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Brewer v. Breen

United States District Court, S.D. New York

January 23, 2018

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,
v.
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,
v.
EXPRESS SCRIPTS HOLDING COMPANY, a Delaware corporation, Nominal Defendant.

          OPINION AND ORDER

          Edgardo Ramos, U.S.D.J.

         On 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).

         I. BACKGROUND[1]

         A. The Parties

         Plaintiffs 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.

         Nominal 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.[2] 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. ¶ 56.

         Thirteen of the Individual Defendants are current or former members of Express Scripts' Board of Directors: Seymour Sternberg (since March 1992);[3] Gary G. Benanv (from January 2000 to May 2016);[4] Thomas P. Mac Mahon (since March 2001);[5] Nicholas J. LaHowchic (since July 2001);[6] George Paz (since January 2004);[7] Maura C. Breen (since July 2004);[8] Woodrow A. Myers, Jr. (since May 2007);[9] Frank Mergenthaler (since July 2009);[10] William J. DeLaney (since September 2011);[11] William L. Roper (since April 2012);[12] Roderick A. Palmore (since September 2014);[13] Elder Granger (since May 2015);[14] and Timothy Wentworth (since June 2015).[15]

         Seven 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.[16] Defendant Wentworth began serving as Express Scripts' President in February 2014, and its CEO in May 2016. Id. ¶ 35.[17] 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.[18] 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, 33-35.

         B. Anthem and Express Scripts' 2009 PBM Agreement

         In 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.

         The PBM 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.[19]

         C. Operational Issues: February 2014-February 2015

         By 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.

         One week later, on February 23, 2015, Express Scripts filed its 2014 Form 10-K with the SEC. Id. ¶ 64.[20] 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.[21]

         On 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.

         Anthem 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.

         D. Pricing Dispute: March 2015-March 2016

         On 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. ¶ 69.

         A few 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.

         Continuing 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. Id.

         On July 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.

         The 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. Id.

         Despite 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.

         On 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.

         During 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.

         On February 16, 2016, Express Scripts filed its 2015 Form 10-K. Id. ¶ 88.[22] 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." Id.

         By 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. ¶ 92.

         E. Procedural History

         Plaintiffs 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 ...


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