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Paduano v. Express Scripts, Inc.

United States District Court, E.D. New York

October 27, 2014

VICTOR PADUANO, FRANK SCALA, NICK CANNER on behalf of themselves and other similarly situated individuals, and HM COMPOUNDING SERVICES, LLC, Plaintiffs,

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For the Plaintiffs: Steven R. Schlesinger, Esq., Stanley A. Camhi, Esq., Jessica M. Baquet, Esq., Shannon E. Boettjer, Esq., Daniel E. Shapiro, Esq., Of Counsel, Jaspan Schlesinger LLP, Garden City, NY.

For the Express Scripts, Inc., Defendant: Christopher Smith, Esq., Jason Husgen, Esq., Sarah Hellmann, Esq., Of Counsel, Husch Blackwell LLP, Saint Louis, MO.

For the Express Scripts, Inc., Defendant: Menachem J. Kastner, Esq., Ally Hack, Esq., Of Counsel, Cozen O'Connor, New York, NY.

For the CVS Caremark Corp., Defendant: Yonaton Aronoff, Esq., Michael D. Leffel, Esq., Connor A. Sabatino, Esq., Of Counsel, Foley & Lardner LLP, New York, NY.

For the OptumRx, Inc., Defendant: Richard H. Silberger, Esq., Christopher George Karagheuzoff, Esq., Dai Wai Chin Feman, Esq., Of Counsel, Dorsey & Whitney, LLP, New York, NY.

For the Prime Therapeutics LLC, Defendant: Jill M. Wheaton, Esq., Dykema Gossett PLLC, Ann Arbor, MI.

For the Prime Therapeutics LLC, Defendant: Peter Joseph Fazio, Esq., Aaronson, Rappaport, Feinstein & Deutsch, New York, NY.

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ARTHUR D. SPATT, United States District Judge.

This multi-party antitrust action is brought by the Plaintiff HM Compounding Services, LLC (" HMC" ) and three individuals, Victor Paduano (" Paduano" ), Frank Scala (" Scala" ), and Nick Canner (" Canner" )(collectively the " Individual Plaintiffs" ), on behalf of themselves and all others similarly situated, who desire to purchase compound medications from HMC.

According to the complaint, the Individual Plaintiffs purchase compound medications from HMC, which operates one of the largest compounding pharmacies in the Eastern United States. HMC provides custom-made medications, i.e., compounded medicines, to numerous patients, including pediatric patients who cannot take pill versions of particular drugs; patients that cannot tolerate one or more ingredients in manufactured drugs; drugs that are no longer manufactured but are still determined to be safe and effective; and compounds for particular types of treatment,

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including pain management, dermatological specialties, biologically identical hormone replacement, sexual dysfunction and enhancement; compounds for autism; compounds for weight management; and compounds for veterinary use.

The named defendants -- Defendants Express Scripts, Inc. (" ESI" ), CVS Caremark Corporation, now known as " CVS Health Corporation" (" Caremark" ), Optum Rx, Inc. (" Optum" ), and Prime Therapeutics, LLC (" Prime" )(collectively the " Defendants" ) -- are or are affiliated with prescription benefit managers (" PBMs" ). PBMs administer the prescription pharmaceutical portion of healthcare benefit programs, which are typically purchased by a plan sponsor. As part of their functions, PBMs provide bundled services related to the administration of pharmaceutical benefits, including claims adjudication, formulary design, management and negotiation of branded drug rebates; management and negotiation of networks of retail pharmacies; review of drug utilization; processing claims from pharmacies for payment; and the operation of specialty and home-delivery pharmacies such as mail order pharmacies used to dispense medications directly to patients. Some chain pharmacies, such as CVS, have merged with PBMs.

Collectively, the Defendants dominate the PBM market in the United States with a market share of more than 80%. The Defendant ESI is the largest PBM and the Defendant Caremark is the second largest PBM.

In short, the Plaintiffs allege that the Defendants have engaged in a concerted and coordinated effort to eliminate HMC, and other independent compounding pharmacies, as competitors in the prescription benefit drug market by placing unwarranted and illegal restrictions on patient access to compounded medications.

