46 F.3d 535 (6th Cir. 1995), 93-3769, Preferred RX, Inc. v. American Prescription Plan, Inc.

Docket Nº:93-3769, 93-3835.
Citation:46 F.3d 535
Party Name:PREFERRED RX, INC., Plaintiff-Appellee, Cross-Appellant, v. AMERICAN PRESCRIPTION PLAN, INC.; Ray Adiel; Medivix, Inc.; and American Preferred Prescription, Inc., Defendants-Appellants, Cross-Appellees, Ronald English, Defendant.
Case Date:February 07, 1995
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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46 F.3d 535 (6th Cir. 1995)

PREFERRED RX, INC., Plaintiff-Appellee, Cross-Appellant,



Inc.; and American Preferred Prescription, Inc.,

Defendants-Appellants, Cross-Appellees,

Ronald English, Defendant.

Nos. 93-3769, 93-3835.

United States Court of Appeals, Sixth Circuit

February 7, 1995

Argued Nov. 28, 1994.

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Nick Tomino (argued and briefed), Reminger & Reminger, Cleveland, OH, for Preferred RX, Inc.

Marvin L. Karp (argued and briefed), Ulmer & Berne, Cleveland, OH, for American Prescription Plan, Inc., American Preferred Prescription, Inc., Ray Adiel, Medivix, Inc., Ronald English.

Before: MILBURN and SUHRHEINRICH, Circuit Judges; and JOINER, District Judge. [*]

JOINER, District Judge.

Defendants American Prescription Plan, Inc. ("APP"); American Preferred Prescription, Inc. ("American Preferred"); Medivix, Inc.; and Ray Adiel appeal the judgment entered in favor of plaintiff Preferred RX, Inc., on its breach of contract and fraud claims. Preferred RX claimed that APP breached its agreement to deal exclusively with Preferred RX, and that all of the defendants made fraudulent representations regarding how their business relationship would be conducted. The jury found APP liable for breach of contract and all four defendants liable for fraud. Judgment was entered against defendants jointly and severally for $1,122,643 in compensatory damages

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and $1 million in punitive damages. Additionally, judgment was entered against Preferred RX on American Preferred's counterclaim in the amount of $61,340.90.

Defendants raise numerous issues, challenging on various grounds both liability and damages, and two defendants challenge the court's personal jurisdiction over them. Preferred RX cross-appeals on two issues, the court's denial of prejudgment interest on the fraud judgment, and the court's decision to compute the amounts due on American Preferred's counterclaim. We affirm in part, reverse in part, and remand.


APP, a New York corporation and a subsidiary of Medivix, operated a mail order pharmacy licensed by the state of New York. The chairman of Medivix is Ray Adiel. In 1987, Michael Erlenbach and James Frederickson formed Preferred RX with the idea of promoting the benefits of mail order pharmaceutical services to persons with insurance who were required to take prescription drugs on a maintenance basis. Erlenbach and Frederickson had done business with Adiel and APP previously, and enlisted APP to serve as the pharmacy for their new plan.

Under the parties' arrangement, Preferred RX charged each customer an annual membership fee of $25, and obtained from the customer an assignment of benefits which permitted it to bill the customer's insurer directly. In return, Preferred RX "waived" the customer's co-pay obligation under his insurance policy. The customer sent his prescription directly to APP, which filled it and returned it by mail. APP billed Preferred RX for the prescription, charging the average wholesale price. Preferred RX, in turn, billed the insurance company at the retail price, which was 35-40 percent higher than wholesale. The insurance company deducted the applicable co-pay obligation from its reimbursement, and the difference between the amount received from the insurance company and the amount paid to APP was profit to Preferred RX. Through this arrangement, the customer was spared the task of submitting claims to his insurer, the need to pay for the prescription and wait for reimbursement, and responsibility for the co-pay obligation.

Preferred RX and APP entered into their first contract in November 1987. The contract had a term of one year and provided that "APP shall have the exclusive right to provide mail order prescription services to Sponsor [Preferred RX] during the term of this Agreement." Contract, p 7(d). The parties performed under this contract for nearly a year. 1 APP assigned a computer identification number to all of its customers, and listed Preferred RX's customers as group 194.

