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Sheet Metal Workers Local No. 20 Welfare and Benefit Fund v. CVS Pharmacy, Inc.

United States District Court, D. Rhode Island

March 31, 2018

SHEET METAL WORKERS LOCAL NO. 20 WELFARE AND BENEFIT FUND, and INDIANA CARPENTERS WELFARE FUND, on behalf of themselves and all others similarly situated, Plaintiffs,
CVS PHARMACY, INC., Defendant. PLUMBERS WELFARE FUND, LOCAL 130, U.A., on behalf of itself and all others similarly situated, Plaintiffs,
CVS PHARMACY, INC., Defendant.



         Presently before the Court is Plaintiffs' Motion for Leave to File First Amended Complaint (ECF No. 56), in which they ask permission to update their story about alleged fraud spearheaded by Defendant CVS Pharmacy, Inc., (“CVS”). In particular, Plaintiffs would like to revise their complaint to comport with information they learned in discovery, namely, that Pharmacy Benefit Managers (“PBMs”), who facilitated generic-drug purchases between Plaintiffs and CVS, were allegedly aware of and abetted CVS's fraud. But not only do Plaintiffs seek to amend their factual allegations; they also hope to add two claims under the Racketeer Influence and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968. For the reasons that follow, Plaintiffs' Motion is GRANTED.

         I. Background[1]

         Alleging negligent misrepresentation, unjust enrichment, and violations of state-consumer-protection acts, Plaintiffs had it in their original complaint that CVS overcharged them by collecting more for generic drugs than it was allowed under the National Council for Prescription Drug Program (“NCPDP”). See Sheet M Workers Local No. 20 Welfare and Benefit Fund v. CVS Health Corp., 221 F.Supp.3d 227, 229-31 (D.R.I. 2016) (denying CVS's motion to dismiss). According to this complaint, a key component of CVS's fraud was its Health Savings Pass (“HSP”) program, which CVS developed to compete with big-box retailers (e.g., Wal-Mart, Inc.) who had recently slashed prices on certain generic drugs. See Id. at 229-30.

         Instituted November 2008 and discontinued February 2016, the HSP program allowed individual cash-paying CVS customers to access discounted prices by paying an annual membership fee. (Pls.' Proposed First Am. Compl. (“PAC”) 3, ECF No. 58-1). Though nominal, the fee paid substantial dividends. CVS saved large sums by purposefully structuring the HSP program to prevent Plaintiffs, and others similarly situated, from accessing the program's discounts while remaining (or so it thought) in compliance with NCPDP's requirement that CVS charge Plaintiffs no more than the general public, that is, no more than the “Usual and Customary” (“U&C”) price for drugs. (Id. at 1-4, 43.) The thought was that because the HSP price was not available to cash customers, but only to HSP members, CVS was not required to offer that price to Plaintiffs, but could instead report the higher price paid by non-HSP-member cash customers as the U&C price.[2] (Id. at 25.) This allowed CVS to retain cash customers without passing on the price cut to purchasers like Plaintiffs. (Id. at 20-24.)

         Since filing its original complaint, Plaintiffs claim discovery has revealed a more complex scheme whereby CVS did not act alone, but rather enlisted the help of various other entities to develop and conceal the gambit described above to bilk Plaintiffs and others out of billions of dollars. (Id. at 31-43.) One of these entities was Caremark, LLC, (“Caremark”). Caremark helped CVS design the HSP program, and in particular, developed the nominal-membership-fee feature as a way to compete with the big-box stores for cash customers without offering similar savings to Plaintiffs. (Id. at 20-24). Caremark also administered the HSP program from its inception in 2008 to 2013, when Medical Security Card Company (“ScriptSave”) took it over. (Id. at 26-27.) Both Caremark and ScriptSave recognized that the program allowed CVS to “‘protect' loyalty member price[s] from third parties.” (Id. at 29.) But, anticipating that these third parties would consider such protection a bug, not a feature, of the program, they worked with CVS to keep it a secret. (Id. at 31.)

         Plaintiffs also allege that four of the country's largest PBMs - Caremark, Express Scripts, Inc., OptumRx, Inc., and MedImpact Healthcare Systems, Inc. - were in on the scheme, too. (Id. at 31-43.) PBMs contract with health plans like Plaintiffs to reimburse pharmacies like CVS when a plan's members fill their prescriptions. (Id. at 4-5, 10.) PBMs ostensibly work on behalf of their health-plan clients to, among other things, negotiate low pharmacy drug prices. (Id.) The interests of PBMs and health plans are not perfectly aligned, however. (See id. at 15-17.) Health plans want cheap drugs; PBMs want the difference between what they pay pharmacies for drugs and what they charge health plans for those drugs to be as large as possible. (Id.) In other words, the difference between what PBMs pay and what they charge is their gain, but the health plans' loss. (See id.)

         The PBMs allegedly increased this spread by deliberately hiding from health plans the fact that CVS was not reporting its HSP price as its U&C price. (Id. at 31.) Each PBM developed an internal policy interpreting definitions of U&C price in their respective contracts with CVS as excluding HSP prices. (Id. at 31-43.) Plaintiffs allege that this was no coincidence - that CVS prompted the PBMs to keep the ruse a secret, and that each PBM knew the others had agreed to do so. (Id.) This assurance was paramount to the scheme, for if any one PBM had confessed, the health plans would have put a stop to it, insisting they pay no more than CVS's cash customers in accordance with their contracts with the PBMs. (Id. at 45.) Indeed, Plaintiffs say that, in a competitive market, such insistence would have been unnecessary, as one or more PBMs would have adopted HSP prices sua sponte in an effort to attract plan business. (Id. at 51-57.)

