United States District Court, S.D. New York
M. SCOTT BREWER, JAMES E. BROWN, SR., MARCUS ESTLACK, KEITH McCLANAHAN, JEREMY JEFFERS, GLENN JEFFRIES, WILLIAM WATERKOTTE, ANDREW WISEMAN, DENZIL MALONE and GARY R. REED, in their capacities as Trustees for the CARPENTERS PENSION FUND OF WEST VIRGINIA, derivatively on behalf of EXPRESS SCRIPTS HOLDING COMPANY Plaintiffs,
MAURA C. BREEN, WILLIAM J. DeLANEY, ELDER GRANGER, NICHOLAS J. LaHOWCHIC, THOMAS P. MAC MAHON, FRANK MERGENTHALER, WOODROW A. MYERS, JR., RODERICK A. PALMORE, GEORGE PAZ, WILLIAM L. ROPER, SEYMOUR STERNBERG, CHRISTOPHER A. McGINNIS, DAVID QUELLER, ERIC R. SLUSSER, TIMOTHY WENTWORTH, GARY G. BENANAV, JAMES M. HAVEL, and CHRISTOPHER K. KNIBB, Defendants,
EXPRESS SCRIPTS HOLDING COMPANY, a Delaware corporation, Nominal Defendant.
OPINION AND ORDER
Edgardo Ramos, U.S.D.J.
September 26, 2016, trustees of the Carpenters Pension Fund
of West Virginia brought this shareholder derivative action
against nominal Defendant Express Scripts Holding Company
("Express Scripts") and members of Express
Scripts' Board of Directors and/or Express Scripts
officers (the "Individual Defendants"), alleging
breach of fiduciary duty, unjust enrichment, and corporate
waste. Compl. (Doc. 1), ¶ 1. Defendants now move to
dismiss, or in the alternative, to stay the action pending
the related securities litigation currently before this
court, In re Express Scripts Holding Company Securities
Litigation (the "Securities Litigation"), 16
Civ. 3338 (S.D.N.Y. 2016) (Doc. 80).
M. Scott Brewer, James E. Brown, Sr., Marcus Estlack, Keith
McClanahan, Jeremy Jeffers, Glenn Jeffries, William
Waterkotte, Andrew Wiseman, Denzil Malone, and Gary R. Reed
are all trustees of the Carpenters Pension Fund of West
Virginia (together, "Plaintiffs"). Compl. ¶
18. The Carpenters Pension Fund has been a shareholder of
Express Scripts since November 2009. Id. ¶ 19.
Defendant Express Scripts is the largest independent pharmacy
benefits management ("PBM") company in the United
States. Id. ¶ 55. As a PBM, Express Scripts
administers prescription drug benefits, negotiates drug
prices with pharmacies, and establishes networks of
pharmacies through which beneficiaries can fill their
prescriptions. Id. Express Scripts also provides
products and services to Medicare Part D plan sponsors.
Id. Express Scripts' 2015 Form 10-K
explained that a substantial portion of Express Scripts'
business was concentrated in a few important client contracts
and that its profitability as a company depended on its
ability to attract and retain clients. Id. ¶
of the Individual Defendants are current or former members of
Express Scripts' Board of Directors: Seymour Sternberg
(since March 1992); Gary G. Benanv (from January 2000 to May
2016); Thomas P. Mac Mahon (since March
2001); Nicholas J. LaHowchic (since July
2001); George Paz (since January
2004); Maura C. Breen (since July
2004); Woodrow A. Myers, Jr. (since May
2007); Frank Mergenthaler (since July
2009); William J. DeLaney (since September
2011); William L. Roper (since April
2012); Roderick A. Palmore (since September
2014); Elder Granger (since May
2015); and Timothy Wentworth (since June
of the Individual Defendants (including two who also served
as Directors) were officers of Express Scripts. Defendant Paz
was CEO of Express Scripts from April 2005 to May 2016.
Id. ¶ 29. Defendant Wentworth began serving as
Express Scripts' President in February 2014, and its CEO
in May 2016. Id. ¶ 35. Defendant David Queller
has been the Senior Vice President of Sales and Account
Management for Express Scripts since July 2014. Id.
