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American Federation of State v. Bristol-Myers Squibb Co.

United States District Court, Second Circuit

June 3, 2013



J. PAUL OETKEN, District Judge.

This case arises from the latest chapter in an ongoing dispute between health insurers and branded drug manufacturers. Insurers are keen to control drug costs, while manufacturers are determined to maintain market share while competing with generics and therapeutic alternatives. In recent years, manufacturers have launched programs through which they offer to cover the cost of co-payment obligations for their branded drugs. Insurers, which create tiered co-pay obligations to encourage plan members to select cheaper drugs, oppose these programs and argue that they increase overall drug costs. That policy dispute produced this lawsuit, which is one of several similar suits pending in jurisdictions across the country. Plaintiffs argue that the co-pay subsidy program is illegal under the federal racketeering and antitrust laws. Defendants have filed a motion to dismiss pursuant to Rules 9(b) and 12(b)(6). The Court held oral argument on this motion on May 10, 2013. For the reasons that follow, Defendants' motion is granted and Plaintiffs are granted leave to re-plead with respect to a portion of their RICO claim.[1]

I. Background[2]

Plaintiff American Federation of State, County and Municipal Employees District Council 37 Health & Security Plan ("DC 37") administers a variety of self-insured health and welfare benefits to its more than 125, 000 members, including a prescription drug benefit plan that contains cost-sharing provisions for plan members. Plaintiff Sergeants Benevolent Association Health and Welfare Fund ("Sergeants") is an employee welfare benefit plan that provides comprehensive health care benefits to approximately 12, 000 individuals. Its prescription drug benefit plan also contains cost-sharing provisions for plan members.

These cost-sharing provisions are intended to place a personal financial obligation on plan members through a tiered co-payment ("co-pay") scheme that places branded drugs in a less preferred position than other commonly prescribed therapeutic or AB-rated generic alternatives. By requiring plan members to provide a higher co-pay for drugs in higher tiers, third party payers ("TPPs") such as Plaintiffs seek to incentivize plan members to select cost-effective treatment and medication. Therapeutic alternatives and AB-rated generics are often more cost-effective than brand name drugs because, on average, generic prescriptions cost payers $16, preferred brand prescriptions cost $118, and non-preferred brands cost $124.[3]

Defendants Bristol-Myers Squibb Co. ("BMS") and Otsuka American Pharmaceutical, Inc. ("Otsuka") jointly market the branded drug Abilify (aripiprazole), a drug approved to treat schizophrenia. Since 2010, Defendants have provided co-pay subsidies-via the Abilify Savings Card-to insured individuals who are prescribed Abilify.[4] McKesson Corporation administers the co-pay subsidy program for Abilify; this program is known as LoyaltyScript and serves more than 17, 000 patients every day. McKesson is not a defendant in this action, but is alleged to be an unnamed coconspirator. In December 2011, as part of their co-pay subsidy program, BMS and Otsuka extended an offer of $100 off per refill for seventeen refills, though patients are not eligible if they have filled more than one prescription for Abilify in the past sixty days. Plaintiffs allege that the purpose of this co-pay subsidy scheme, whereby Defendants knowingly offer and pay remuneration in the form of co-pay subsidies to patients to induce them to purchase Defendants' brand name drug, is to encourage patients and doctors to choose Abilify rather than less expensive therapeutic alternatives.[5]

The existence of co-pay subsidy schemes is "open and notorious." Indeed, co-pay subsidy administration has become a "cottage industry, " and BMS is not the only branded drug manufacturer to maintain a co-pay subsidy program. Though the details vary, co-pay subsidy programs all work the same way. Individuals enroll in drug-specific programs online and provide basic information. The drug company then mails them a wallet-sized card that includes instructions to pharmacists on how to process covered prescriptions. First, the pharmacist enters information into a computerized data management system. Information about the patient, including the patient's personal co-pay obligation, is transmitted to the pharmacist from the insurance company or its pharmacy benefit manager ("PBM"). After learning what the patient owes, the pharmacist then enters information from the co-pay card system into the secondary insurer field. The plan member pays the out-of-pocket difference between his or her co-pay and the amount subsidized by Defendants. Thus, the TPP-e.g., Plaintiffs-pays the full amount of its usual payment for the branded drug in question, but the plan member pays only part (or none) of his or her ordinary co-pay. The patient's TPP is never told, and has no way of knowing, that a third party-such as BMS-has paid all or nearly all of the personal co-pay obligation.

Defendants not only determine the price at which wholesalers or large retailers will purchase prescription drugs from them, but also control the reimbursement benchmark used to determine the amount to be paid for the drugs by public and private health benefit providers. BMS sets the Wholesale Acquisition Cost ("WAC") for its drugs, and either BMS or a reporting agency causes to be published the Average Wholesale Price Price ("AWP") for its drugs. Plaintiffs allege that "[w]hen cost sharing is routinely waived, the true acquisition cost for the medical service or product is not the stated or reported price being charged to health benefit providers, but rather the price after deduction for the routinely waived co-payment. " (emphasis in original).

