atlantic Radiology Specialists, LLC ( collectively "Virtual Physical") claim damages in an action arising out of the sale of medical equipment by defendant Phillips Medical Systems North America, Inc. ("Phillips"). Virtual Physical alleges that Phillips breached express and implied warranties in its sale of computed tomography (CT) scanning machines. Additionally, Virtual Physical alleges that Phillips committed fraud and negligent misrepresentation in its characterizations of the safety of the machines sold to Virtual Physical. Philips counterclaims that Virtual Physical refused to pay under a service agreement entered into by the parties thereby breaching that contract. Now pending are Phillips's motion for summary judgment and Virtual Physical's motion for partial summary judgment. For the reasons that follow, I will grant Phillips' motion for summary judgment, and deny Virtual Physical's motion for partial summary judgment.

BACKGROUND Virtual Physical is a limited liability company which had locations in Rockville and

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Pikesville, Maryland. Its primary business is imaging of the human body to screen for asymptomatic and potentially life-threatening diseases generally not detectable by physical exam or standard screening tests. In 2000, Virtual Physical contacted Phillips, a leading manufacturer of CT equipment, to discuss Virtual Physical's desire to offer whole-body CT screens to the general public. The COO of Virtual Physical, David Klingler, had a long-standing friendship with a Philips Regional Sales Manager, Stephen Meeder, and Klingler contacted Meeder about purchasing Phillips' CT Secura, a full-body CT scanning product. Under the FDA regulatory scheme, CT scanners require pre-market notification clearance (510(k) clearance) from the FDA. The CT Secura, a diagnostic X-ray system, received that clearance. Its 510(k) summary noted it was indicated for use to "produce cross-sectional images of the body by computer reconstruction of x-ray transmission of data" and was intended for use "by a physician in the diagnosis and planning phases of patient conditions and treatment." (Pl.'s Mem. at Ex. E, CT Secura MV 510(k) Summary, dated May 12, 2000.) Despite the clearance of some CT scanners, the FDA's website also noted that no data had been presented to the agency indicating that tests performed for screening, i.e. testing individuals without symptoms, is safe. (See Whole Body Scanning Using Computed Tomography, FDA Website, http://www.fda.gov/cdrh/ct/regulatory.html (last updated April 17, 2002)) The FDA thus concluded that individual physicians could decide whether asymptomatic patients could benefit from these CT scans, but noted that statements indicating the FDA has approved CT screening scans are incorrect. (Id.) Throughout 2000, Philips and Virtual Physical engaged in negotiations about purchasing the CT Secura. Virtual Physical alleges that, despite the FDA restrictions noted above, Phillips

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understood that Virtual Physical intended to use Phillips' machines to conduct whole-body screens on the general public. In his deposition, Meeder admitted that Klingler told him that Virtual Physical was planning to do screening services on patients without doctor referrals. (Pl.'s Opp. Mem. at Ex. B, Meeder Dep. at 14-15.) When asked whether anybody at Phillips told him not to mention that screenings with the Secura were inappropriate, Meeder testified: Q: Did anyone from Phillips ever say to you that this equipment should not be used for screening purposes? A: Not at all. Q: Did anyone from Phillips ever tell you that the word screening is a bad word and it shouldn't ever be used in the sales process? A: Not at all. Q: Did anyone from Phillips ever tell you, either in training, or later as you worked with the company in sales, that the CT scanners should only be used with a physician referral? A: I don't even get into that. I don't even listen to that, and I don't even know of anything like that. (Id. at 15-16.) Virtual Physical alleges that, in making the sales pitch, Phillips specifically told them that the Secura was a safe product. Jonathan Hazman, one of the owners of Virtual Physical, Inc., testified that Meeder told him the radiation emitted from the CT scanner was the equivalent of four to six chest x-rays or "flying from the east coast to the west coast." (Pl.'s Opp. Mem. at Ex. A, Hazman Dep. at 19, 31.) Meeder also told Virtual Physical that the CT Secura emitted the lowest dose of radiation on the market, and Hazman testified that Virtual Physical planned its marketing scheme around the fact that the CT Secura emitted the lowest dose of radiation on the market. (Id. at 56.) In the negotiations with Phillips, Virtual Physical alleges that it told Philips it was seeking a "partnership ... not a transactional sale," (Pl.'s Opp. Mem. at Ex. C, E-mail from Joseph Marzullo to Stephen Meeder and Bruce Heinz, dated Jun. 22, 2006) and Meeder also 3