Although not emphasized by the complaint, the relationships between HMC and the respective defendant-PBMs are each governed by a Pharmacy Network Agreement. The HMC agreement with Caremark (the " Caremark Provider Agreement" ), the HMC agreement with Optum (the " Optum Provider Agreement" ), and the HMC agreement with Prime (the " Prime Provider Agreement" ) each contain or incorporate an arbitration provision for resolving disputes arising therefrom. The HMC agreement with ESI (the " ESI Provider Agreement" ) contains a forum selection clause for resolving disputes arising therefrom.

Presently pending before the Court are a number of motions, including separate motions by Caremark, Optum, and Prime to sever HMC's claims against them and to refer those claims to arbitration. Also pending before the Court is a motion by ESI to sever HMC's claims against it and transfer those claims to the contractually-designated forum in Missouri.


A. Factual History

The Court first recounts the termination of the contractual relationships between HMC and each of the Defendants, save for Prime, which has not terminated its contractual relationship with HMC. Unless stated otherwise, the following facts are drawn from the complaint.

1. The Termination of the Caremark Provider Agreement

By letter dated June 30, 2014, Caremark informed HMC of an " ongoing audit" of its pharmacy " covering the period of April 2013 through September 30, 2013." (Compl., at ¶ 55.) That " ongoing audit" had not been previously disclosed to HMC. In that letter, Caremark informed HMC

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that " CVS Caremark is placing your pharmacy under payment and adjudication suspension" effective immediately based upon purported " compliance issues" identified in the ongoing audit. (Id.) Caremark informed HMC that, pursuant to this decision, HMC " may not submit claims to Caremark for adjudication" and that " future cycle checks for prior claims will be withheld pending resolution of our audit review." (Id.) Accordingly, effective June 30, 2014, Caremark stopped paying claims submitted by HMC and precluded HMC from submitting any future claims.

By letter dated July 16, 2014, HMC addressed its stated audit concerns, and requested that Caremark reinstate HMC. By letter dated July 28, 2014, Caremark denied HMC's request to reconsider the payment and adjudication suspension placed upon HMC. In that letter, Caremark admitted that it had instituted a policy of rejecting compounded prescriptions and requiring prior authorizations " based upon plan edits." (Id. at ¶ 56.) No information about the " plan edits" was provided in that letter, nor were those " plan edits" disclosed to HMC prior to the termination letter. (Id.) Caremark also stated: " We do not believe that there is any patient harm with our decision to suspend payment and claims adjudication for HM Compounding . . ." (Id.)

2. The Termination of the Optum Provider Agreement

On or about August 15, 2013, a pharmacy services administrative organization, Wholesale Alliance TPS LLC DBA Third Party Station (" TPS" ) entered into the Optum Provider Agreement with Optum. TPS entered into the Agreement " on behalf of itself and each of the Pharmacies" in TPS's network, including HMC. (Doc No. 39, Ex. A, at 1.)

By Termination Letter dated March 3, 2014, Optum informed Third Party Station (" TPS" ), a Third Party Administrator in Optum's prescription benefit program, that HMC was being terminated as a network provider because the Pharmacy Network Agreement " prohibits delivering, shipping, mailing and/or dispensing Covered Prescription Services to members" and demanded that HMC cease and desist from engaging in such activity. (Compl. at ¶ 51.)

By letter dated March 17, 2014, attorneys for HMC responded to that termination letter, explaining that the contract provision cited by Optum did not prohibit " delivering, shipping" and or " dispensing" prescription services to members, nor could it if it were to comply with governing legal and ethical requirements for these services under New York law.

By letter dated May 29, 2014, Optum responded to that letter by asserting that HMC's contract was being terminated immediately " for cause" on the basis that the " that mailing, shipping and or delivering of Covered Prescription Services is not allowed under the retail contract with [Optum]." (Id. at ¶ 52.)

Subsequently, by letters dated June 25, 2014, Optum informed HMC that it was terminating " for cause" the Optum Provider Agreement due to alleged " Fraud, Waste and Abuse" for purportedly engaging in " prescription splitting to obtain multiple dispensing fees, etc." (Id. at ¶ 54.)

By letter dated July 16, 2014, HMC explained that it was not " splitting" prescriptions and receiving multiple dispensing fees and requested that the contract be reinstated until an appeal hearing on the issue was held. Optum denied that request, allegedly causing HMC money damages.