¶ 33. Defendant Eric R. Slusser is Express Scripts'
Executive Vice President and Chief Financial Officer.
Id.¶ 34. He has served in that role since
September 2015. Id. Defendant Christopher A.
McGinnis has served as the Vice President, Chief Accounting
Officer, and Controller since September 2015. Id.
¶ 32. Before that, he served as Vice President of
Finance and Investor Relations. Id. Defendant
James M. Havel was Executive Vice President of Finance from
September 2015 to March 2016. Id. ¶ 37. He also
served as Executive Vice President and Interim Chief
Financial Officer from January 2015 to September 2015.
Id. Defendant Christopher K. Knibb served as Vice
President of Financial Planning and Analysis from September
2015 to 2016. Id. ¶ 38. Prior to that, he was
the Vice President and Chief Accounting Officer from February
2013 to September 2015. Id. Defendants Wentworth,
Slusser, Queller, and Paz were also named as defendants in
the Securities Litigation. Id. ¶¶ 29,
Anthem and Express Scripts' 2009 PBM Agreement
2009, Express Scripts entered into two agreements with
Anthem, Inc. ("Anthem"), a health benefits company.
Id. ¶ 57. First, Express Scripts acquired
Anthem subsidiaries that performed PBM services for Anthem
in-house. Id. Second, Anthem contracted for Express
Scripts to provide PBM services for its beneficiaries over
the next ten years (the "PBM Agreement").
Id. As a result, Anthem became Express Scripts'
largest client, and was responsible for approximately 14% of
Express Scripts' annual revenue. Id.
Agreement included a section entitled "Periodic Pricing
Review." Id. ¶ 60. Under that section,
Anthem or a third-party consultant would periodically review
Express Scripts' pricing terms. Id. If the
pricing was not consistent with what the contract called
"competitive benchmark pricing, " Anthem had the
ability under the Agreement to propose renegotiated pricing
terms and Express Scripts agreed to negotiate over those
terms in good faith. Id. The PBM Agreement also
required Express Scripts to perform Medicare Part D services
in accordance with Medicare regulations and instructions from
the Centers for Medicare and Medicaid Services
("CMS"). Id. ¶ 61.
Operational Issues: February 2014-February 2015
early 2014, Express Scripts was failing to meet CMS-mandated
turnaround times with respect to the processing of Medicare
Part D claims. Id. ¶ 62. On February 4, 2014,
Anthem issued a corrective action plan for Express Scripts.
However, according to Plaintiffs, Express Scripts did not
implement an adequate information technology system to
process the Medicare Part D claims, and a little over a year
later, on February 16, 2015, Anthem sent Express Scripts a
formal notice of breach of the PBM Agreement due to
operational failures. Id. ¶¶ 62-63. The
notice of breach informed Express Scripts that Anthem had the
right to terminate the PBM Agreement. Id.
week later, on February 23, 2015, Express Scripts filed its
2014 Form 10-K with the SEC. Id. ¶
64. The Form 10-K acknowledged that the
company's financial results would be materially adversely
affected if a large client changed the terms of a contract or
terminated a contract. Id. It also acknowledged that
failure to effectively execute Express Scripts' Medicare
Part D program could have an adverse effect on the company.
Id. It did not, however, mention Anthem's notice
of breach nor its own alleged failures with respect to its
administration of Anthem's Medicare Part D program.
Id. ¶¶ 64-65.
February 25, 2015, Defendant Queller stated in a conference
call for investors that "[W]e've got a great
relationship with Anthem.... Our teams work together closely
each and every day. The relationship is very, very
solid." Id. ¶ 66. He added that Express
Scripts "look[s] forward to having [Anthem] as a client
through the end of... 2019 and we'd love to have them for
a longer time as well." Id.
and Express Scripts convened its Joint Pharmacy Operating
Committee ("JPOC") to attempt to resolve the
operational issues, but the parties did not come to a
resolution. Id. ¶ 67.
Pricing Dispute: March 2015-March 2016
March 18, 2015, Anthem notified Express Scripts that it had
conducted a market analysis and it believed Express
Scripts' pricing was higher than "competitive
benchmark pricing." Id. ¶ 68. Anthem
proposed new pricing terms and requested that Express Scripts
respond by March 30, 2015, but Express Scripts did not do so.