         According to Plaintiffs, fraud operated here on more than a wink and a nod. Plaintiffs allege that it “was orchestrated out of the corporate headquarters of CVS, Caremark, each remaining PBM, and ScriptSave” and “required those headquarters to communicate directly and frequently by U.S. Mail and interstate wire facilities.” (Id. at 60-61.) Plaintiffs aver that these parties “share[d] information regarding various cash discount programs, the structure of those programs, and whether they [were] reporting those prices as U&C prices.” (Id. at 66.) For example, in a back-and-forth between CVS executives and executives at Indiana Carpenters Welfare Fund's PBM, Medco Health Solutions, Inc., (now owned by Express Scripts), Medco assured CVS that it would interpret its definition of U&C price - “the lowest net cash price a cash . . . customer would have paid . . . inclusive of all applicable discounts” - as excluding CVS's HSP price, even though Medco had previously determined that it would consider Wal-Mart, Inc., 's discounted price for generics as its U&C price. (Id. at 33-38.) Unsuccessful in its attempt to have Medco modify its definition of U&C price to explicitly exclude discounts associated with “card programs such as CVS' Health Savings Pass, ” CVS settled for Medco's sotto voce amendment. (Id.) CVS then notified an ostensible competitor of Medco's - Caremark - of Medco's decision when a vice president at CVS, Tina Egan, forwarded an email to Caremark's senior legal counsel, Roderick Bergin, containing Medco's discreet capitulation. (Id. at 37 (“Ms. Egan forwarded Medco's response to Roderick Bergin . . . as an ‘FYI.'”).)

         Plaintiffs believe that the foregoing, if proved, supports the two RICO claims in their PAC. In the first of these claims, Plaintiffs allege that CVS and Caremark shepherded a RICO enterprise that included the aforementioned PBMs and ScriptSave, all of whom Plaintiffs want as defendants. (Id. at 51-64.) This enterprise worked together to defraud Plaintiffs by disguising the fact that CVS failed to report HSP prices as its U&C prices for certain generic drugs. (Id.) The second claim is similar to the first, except that it splits the enterprise alleged in the first claim into three, each including CVS, Caremark, ScriptSave, and one of the three other PBMs. (Id. at 64-78.) Plaintiffs also have a standalone fraud claim in their PAC, which relies on the same alleged fraud underlying their RICO claims. (Id. at 82-83.) The remaining claims - negligent misrepresentation, unjust enrichment, and violations of state-consumer-protection acts - are holdovers from the original complaint. See Sheet M Workers, 221 F.Supp.3d at 230.

         II. Discussion

         A. Legal Standard

         The parties disagree as to whether Federal Rule of Civil Procedure 15(a) or 16(b) supplies the standard by which the Court must evaluate Plaintiffs' Motion. But, in fact, both apply.

         The First Circuit has made plain that where, as here, a plaintiff seeks to amend its complaint after the deadline for doing so set by the district court's scheduling order has passed, Rule 16(b)'s “good cause” standard applies. O'Connell v. Hyatt Hotels of P.R., 357 F.3d 152, 154 (1st Cir. 2004).[3] This standard - “[u]nlike Rule 15(a)'s ‘freely given' standard, which focuses mostly on the bad faith of the moving party and the prejudice to the opposing party” - “emphasizes the diligence of the party seeking the amendment.” Id. at 155. Under Rule 16(b), “[p]rejudice to the opposing party remains relevant but is not the dominant criterion.” Id.

         If a plaintiff makes it over the hurdle set by Rule 16(b), the district court must then evaluate a contested motion to amend under Rule 15(a)'s “freely give[n]” standard. See Leary v. Daeschner, 349 F.3d 888, 909 (6th Cir. 2006) (“Once the scheduling order's deadline passes, a plaintiff first must show good cause under Rule 16(b) for failure earlier to seek leave to amend before a court will consider whether amendment is proper under Rule 15(a).”); 6A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1522.2 (3d ed. 1998) (same). That is, the district court must ask whether a plaintiff's amendment would cause undue delay, was brought in bad faith, or with a dilatory motive, or if the amendment would be futile. Grant v. News Grp. Bos., Inc., 55 F.3d 1, 5 (1st Cir. 1995).

         Particularly salient at the moment are questions of undue delay[4] and futility. Undue delay, on its own, can be a basis for denying amendment in the First Circuit. Acosta-Mestre v. Hilton Int'l of P.R., Inc., 156 F.3d 49, 52 (1st Cir. 1998). But see Wright & Miller, supra, at § 1488 (“In most cases, delay alone is not a sufficient reason for denying leave.”). There is no delay that is per se undue. Wright & Miller, supra, at § 1488 (“Quite appropriately the courts have not imposed any arbitrary timing restrictions on requests for leave to amend and permission has been granted under Rule 15(a) at various stages of the litigation.”). Rather, a district court mulling a motion to amend in a particular case must consider any alleged delay with that case's specific history in mind. Id. (“The policy of allowing amendments to be made at any time during the litigation is sound. It would be unreasonable to restrict a party's ability to amend to a particular stage of the action inasmuch as the need to amend may not appear until after discovery has been completed or testimony has been taken at trial.”). However, the First Circuit has not hesitated to affirm the ...

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