United States ex rel. Denis v. Medco Health Solutions, Inc.

UNITED STATES OF AMERICA,STATE OF CALIFORNIA,STATE OF FLORIDA, andSTATE OF NEW JERSEY, ex rel.,PAUL DENIS, Plaintiffs, v. MEDCO HEALTH SOLUTIONS, INC.,and EXPRESS SCRIPTS HOLDING COMPANY, Defendants.

Civ. No. 11-684-RGA

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

January 5, 2017

Jeffrey S. Goddess, Esquire and P. Bradford deLeeuw, Esquire of Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware. Counsel for Plaintiffs. Of Counsel: David S. Stone, Esquire (argued) of Stone & Magnanini LLP, Berkeley Heights, New Jersey.

Jack B. Blumenfeld, Esquire and Rodger D. Smith II, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware. Counsel for Defendants. Of Counsel: Enu Mainigi, Esquire, Holly Conley, Esquire, D. Keith Clouser, Esquire and Craig D. Singer, Esquire (argued) of Williams & Connolly LLP, Washington D.C.

MEMORANDUM OPINION

Dated: January 5, 2017

Wilmington, Delaware

ANDREWS, United States District Judge:

Relator Paul Denis brings this qui tam action against Defendants Medco Health Solutions, Inc. and its parent, Express Scripts Holding Company (collectively, "Medco") alleging violations of the False Claims Act ("FCA"), 31 U.S.C. § 3729-33, and analogous state statutes. Medco has moved to dismiss this action pursuant to Fed. R. Civ. P. 12(b)(1). Specifically, Medco claims that the court lacks subject matter jurisdiction pursuant to two provisions of the FCA: 31 U.S.C. § 3730(e)(4) (the "public disclosure bar") and 31 U.S.C. § 3730(b)(5) (the "first-to-file rule"). If the court finds that it has subject matter jurisdiction over this action, Medco argues that Denis' complaint should still be dismissed for failure to state a claim as required by Fed. R. Civ. P. 12(b)(6), and failure to plead fraud with specificity as required by Fed. R. Civ. P. 9(b).

The court has original jurisdiction over the federal law claims pursuant to 28 U.S.C. § 1331 and 31 U.S.C. § 3732(a), and supplemental jurisdiction over the state law claims pursuant to 28 U.S.C. § 1367 and 31 U.S.C. § 3732(b). For the following reasons, the court finds that it lacks subject matter jurisdiction over this case. Accordingly, Medco's motion is granted and the complaint is dismissed without prejudice.

I. BACKGROUND

A. Procedural History

On August 3, 2011, Denis filed his original complaint under seal on behalf of the United States of America. (D.I. 2). On June 6, 2013, Denis filed his first amended complaint adding details regarding the purportedly false claims and noting that, since filing the original complaint, Medco had merged with Express Scripts. (D.I. 16). On October 11, 2013, Denis filed a second amended complaint adding state law claims and, as nominal plaintiffs, the states of California, Florida, New York, and New Jersey. (D.I. 28). The United States and California notified the courtof their decision not to intervene. (D.I. 21, D.I. 47). New York voluntarily dismissed its claims. (D.I. 31). Florida and New Jersey have not filed a notice of intervention or declination. On June 5, 2015, the court unsealed the case. (D.I. 55). Denis filed a third amended complaint on October 22, 2015, which is the operative complaint in this action. (D.I. 78). The third amended complaint removed New York as a nominal plaintiff and any related allegations. (Id.). It also added allegations related to Denis' personal knowledge of the purportedly false claims. (See, e.g., id. at ¶¶ 20-21, 108, 111, 117). Medco's motion to dismiss followed.

B. The Parties

Medco is a pharmacy benefit manager, or "PBM." It provides services to health plans and their enrollees by administering pharmacy benefits, processing pharmacy claims, developing formularies, and negotiating with pharmaceutical manufacturers to obtain rebates for health plan sponsors. (D.I. 78 ¶ 8; D.I. 81-1, Ex. 2 ¶¶ 33-34). Medco's clients include health plans with enrollees receiving medical benefits through Medicaid, Medicare Part D, Medicare + Choice, the Retirement Drug Subsidy program, and government employers. (D.I. 78 ¶ 9; D.I. 81-1, Ex. 2 ¶ 38).

Denis was hired by Medco in 1992 as a Director of Special Drug Purchasing, a title that later changed to Director of Pharmaceutical Contracting. (D.I. 78 ¶ 46). In 1995, Denis was promoted to Vice President of Pharmaceutical Contracting, a position in which he remained until becoming a Vice President in Employer Sales in 2007. (Id.). Denis left Medco in November 2008. (Id. at ¶ 48).