Id. On April 1, 2015, Anthem provided Express
Scripts with another formal notice of breach. Id.
weeks later, on April 28, 2015, Express Scripts issued a
press release from Defendant Wentworth stating that the
company's product offerings drove its client retention
and was "in high demand." Id. ¶ 70.
The next day, during a conference call, Defendant Paz stated
that "Anthem is an incredibly important client to us,
" and that Express Scripts "really enjoys" its
relationship with Anthem and its ability to provide services
to Anthem members. Id. ¶ 72.
their attempts to resolve the significant differences between
their companies' positions, the presidents of Anthem and
Express Scripts met on May 27, 2015. Id. ¶ 73.
They did not, however, resolve the dispute at that time.
28, 2015, Express Scripts issued a press release from
Defendant Paz stating that Express Scripts' business
model was "fully aligned with client needs."
Id. ¶ 74. Defendant Wentworth also issued a
statement in the same press release saying that Express
Scripts was "proud of the relationships we have built
with clients." Id. The next day, during a
conference call, Defendant Wentworth stated that he was
confident that Express Scripts would have strong client
retention "across the board" and that the
company's "business outlook remain[ed] strong."
Id. ¶ 76.
next month, on August 26, 2015, Express Scripts agreed to a
corrective action plan with respect to Medicare Part D
processing problems. Id. ¶ 77. However,
according to Plaintiffs, Express Scripts continued to be
noncompliant with respect to Medicare Part D operations.
these issues with its Anthem relationship, on an October 27,
2015 conference call, Defendant Wentworth stated that Express
Scripts was "confident in the upper range of our
expected retention rate, a reflection of the trust clients
have in Express Scripts." Id. ¶ 78. He
made similar comments on a conference call the next day.
Id. ¶ 80. Just a little over a week later, on
November 9, 2015, Anthem and Express Scripts underwent
mediation. However, their differences were not resolved.
Id. ¶ 81.
December 22, 2015, Express Scripts addressed its negotiations
with Anthem in a conference call. Defendant Paz told
investors that Express Scripts was "fully committed to
reaching a mutually beneficial agreement" and that
discussions with Anthem were "very early on."
Id. ¶ 82. Over the next several weeks, Express
Scripts and Anthem continued to negotiate, with Express
Scripts favoring a proposal that reduced pricing by only $1
billion and Anthem favoring a proposal that reduced pricing
by $9.7 billion. Id. ¶¶ 83-85.
this period, on January 12, 2016, Anthem's CEO publicly
threatened to terminate its relationship with Express Scripts
and Anthem's general counsel announced that the two
companies had exhausted the internal dispute process provided
for in the PBM Agreement. Id. ¶ 86. Express
Scripts, however, maintained that 2015 was its
"strongest retention year ever" and that it was
"well positioned to drive growth and deliver value to
clients and shareholders." Id. ¶ 87.
February 16, 2016, Express Scripts filed its 2015 Form 10-K.
Id. ¶ 88. The Form 10-K stated that the
company's finances might be materially adversely affected
if a large client changed the terms of a contract or
terminated a contract. Id. With respect to Anthem in
particular, the Form 10-K stated that Express Scripts was
"actively engaged in good faith discussions with Anthem
and intend[ed] to continue to comply with the requirements of
the [PBM A]greement." Id. ¶ 89. During a
conference call the next day, Defendant Paz told investors
that Express Scripts was "delivering great service to
Anthem" and "performing at a high level."
Id. ¶ 91. He also referred to the ongoing-and
failing-pricing renegotiations as "pretty routine."
mid-March 2016, both parties were still unwilling to change
the pricing positions they expressed earlier that year.
Id. ¶ 85. On March 21, 2016, Anthem sued
Express Scripts for breach of contract. Id. ¶
filed the Complaint on September 26, 2016. See
Compl. (Doc. 1). On November 16, 2016, Clifford Elow and
Amitkumar Khandhar, moved for permissive intervention. Doc.
44. Before that motion was decided, from January 29, 2017 to
April 10, 2017, the Court granted a stay pending a decision
from the Judicial Panel on Multidistrict Litigation regarding
whether the case would be transferred to the Eastern District
of Missouri ...