In September 1988, APP and Preferred RX entered into a new contract with a two-year term. This contract provided that Preferred RX was to receive a two percent commission on sales of brand name drugs to its members. The contract also imposed an exclusivity obligation on APP by adding the following to p 7(d): "Recognizing the unique nature of Sponsor, APP agrees not to provide prescription services to any other organization structured like Sponsor during the term of this agreement." Erlenbach testified that he and Frederickson wanted to make exclusivity a two-way street, stating that in light of Preferred RX's obligation not to do business with another mail order pharmacy, "we simply asked for the opposite side of the coin, that's okay, you can't do business with another Preferred RX." Frederickson testified that he and Erlenbach were concerned that APP not share Preferred RX's "technology" with another entity, or "develop[ ] their own program and [become] that entity themselves." The 1988 contract remained in force throughout the time period leading up to this suit. 2

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Marketing Directed at AIDS Patients; Ron English

In mid-1988, the availability and high cost of the medication AZT led Erlenbach and Frederickson to propose that they focus their marketing efforts in the AIDS community. Adiel introduced Erlenbach to Ron English, described as a New York philanthropist with connections in the gay community. Erlenbach proposed that English assist in marketing Preferred RX. English agreed, but did not want to sign a contract with Preferred RX. Instead, Preferred RX and English entered into an oral arrangement, whereby Preferred RX agreed to pay English a two percent commission on sales generated by him as well as a portion of the $25 fee paid by its customers. Preferred RX agreed to send the commission to APP for forwarding to English, but paid the portion of the fee directly to English. Although Adiel later informed Erlenbach that APP and English had entered into a written contract, Erlenbach did not know its terms until after this action was filed. By that contract, APP engaged English as an agent to market its services, and agreed to pay him a two percent commission on the sales he generated.

In October 1988, APP issued a memorandum to its customer service personnel, sending a copy to Preferred RX, instructing them that when a call regarding Preferred RX or Ron English or Ron came in, the caller was to be referred to Preferred RX at its 800 number. English secured the publication of an article in an AIDS magazine about the benefits of mail order pharmacy services, in which Preferred RX's name and phone number were listed. Preferred RX's business with AIDS patients increased significantly after the article was published.

Group 203; APP's Direct Marketing

Within months of entering into the second contract with Preferred RX, APP decided to begin direct marketing of its business. A meeting was held in November 1988 at Adiel's home at which Adiel, his wife Eleanor, APP's president Uri Kollnesher, and two APP employees were present. The employees testified that Adiel told them that APP was going to market its services directly to AIDS patients in a manner similar to Preferred RX's operations. Adiel explained that APP would obtain an assignment of benefits from customers, using Preferred RX's form as an example, and then bill the insurance companies directly. The employees also were told that new customers responding to these marketing efforts would be entered as group 203 in APP's computer. The employees were instructed to refer phone calls from new customers, including those resulting from English's efforts to Eleanor Adiel, and further were told that they were not to disclose the existence of group 203 to Erlenbach. Adiel acknowledged that a meeting was held at his home, but denied participating in it. Eleanor Adiel testified that group 203 was not comprised solely of AIDS patients but, rather, all persons with insurance. APP hired an employee to manage insurance billing, because the company previously had not billed insurance companies directly.

In early 1989, Adiel and Kollnesher approached Erlenbach, stating that English wanted a change in the parties' operating procedure. They explained that English was concerned that he could not verify that he was given credit for all of the business that went directly to Preferred RX, and said that he wanted calls to be referred first to APP so that a record could be kept of the sales generated by him. To accommodate English, Preferred RX agreed that promotional material would list only APP's name, or American Preferred Plan, the name under which the business sometimes was marketed. Erlenbach was told that APP would take each new customer's name and number, and then refer him or her to Preferred RX. Adiel denied that these representations were made.

APP's promotional materials subsequently made no reference to Preferred RX, and an

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article published in 1989 through English's efforts was similarly silent. Erlenbach testified that he and Frederickson were not concerned by this because they had been assured that APP would refer all calls from customers with insurance to Preferred RX. Erlenbach testified that Preferred RX stopped marketing in the AIDS community based upon these assurances. However, Preferred RX did not receive many new customers after its name was omitted from the marketing materials. Erlenbach questioned this with Adiel and Kollnesher, and was told that they too were concerned, and that the market simply could be slow in developing...

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