Plaintiffs allege that Defendants' co-pay subsidy programs "undermine the contractual insurance arrangement between the insurer and the insurer's member by reducing or eliminating the personal cost-share feature of the insurance contract" and "increase the overall burden on the plan for providing benefits to its members." Further, "[b]y providing undisclosed kickbacks to reduce or eliminate the cost-sharing mechanism in thousands of health insurance contracts for widely used maintenance prescription drugs, defendants unfairly undermine health benefit providers' best attempts to control prescription drug costs." Indeed, "Defendants offer such sweeping bribes that they often effectively reduce the co-pay for their branded drug to less than the average co-pay for therapeutic or AB-rated generic alternatives, " and, in so doing, "intend to interfere with health plans' cost-sharing provisions." (emphasis in original)

Defendants' co-pay subsidy programs require use of the mail and wires, as Defendants advertise their co-pay subsidy programs on the Internet, in magazines, and on network television, and send the physical co-pay cards to individuals, doctors, and pharmacies via the mail.

II. Standard of Review

Federal Rule of Civil Procedure 8(a)(2) requires "a short and plain statement of the claim showing that the pleader is entitled to relief." To survive a motion to dismiss pursuant to Rule 12(b)(6), a plaintiff must plead sufficient factual allegations "to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court must accept as true all well-pleaded factual allegations in the complaint, and "draw[ ] all inferences in the plaintiff's favor." Allaire Corp. v. Okumus, 433 F.3d 248, 250 (2d Cir. 2006) (quotations omitted). That said, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678 (citation omitted); see also id. ("A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement." (quotation marks and citations omitted) (alteration in original)).

III. RICO Claims

A. Definition of RICO

Congress enacted RICO in 1970 as part of the Organized Crime Control Act "to seek the eradication of organized crime in the United States." Pub.L. No. 91-452 (1970). Pursuant to the statute, it is "unlawful for any person employed or associated with any enterprise... to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt." 18 U.S.C. § 1962(c).

To state a plausible civil claim for violation of RICO § 1962(c), Plaintiffs' pleadings "must demonstrate, as to each defendant, that while employed by or associated with an enterprise engaged in interstate or foreign commerce, and through the commission of at least two predicate acts constituting a pattern of racketeering, ' the defendant directly or indirectly conducted or participated in the conduct of the affairs of such enterprise." Gross v. Waywell, 628 F.Supp.2d 475, 485 (S.D.N.Y. 2009) (citing 18 U.S.C. § 1962(c); Spool v. World Child Int'l Adoption Ag., 520 F.3d 178, 183 (2d Cir. 2008)); see also Lundy v. Catholic Health Sys. of Long Island Inc., 711 F.3d 106, 119 (2d Cir. 2013) ("To establish a civil RICO claim, a plaintiff must allege (1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity, ' as well as injury to business or property as a result of the RICO violation.' The pattern of racketeering activity must consist of two or more predicate acts of racketeering." (citations omitted)).

The Supreme Court has noted that "the RICO statute provides that its terms are to be liberally construed to effectuate its remedial purposes.'" Boyle v. United States, 556 U.S. 938, 944 (2009) (citation omitted). The true civil RICO plaintiff may well provide a laudatory societal service, supplementing the government's efforts "to protect the general public and the common good from felonious conduct." Gross, 628 F.Supp.2d at 481 (citing Agency Holdg. Corp. v. Malley-Duff & Assocs., 483 U.S. 143, 151 (1987)). Yet it is well known that the federal courts are flooded with cases molded to the RICO form, even though they are truly little more than garden variety claims for fraud. See Rosenson v. Mordowitz, No. 11 Civ. 6145, 2012 WL 3631308, at *4 (S.D.N.Y. Aug. 23, 2012). "Consequently, courts have an obligation to scrutinize civil RICO claims early in the litigation [to] separate the rare complaint that actually states a claim for civil RICO from that more obviously alleging common law fraud." Id.