characterized the relationship as a partnership. (Id. at Ex. B, Meeder Dep. at 26-27.) Accordingly, Virtual Physical asked Philips to draft its marketing materials. Virtual Physical now argues that those marketing materials were deceptive and greatly understated the risks associated with using the Secura. The radio advertisements distributed by Phillips read: "Healthcare is changing. In a way, it is getting - well - healthier ... Our new CT scanner from Philips takes pictures faster, so your doctor gets the results sooner - and so do you. And it uses less radiation, so it's safer for you and your whole family - especially kids. It was easy for us to choose this new CT scanner." (Id. at Ex. I, Radio Advertisements, at 1-2.)1 Virtual Physical and Philips entered into a contract on March 13, 2001, for the lease of a Philips CT scanning machine. In what appears to be the Contract's first page, the Contract dictates the payment and delivery terms and the requested shipping date. (Pl.'s Opp. Mem. at Ex. L.) In addition, the first page also provides that the "Warranty Terms" are "12 months standard." The conditions of sale listed in the back of the contract include a warranty section, which provides: THE WARRANTIES REFERENCED IN THIS SECTION ARE THE ONLY ONES MADE BY PHILIPS AND ARE EXPRESSLY IN LIEU OF ANY OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IN LIEU OF ANY OTHER OBLIGATIONS OR LIABILITY ON THE PART OF PHILIPS.

Phillips also produced several print advertisements that Virtual Physical alleges depicted healthy families. One, depicting a smiling mother and daughter stated: "She taught you right from wrong. And now that she needs a CT exam, you can return the favor. Tell her about our new CT system from Philips. It uses the least amount of radiation to create images. And it's so much faster, she'll be back to giving you advice in no time. To learn more about our CT scanner, ask your doctor or give us a call." (Id. at Ex. I.) 4

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(Id.) (all caps in original) In addition to the contract, the defendant attaches a warranty sheet with a section titled "One Year System Warranty," which provides: "Philips warrants to Customer that the CT System to be delivered and installed will be free from defects in material and manufacturing workmanship which appear within one (1) year after delivery at the Customer site." (Def.'s Reply at Ex. K, One Year System Warranty at 1.) Virtual Physical leased two CT Secura machines from Philips with these contract terms, with the latter delivered, according to the defendant, no later than November 30, 2001. (Def.'s Reply, at 6.) On June 5, 2001, the L.A. Times ran an article that discussed the risks associated with CT scanners. (Marlene Cimons, FDA Raises Body Scan Safety Issue, LA Times, June 5, 2001, attached at Def.'s Mem. at Ex. F.) That article noted that some Food and Drug Administration officials were worried that full-body CT screening scans "may be exposing thousands of Americans to unnecessary and potentially dangerous radiation," and that CT scans of the chest delivered 100 times the radiation of a conventional chest x-ray. The article also stated that CT scanners can deliver between .2 to 2 rads of radiation during a single scan depending in part on a patient's body size. A person identified as a Virtual Physical spokesman, responding to the FDA and doctor's concerns, was quoted in the article, stating that the company thought the products' benefits outweighed the risks. The article further noted that a study was being conducted by the state of New York to investigate whether CT scanning was effective in detecting lung cancer in smokers. No Philips machine was specifically mentioned in the article. Virtual Physical claims that while it was being contacted for the LA Times piece, it was simultaneously contacted by a retired radiologist for a rebuttal article. Published ten days after the LA Times piece, Doctors Glueck and Cihak directly addressed the LA Times article and

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argued that full-body CT screening scans were safe. (Michael Glueck and Robert Cihak, Letting CT Scans out of the Bag, www.worldnetdaily.com, June 15, 2001, attached at Pl.'s Opp. Mem. at Ex. N.) Citing to a Johns Hopkins study, the doctors argued that the benefits of such screenings were significant, and that "the radiation dose from a whole-body CT scan is safe." The doctors also cited a New York Weill Cornell Center study that estimated that chest CT scans "could save more than 100,000 lives annually in the United States by detecting lung cancer" at an early stage. Virtual Physical states that this article confirmed Philips's representations that their products emitted a safe level of radiation relative to the benefits received from the tests, though the article did not directly rebut the claim in the LA Times article that a full-body CT scan emitted 100 times the radiation of a chest X-ray. Virtual Physical also notes that several articles published since the LA Times article have argued whether such screenings are safe and effective with no consensus appearing to have been definitively reached. (See Pl.'s Opp. Mem. at 12-13.) While Virtual Physical's business was strong for the first part of 2001, leading it to open another location in Rockville, Virtual Physical admits that business slowed around September 11, 2001. Nevertheless, Virtual Physical leased another CT Scanner around November 30, 2001, again claiming to rely on the representations of Philips that the device was safe. On December 18, 2003, Virtual Physical executed two Customer Care Service Agreements ("Service Agreements") for the service and maintenance of the Philips's CT Scanning machines for a period of three years. (Compl. at Ex. C, D.) These Service Agreements state that "[t]he Agreement may be terminated by Customer upon replacement of the Equipment or upon the termination of the underlying lease for the Equipment, upon 30 days prior written notice." Virtual Physical's business did not improve in 2003 and 2004, and the business went

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through a strict foreclosure and transfer of assets to Mid-Atlantic. On April 8, 2005, Mid-Atlantic shut down the business. On April 21, 2005, Virtual Physical informed Philips of its decision to shut down its operations. (Am. Compl. at

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