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3. The Termination of the ESI Provider Agreement

By letter dated July 22, 2014, HMC informed ESI that it had become aware that ESI was directly notifying providers that they were not to continue prescribing compounded medications even if it was in the patient's best interest to receive compounded medicine.

On July 31, 2014, ESI sent HMC a " notice of immediate termination" of the ESI Provider Agreement. In its letter, ESI alleged that HMC had purportedly made material misrepresentations to ESI regarding collecting patients' co-payments and, as a result, was terminating HMC's contract immediately.

By letter dated August 1, 2014, ESI responded to HMC's July 22, 2014 letter. In that letter, ESI did not deny making such statements to prescribing physicians; rather, it took the position that ESI " has a legal right to communicate with providers regarding benefit coverage issues." (Id. at ¶ 57.)

B. Procedural History

On September 10, 2014, the Individual Plaintiffs, on behalf of themselves and all others similarly situated, and HMC commenced this action in the Supreme Court of the State of New York, County of Nassau. The complaint asserts causes of action for (1) fraud and misrepresentation; (2) deceptive trade practices in violation of New York General Business Law (" NYGBL" ) § 349; (3) antitrust law violations under NYGBL § 340 (the " Donnelly Act" ); and (4) unfair insurance practices based on alleged violations of state statutes, including New York State Insurance Law § 2401, et seq.. The complaint also seeks permanent injunctive relief.

On September 10, 2014, the Plaintiffs brought an order to show cause seeking the issuance of a temporary restraining order. Following a hearing beginning on September 10, 2014 and continued on September 11, 2014, the Hon. Stephen A. Bucario issued an order enjoining the Defendants from, among other things, (1) denying compound prescription drug-ingredient insurance coverage and (2) denying prescription drug benefit coverage to a putative nationwide class of individuals filling prescriptions for compound drugs at HMC and other pharmacies.

On September 12, 2014, based on traditional diversity jurisdiction, the Class Action Fairness Act (" CAFA" ), Pub. L. No. 109-2, 119 Stat. 4 (2005), codified in part at 28 U.S.C. § 1332(d), and federal question jurisdiction, the Defendants removed this action to this Court.

On September 15, 2014, ESI filed a motion by order to show cause to sever HMC's claims against ESI and to transfer those claims, pursuant to 28 U.S.C. 1404(a) and a forum selection clause in the ESI Provider Agreement, to the United States District Court for the Eastern District of Missouri.

Also, on September 15, 2014, ESI moved by order to show cause to vacate the temporary restraining order (" TRO" ) issued on September 11, 2014.

On September 22, 2014, the Plaintiffs moved by order show cause to hold the Defendants in contempt for their alleged failure to abide by the September 11, 2014 TRO.

On September 23, 2014, Caremark moved, pursuant to Section 1 of the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (the " FAA" ), by order to show cause to sever HMC's claims against it and to compel arbitration of those claims against based on an arbitration provision incorporated in the Caremark Provider Agreement.

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Also, on September 23, 2014, Caremark moved by order to show cause to vacate the September 11, 2014 TRO.

On September 24, 2014, Optum moved by order to show cause, pursuant to Section 1 of the FAA and Fed.R.Civ.P. 21, to sever HMC's claims against it and to compel arbitration of those claims in Los Angeles, California.

In addition, on September 24, 2014, Optum filed an emergency motion by order to show cause to vacate the September 11, 2014 TRO.

On September 25, 2014, the Plaintiffs filed an emergency motion for an order to extend the September 11, 2014 TRO and to schedule a hearing.

On September 26, 2014, Prime moved to join the pending motions to vacate the September 11, 2014 TRO.

On September 29, 2014, with each party represented, the Court held oral argument on the pending motions. At the conclusion of that hearing, the Court extended the September 11, 2014 TRO for fourteen days, but allowed the parties to submit proposed modifications. The Court referred the pending motions for contempt and for a preliminary injunction to United States Magistrate Judge Arlene R. Lindsay.