B. Pattern of Racketeering: Mail and Wire Fraud

"To allege a violation of Section 1962(d), Plaintiff[s] must allege that the defendants agreed to commit at least two predicate acts in furtherance of a pattern of racketeering activity, and that these agreed-upon acts, if carried out, would have formed a pattern of racketeering activity.'" MLSMK Inv. Co. v. JP Morgan Chase & Co., 737 F.Supp.2d 137, 141-42 (S.D.N.Y. 2010), aff'd in part, 431 F.Appx. 17 (2d Cir. 2011), and aff'd, 651 F.3d 268 (2d Cir. 2011) (quoting Jordan ( Bermuda) Inv. Co. v. Hunter Green Inv. Ltd., 154 F.Supp.2d 682, 695 (S.D.N.Y. 2001) (citation omitted)). The specific predicate acts that constitute racketeering activity are enumerated in the statute and include mail fraud (18 U.S.C. § 1341) and wire fraud (18 U.S.C. § 1343). See 18 U.S.C. § 1961(1). "A violation of mail or wire fraud requires a showing of (1) a scheme or artifice to defraud and (2) a mailing or wire transmission in furtherance of that scheme." Boritzer v. Calloway, No. 10 Civ. 6264, 2013 WL 311013, at *6 (S.D.N.Y. Jan. 24, 2013) (citing §§ 1341, 1343). "If a party intends to allege that communications constitute predicate acts of mail or wire fraud, it must allege the following elements of those offenses: (1) the existence of a scheme to defraud, (2) defendants' knowing participation in such a scheme, and (3) the use of wire or mail communications in interstate commerce in furtherance of that scheme." MLSMK Inv. Co., 737 F.Supp.2d at 142 (quotation marks and citations omitted); see also Boritzer, 2013 WL 311013, at *6 ("[A] proper pleading of predicate acts based on mail and wire fraud requires an allegation of an underlying fraudulent scheme, which, in turn, [requires] (1) the existence of a scheme to defraud; (2) fraudulent intent on the part of the defendant; and (3) the materiality of the representations." (internal citations and quotation marks omitted)). RICO allegations "merit particular scrutiny where, as here, the predicate acts are mail and wire fraud, and where the use of mail or wires to communicate is not in and of itself illegal, unlike other predicate acts such as murder or extortion." Rosenson, 2012 WL 3631308, at *4 n.3.

RICO claims based on mail and wire fraud are subject to the heightened pleading standard established by Rule 9(b), which provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." See McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992) (noting that Rule 9(b)'s heightened pleading standard applies where mail fraud is alleged as a RICO predicate offense). "[T]o comply with Rule 9(b), the complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'" Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir. 2006) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)); see also Kramer v. Lockwood Pension Servs., Inc., 653 F.Supp.2d 354, 389 (S.D.N.Y. 2009) (noting applicability of Rule 9(b) requirements in the RICO context). "Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Rule 9(b).

Plaintiffs make the following allegations in support of their claim that Defendants have committed mail and wire fraud:

124. The co-pay subsidy enterprise engaged in an intentional scheme to defraud plaintiffs and the class by interfering with their cost-sharing provisions, causing them to pay for prescriptions of the subsidized drug that they would not otherwise have paid for, and causing them to pay an inflated rate for each subsidized prescription. These transactions necessarily involve use of the wires.
125. The co-pay subsidy enterprise engaged in an intentional scheme to defraud plaintiffs and the class by causing misrepresentations to be made via the wires at the time of the point of sale transaction - that is, when the member presents the co-pay card at the pharmacy - when, as instructed by the defendants, the pharmacist electronically charges the health benefit provider the full benchmark price without accounting for the existence of co-pay subsidies (as instructed by defendants). These transactions necessarily involve use of the wires.[6]
126. The co-pay subsidy enterprise engaged in an intentional scheme to defraud plaintiffs and the class by reporting benchmark prices to reporting agencies while failing to account for the routine waiver of co-pays. These transactions necessarily involve the use of the mail and wires.[7]

Defendants argue, and Plaintiffs do not dispute, that the mere existence of the BMS co-pay subsidy program is not a fraud on anyone because it involves no element of deception. To the contrary, the program is "open and notorious, " information about its terms and conditions is readily available on a number of public websites, and Plaintiffs do not allege that anyone is deceived about the effect of these programs. Nor do Plaintiffs allege any sort of omission or misrepresentation with respect to the existence of the program. See, e.g., McLaughlin, 962 F.2d at 192 ("The mail fraud statute requires some element of deception."); Borizer, 2013 WL 311013, at *6 ("In order for the deceit implicit in fraud to rise to the level of wire fraud in particular, defendants must have used the... wires as a means to obtain money or property by means of false or fraudulent pretenses, representations, or promises or for purposes of executing a scheme to defraud.'" (quoting Drexel Burnham Lambert, Inc. v. Saxony Heights Realty Assoc., 777 F.Supp. 228, 238 (S.D.N.Y. 1991)). Rather, the allegations in paragraph 124 show only that Plaintiffs believe that the co-pay subsidy program is counter to their business objectives.

The main dispute over the predicate offense requirement thus turns on Plaintiffs' remaining theories of mail and wire fraud: (1) that Defendants caused misrepresentations to be made at the point of purchase ("misrepresentation theory"); (2) that Defendants committed fraud through the routine and hidden waiver of personal co-pay obligations ("waiver theory"); and (3) that Defendants committed fraud by causing inaccurate price benchmarks to be promulgated ("benchmark theory"). As discussed below, the misrepresentation and waiver theories of liability do not succeed as a matter of law and the RICO allegations based on those theories of fraud are dismissed with prejudice. The benchmark theory has not been alleged with the ...

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