HM Compounding Servs., LLC v. Express Scripts, Inc.

349 F.Supp.3d 794

HM COMPOUNDING SERVICES, LLC, and HMX Services, LLC, Plaintiffs,

v.EXPRESS SCRIPTS, INC., Defendant.

No. 4:14-CV-01858 JAR

United States District Court, E.D. Missouri, Eastern Division.

Signed October 26, 2018

Andrew Scott Brenner, Shani Rivaux, Steven W. Davis, Tyler Evan Ulrich, Lawrence V. Ashe, Kristina Marie Infante, Boies and Schiller LLP, Miami, FL, Richard A. Feinstein, Nicholas A. Widnell, Boies and Schiller LLP, Washington, DC for Plaintiffs.

Christopher A. Smith, Jason Husgen, Sarah C. Hellmann, Husch Blackwell LLP, Saint Louis, MO, Eric C. Lyttle, Pro Hac Vice, Meghan Ann McCaffrey, Michael John Lyle, Quinn and Emanuel, LLP, Washington, DC, Amanda Lynn Nelson, Menachem J. Kastner, Ally Hack, New York, NY, for Defendant.

MEMORANDUM AND ORDER

JOHN A. ROSS, UNITED STATES DISTRICT JUDGE

This matter is before the Court on Express Scripts' Motions to Exclude Expert Report and Testimony of Plaintiff's experts Loyd Allen (Doc. No. 466), Kenneth Schafermeyer (Doc. No. 469), and Richard Moon (Doc. No. 474), and Express Scripts' Motion for Reconsideration and For Sanctions Concerning the Production of Cash Transactions (Doc. No. 498) and Request for Terminating Sanctions in Connection with Plaintiffs' Discovery Misconduct (Doc. No. 521).¹ The Court took up these motions at a hearing on October 12, 2018. Because the issue of sanctions is intertwined with the Court's rulings on Express Scripts' Daubert motions, the Court will address them together. There are also pending motions for summary judgment (Doc. Nos. 472, 478), which will be addressed separately.

I. Background

As the Court noted at the hearing on October 12, this four-year old case has been vigorously contested since its inception. There is no question that vigorously contested litigation can become contentious. While some of the discovery disputes in this case have not necessarily been out of the ordinary, there came a point in time when the Court determined it necessary – given the scope and extent of the discovery disputes, and after giving the parties every opportunity to limit those disputes – to appoint a Special Master to resolve some of the parties' discovery issues.

Among the discovery issues addressed by the Special Master was ESI's motion to compel production of documentation pertaining to HM's cash transactions. (Doc. No. 499-4) The issue of cash transactions is relevant because under the parties' Agreement HM was entitled to seek reimbursement for covered medications at the lesser of the Average Wholesale Price (AWP) or the "usual and customary" price (U & C), which is based on sales to cash paying customers. Records of cash transactions will show whether the price submitted to ESI reflected what HM actually charged its cash customers. HM opposed the motion, stating it had searched its pharmacy database Micro Merchant, and confirmed there "were no such transactions." HM attached a sworn declaration from its Chief Marketing Officer Spencer Malkin in support, stating that "HM searched its records to determine whether [HM]'s records contain any record of its customers paying cash for a dispensed compound prescription during the time period January 1, 2014 through August 31, 2014 and found no such records." (Doc. No. 499-5) The Special Master recommended the ESI's motion be denied based on the representations of Malkin as well as the representations of HM's counsel (Doc. No. 445 at 5-6), and the Court adopted the Special Master's report and recommendation (Doc. No. 447).

By the time fact discovery closed on April 26, 2018, HM had produced a mere 1,263 documents to ESI.² Two months later, on June 14, 2018, well after the completion of depositions and expert reports, HM produced 18,619 documents to ESI. HM produced 24 more documents on June 22, 2018, and 81 more documents on July 1, 2018. Then, on July 9, 2018, HM – without notice to ESI – produced an additional 28,070 documents. Based on these untimely productions totaling 46,794 documents, ESI filed a motion for an order to show cause and for sanctions on July 11, 2018, seeking, inter alia , an explanation for HM's untimely production. (Doc. No. 451)