Later that afternoon, the parties appeared before Judge Lindsay, who directed the parties to submit a proposed expedited briefing schedule to this Court in connection with the motions to transfer venue and compel arbitration. Judge Lindsay stayed a determination of the motions for contempt and for a preliminary injunction pending a determination of the motions not referred by this Court.

On October 1, 2014, Prime moved pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the complaint as against it, or, in the alternative, to compel arbitration of HMC's claims against it in Minnesota and to stay this matter until that dispute was resolved, or, in the alternative, to sever Prime from this case pursuant to Fed.R.Civ.P. 21.

Also, on October 1, 2014, ESI moved pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) to dismiss the complaint as against it for failure to state a claim upon which relief can be granted.

On October 3, 2014, the Court, upon review of the proposed and modified TROs submitted by the parties, (1) vacated the September 11, 2014 TRO and (2) ordered that, pending further order of this Court, the Defendants were stayed and enjoined from (a) denying prescription drug benefit coverage to the Individual Plaintiffs for compounded medications prescribed to them on or after September 11, 2014, or for the refill of an existing refillable prescription after September 11, 2014, by their licensed physicians, which had heretofore been covered by their insurance; (b) from refusing to process and/or pay claims submitted by HMC for the payment of prescriptions dated on or after September 11, 2014, or for the refill of an existing refillable prescription after September 11, 2014, for compounded medications prescribed by licensed physicians for their patients, which had heretofore been covered by their insurance; (c) from retaliating in any way against any licensed physician who writes a prescription for a compounded medication and/or provides materials or information required by a defendant for prior approval of compounded medications for a patient; (d) from prohibiting HMC from using the United States Postal Service or other delivery service to deliver to patients the compounded medications prescribed by their licensed physicians.

The Court also directed that, within five days of the date of the order, the Plaintiffs

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must post a bond in the sum of One Hundred Thousand ($100,000.00) Dollars to be deposited with the Court in an interest bearing account as a condition of the October 3, 2014 TRO. Finally, the Court directed that the October 3, 2014 TRO remain in full force and effect until a hearing on the preliminary injunction.

Also, on October 3, 2014, HMC filed a letter motion requesting that the Court issue an order holding in abeyance ESI's and Prime's motions to dismiss pending a decision on the motions to sever/arbitrate/transfer.

On October 8, 2014, the Court granted HMC's motion for a stay to the extent it indicated that HMC would have until 14 days after the Court rendered a decision on the respective motions to sever/ arbitrate/transfer to respond to the motions to dismiss brought by ESI and Prime.

On October 10, 2014, Caremark moved to strike in its entirety the declaration of Stanley A. Camhi, Esq., submitted in support of HMC's opposition to Caremark's motion to sever HMC's claims against it and to compel arbitration of those claims. According to Caremark, Camhi's declaration is (1) non-compliant with 28 U.S.C. § 1746 as it was not expressly made " under penalty of perjury" ; (2) is not based upon personal knowledge; and (3) contains legal arguments.

On October 14, 2014, HMC submitted a supplemental declaration from Camhi made " under penalty of perjury." As this supplemental declaration was submitted after the date agreed upon by HMC and Caremark for HMC to submit its opposition papers (see Doc No. 57), the Court construes this submission as a motion for leave to file a supplemental declaration in support of its opposition papers and the Court, in its discretion, grants that request, thereby mooting in part Caremark's motion to strike. As to the other bases for the motion to strike, the Court will disregard any statements not based upon personal knowledge or those that contain legal arguments, rather than strike the declaration in its entirety. For the foregoing reasons, the Court denies Caremark's motion to strike Camhi's declaration in its entirety.

Also, October 14, 2014, HMC, dissatisfied with what it perceived as the Defendants' non-compliance with the October 3, 2014 TRO, moved by letter motion for a hearing to clarify the scope of that order or for the Court to set a schedule for a contemplated formal contempt motion. Caremark, Optum, and ESI filed letters in opposition to this request, disputing HMC's interpretation of the October 3, 2014 TRO.

As explained later, at this juncture, the Court declines to revisit or interpret the terms of the October 3, 2014 TRO. HMC can address its concerns to the appropriate arbitrators or, with respect to ESI, the federal district court in Missouri. The October 14, 2014 letter motion is, thus, denied without prejudice.