C. Previous False Claim Allegations Against Medco

In 1990, Congress enacted the Medicaid Rebate Act, 42 U.S.C. § 1396r-8, often referred to as the "Best Price" program, to address the fact that Medicaid was routinely paying more forprescription drugs than other large buyers. (D.I. 81-1, Ex. 1 ¶ 58; id., Ex. 2 ¶ 21). Pursuant to the Medicaid Rebate Act, participating manufacturers who want their drugs covered by Medicaid must enter into a rebate agreement with the Secretary of Health and Human Services. (D.I. 81-1, Ex. 2 ¶ 22). The rebate agreement requires manufacturers to pay a quarterly rebate to each participating state. The rebate is calculated as the product of: (a) the number of drug units paid for by the state; and (b) a certain percentage of the average manufacturer price, or the difference between the average manufacturer price and the best price, whichever is greater. (D.I. 81-1, Ex. 1 ¶ 59 (citing 42 U.S.C. § 1396r-8(c)(l))). "Best price" is defined as "the lowest price available" from the manufacturer "inclusive of cash discounts, free goods, volume discounts, and rebates." (D.I. 81-1, Ex. 2 ¶ 26).

Several years before Denis sued, multiple civil complaints and news reports alleged that pharmaceutical manufacturers paid kickbacks to PBMs, including Medco, in exchange for PBMs favoring certain drugs, and the PBMs disguised the kickbacks as something other than rebates to avoid sharing the disguised rebates with clients, as required. (D.I. 81-1, Exs. 1-5; D.I. 81-2, Exs. 6-8; D.I. 81-3, Exs. 9-10; D.I. 81-4, Exs. 10-11; D.I. 81-5, Exs. 12-18). Two of the civil complaints naming Medco as a defendant were the qui tam actions captioned United States ex rel. Schumann v. Medco, No. 03-CV-5423 (E.D. Pa.) (hereinafter Schumann); and United States ex rel. Hunt, et al. v. Merck-Medco Managed Care L.L.C., No. 00-CV-737 (E.D. Pa.) (hereinafter Hunt).¹

In the Schumann litigation, the relator alleged that "Medco and the AstraZeneca Defendants entered into a series of sham contracts, and amendments thereto, for purchase discounts to Medco . . . in exchange for Medco's agreement to purchase Prilosec® and Nexium® for dispensing as the exclusive proton pump inhibitor ('PPI') drugs in its mail service pharmacies and for preferred placement on its formularies, including formularies used by Government Programs." (D.I. 81-1, Ex. 2 ¶ 119). "Government Programs" was defined as any federal or state health plan used to pay benefits in whole or in part, including Medicaid, Medicare, and Medicare Part D. (Id. at ¶¶ 38-39). As a result of the sham contracts, the best price for Prilosec and Nexium "did not reflect the purchase discounts on those drugs that the AstraZeneca Defendants sought to conceal . . . ." (Id. at ¶ 117). Finally, the relator alleged that AstraZeneca paid the disguised rebates to Medco pursuant to the sham contracts "from 1996 through at least 2007, and perhaps continuing thereafter." (Id.).

In the Hunt litigation, the relators primarily alleged that Medco had engaged in several fraudulent practices when filling prescriptions, including cancelling and destroying prescriptions, billing patients for drugs they never ordered, and creating false records of contact with physicians. (D.I. 81-1, Ex. 3 ¶ 1). But the relators also alleged that Medco had violated the Anti-Kickback Statute by soliciting and receiving inducements from pharmaceutical manufacturers to favor their products. (Id.). When asked during discovery to elaborate on the inducements Medco allegedly solicited, Hunt responded that:

Medco has received both rebate and non-rebate payments from manufacturers. . . . In client contracts, Medco is obliged to pass through a percentage (sometimes 100%) of formulary rebates collected . . . . The amount of money collected from manufacturers that Medco must pass on to health plan clients, including those with federal contracts, depends on how payments are categorized by Medco and the manufacturer. By entering into non-rebate agreements with manufacturers, or by constructing agreements allocating some rebate payments to a non-formulary bucket, Medco is able to retain a larger share of the total it collectsfrom manufacturers. To the extent these payments were made to, and accepted by, Medco to induce it to enter into rebate contracts, or solicited by Medco to induce drug manufacturers to enter into rebate contracts, the payments constituted kickbacks.

(D.I. 81-1, Ex. 4 at pp. 61-62).

In 2006, the government intervened in both the Hunt and Schumann litigation as to Medco and entered into settlement agreements to resolve those claims. (D.I. 80 at 4-5). Contemporaneous with the settlements, Medco entered into a corporate integrity agreement ("CIA") with the Office of Inspector General of the Department of Health and Human Services and the Office of Inspector General of the Office of Personnel Management. (D.I. 78 ¶ 13). Under the CIA, Medco was required to monitor and track all "focus arrangements," a term defined as all arrangements under which "compensation or remuneration is received by Medco from or on behalf of a pharmaceutical manufacturer, including but not limited to, rebates, regardless of how categorized, market share incentives, commissions, fees under products and services agreements, fees received for sales utilization data and administrative or management fees." (Id. at ¶ 15). The definition of "focus arrangements" specifically excluded "purchase discounts based upon invoiced purchase terms." (Id. at ¶ 16).

D. Relator's False Claim Allegations

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