In response, HM asserted "substantial justification" for its late production of documents, explaining that it had believed a 2014 e-mail archive with responsive documents was destroyed in a vendor dispute with its then IT vendor EOX/Intermedia in 2016. In April 2018, HM discovered a mirror image copy of the 2014 e-mail archive at another vendor, Advanced Network Consulting. HM represented that the post-discovery production came from that re-discovered 2014 mirror image e-mail archive, which according to HM, was not previously known or available to them. HM submitted a declaration from its Chief Marketing Officer Spencer Malkin (Doc. No. 459-1) outlining these issues, and representing that as of July 16, 2018, "all relevant documents located within the archive have since been produced to Defendants." (Id. at ¶ 12)

The Court held a hearing on ESI's motion on July 19, 2018. At that hearing, counsel for HM indicated that additional documents from the 2014 archive were being withheld as privileged. The Court granted ESI's motion for sanctions, finding HM's conduct in failing to timely provide documents was, at a minimum, grossly negligent and ordering HM to produce all documents including those on its privilege log in a readable format for attorneys' eyes only. The Court further ordered HM to produce for deposition, at its cost and expense, two of its employees regarding the evidence disclosed in HM's recent document production, as well as a corporate representative to testify regarding HM's recent document production. (Doc. No. 464) The Court reserved ruling on any other sanctions following the completion of the additional discovery on HM's late production, and the explanation for it. Thereafter, between July 23 and August 22, 2018,³ HM produced 71,470 documents that had previously been withheld, including a spreadsheet created in 2014 by Marc Poirier, HM's Chief Financial Officer, detailing thousands of cash transactions processed by HM. (Doc. No. 498-7) Poirier drew on records from Micro Merchant to arrive at an estimated breakdown of cash versus insured transactions processed by HM as of September 16, 2014. This spreadsheet directly contradicts representations made by HM and Malkin to both the Special Master and this Court that there were no such records.⁴

HM has now admitted that Malkin's representation that there were no records of cash transactions was false. In its response to ESI's motion for reconsideration and for sanctions concerning the production of cash transactions filed on September 10, 2018, HM submitted an unsworn declaration from Malkin stating that

The statement in my prior Declaration ... was made based on a search I directed my staff to make. Specifically, I understood that the relevance of ‘cash sales’ had to do with ESI claiming that HMC was selling prescriptions for cash at a price lower than AWP. I therefore directed my staff to run a search for records reflecting cash sales at a price different than AWP. That search was run and it was reported to me by my staff that HMC had no records of such transactions. Accordingly, my prior Declaration should have said that a review of HM New Jersey's pharmacy's records do not contain any record of its customers paying cash for a dispensed compound prescription during the period January 1, 2014 through August 31, 2014 that was lower than the AWP charged for those same compounds. The statement that there were no records of any cash transactions at all was incorrect . (emphasis added)

The Court-ordered depositions took place on September 27 and 28, 2018. The following week, HM produced over 1,100 additional documents consisting of records of system edits and overrides for prescription claims submitted to ESI for reimbursement ("the audit trail") from its pharmacy database Micro Merchant. This information had been the subject of a number of discovery requests by ESI as far back as September 2015 (Doc. No. 453-1), yet in September 2017, HM's counsel represented "we are not aware of any overrides being performed so we have not identified any documents responsive to this request ... As we understand this request ... we do not have any documents responsive to this request." (Doc. No. 453-6) HM acknowledged at the October 12 hearing that documents from Micro Merchant have always been available to it (and had nothing to do with the IT vendor dispute) and again contradict its previous representations that such records do not exist.

On October 10, 2018, ESI filed a request for terminating sanctions in connection with HM's discovery misconduct. ESI asserts that HM's records of uninsured/cash transactions and the audit trail are relevant not only to its claims and defenses, but also to HM's compliance with the Provider Agreement and its alleged damages and lost profits. The documents also impact the opinions and assumptions offered by each of HM's proffered experts, as discussed below. The Court held a hearing on October 12, 2018 to address the parties' motions for summary judgment and ESI's Daubert motions and took up ESI's sanctions motions as well.

II. Discussion

A. Sanctions

The Court's authority to sanction a party for its discovery misconduct flows from its inherent power to "manage [its] own affairs so as to achieve the orderly and expeditious disposition of cases, including fashion[ing] an appropriate sanction for conduct which abuses the judicial process." Knapp v. Convergys Corp., 209 F.R.D. 439, 442 (E.D. Mo. 2002) (internal quotation omitted). Pursuant to Rule 37, a district court has broad discretion to impose sanctions for discovery violations, see Nat'l Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 642–43, 96 S.Ct. 2778, 49 L.Ed.2d 747 (1976) (per curiam), including "(i) directing that the matters embraced in the order or other designated facts be taken as established...