A. As to the Respective Motions to Sever and Arbitrate

The FAA embodies a " federal policy favoring arbitration." Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 302, 130 S.Ct. 2847, 177 L.Ed.2d 567 (2010)(citation and quotation marks omitted) . Thus, courts apply a " presumption of arbitrability," but only if an " enforceable arbitration agreement is ambiguous about whether it covers the dispute at hand." Id. at 301, 130 S.Ct. 2847. " In other words, while doubts concerning the scope of an arbitration clause should be resolved in favor of arbitration, the presumption does not apply to disputes concerning

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whether an agreement to arbitrate has been made." Applied Energetics, Inc. v. NewOak Capital Mkts., LLC, 645 F.3d 522, 526 (2d Cir. 2011).

With these standards in mind, the Court addresses the motions to sever/arbitrate/transfer.

1. The Caremark Motion to Sever and Arbitrate

As noted above, the relationship between Caremark and HMC is governed by the Caremark Provider Agreement. That agreement was entered into between HMC and Caremark's subsidiaries, CaremarkPCS, L.L.C. and Caremark, L.L.C., the entities that perform the prescription benefit management services discussed in the complaint.

Of relevance here, paragraph 11 of the Caremark Provider Agreement provides: " The [Provider] Agreement, the Provider Manual, and all other Caremark Documents constitute the entire agreement between [HMC] and [Caremark], all of which are incorporated by this reference as if fully set forth herein" (Doc No. 34, Exh. A, at ¶ 11.) The " Provider Manual" is distributed to all pharmacy providers in Caremark's networks. The Provider Manual has been revised from time to time, and each new version is sent to HMC.

In addition, the Provider Manual contained a provision authorizing Caremark to unilaterally amend the Caremark Provider Agreement and Provider Manual:

From time to time, and notwithstanding any other provision in the Provider Agreement (which includes the Provider Manual), Caremark may amend the Provider Agreement, including the Provider Manual or other Caremark Documents, by giving notice to Provider of the terms of the amendment and specifying the date the amendment becomes effective. If Provider submits claims to Caremark after the effective date of any notice or amendment, the terms of the notice or amendment is accepted by Provider and is considered part of Provider Agreement.

(Id., Exh B.)

Caremark sent the 2014 version of the Provider Manual to HMC and it was signed for by HMC in November 2013. Like its predecessors, the 2014 Provider Manual includes an arbitration provision, which provides:

Any and all disputes between Provider and Caremark (including Caremark's employees, parents, subsidiaries, affiliates, agents and assigns (collectively referred to in this Arbitration section as " Caremark" ), including but not limited to disputes in connection with, arising out of, or relating in any way to, the Provider Agreement or to Provider's participation in one or more Caremark networks or exclusion from any Caremark networks, will be exclusively settled by arbitration. Unless otherwise agreed to in writing by the parties, the arbitration shall be administered by the American Arbitration Association (" AAA" ) pursuant to the then applicable AAA Commercial Arbitration Rules and Mediation Procedures (available from the AAA). . . . The arbitrator(s) shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of the agreement to arbitrate, including, but not limited to any claim that all or part of the agreement to arbitrate is void or voidable for any reason. The arbitrator(s) must follow the rule of Law, and the award of the arbitrator(s) will be final and binding on the parties, and judgment upon such award may be

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entered in any court having jurisdiction thereof. Any such arbitration must be conducted in Scottsdale, Arizona and Provider agrees to such jurisdiction, unless otherwise agreed to by the parties in writing. The expenses of arbitration, including reasonable attorney's fees, will be paid for by the party against whom the award of the arbitrator(s) is rendered, except as otherwise required by law.
Arbitration with respect to a dispute is binding and neither Provider nor Caremark will have the right to litigate that dispute through a court. In arbitration, Provider and Caremark will not have the rights that are provided in court, including the right to a trial by judge or jury. In addition, the right to discovery and the right to appeal are limited or eliminated by arbitration. All of these rights are waived and disputes must be resolved through arbitration.
No dispute between Provider and Caremark may be pursued or resolved as part of a class action . . .
The above notwithstanding, nothing in this provision shall prevent either party from seeking preliminary injunctive relief to halt or prevent a breach of this Provider ...

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