Chicago, Carpenters Welfare Fund v. Caremark

Decision Date19 January 2007
Docket NumberNo. 05-3476.,05-3476.
Citation474 F.3d 463
PartiesCHICAGO DISTRICT COUNCIL OF CARPENTERS WELFARE FUND, Plaintiff-Appellant, v. CAREMARK, INCORPORATED and Caremark Rx, Incorporated, Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Kenneth P. Ross (argued), Coleman & Associates, Chicago, IL, for Plaintiff-Appellant.

Robert H. Griffith (argued), Foley & Lardner, Chicago, IL, for Defendants-Appellees.

Before ROVNER, EVANS and SYKES, Circuit Judges.

ROVNER, Circuit Judge.

The Chicago District Council of Carpenters Welfare Fund ("Carpenters") sued Caremark, Inc. and its parent company Caremark Rx, Inc. (collectively "Caremark") for breach of fiduciary duties under 29 U.S.C. § 1106(b) of the Employee Retirement Income Security Act of 1974 ("ERISA").1 The district court determined that Caremark was not an ERISA fiduciary and therefore granted Caremark's motion to dismiss. We affirm.

I.

We take the facts as presented in the Complaint. Carpenters provides healthcare benefits to the members of a labor union. One of the benefits provided is prescription drug coverage which entitles the union members to obtain brand name or generic prescription drugs for a small co-payment. Carpenters pays the rest of the cost. In order to manage this benefit, Carpenters entered into a series of contracts with Caremark, Inc., one of the nation's largest Pharmaceutical Benefit Management ("PBM") companies.2 There are three such contracts in the record, signed in 1996, 1999, and 2003. Each covers a multi-year period. The first two contracts are between Caremark and Carpenters directly; we will refer to these as the "1996 Contract" and the "1999 Contract" respectively. The third agreement was executed in two parts: first is a contract between Caremark and Midwest Employee Benefit Fund Coalition, an organization of which Carpenters was a member. In the second part, Carpenters entered into a Participating Group Agreement with Caremark that set specific terms for services covered and prices. Together we will refer to those last two agreements as the "2003 Contract."

A.

The parties disagree about the nature of Caremark's obligations under the contracts. Carpenters portrays Caremark as its fiduciary, responsible for, among other things, negotiating prices with retail pharmacies and drug manufacturers on behalf of Carpenters. Caremark claims only to have agreed to provide the stated benefits at prices determined via arm's-length negotiations between Caremark and Carpenters. Carpenters attached to the Complaint the three contracts at issue, and under the Federal Rules of Civil Procedure, those contracts are considered parts of the pleading. Fed. R. Civ. Pro. 10(c); Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir.1993). We may thus turn to the contracts to determine the nature of the agreement. To the extent that the contracts contradict the Complaint, the contracts trump the facts or allegations presented in the Complaint. Flannery v. Recording Indus. Assoc. of Am., 354 F.3d 632, 638 (7th Cir.2004); Thompson v. Illinois Dept. of Prof. Regulation, 300 F.3d 750, 754 (7th Cir.2002); Perkins v. Silverstein, 939 F.2d 463, 469 n. 4 (7th Cir.1991) (in determining the sufficiency of the complaint, the court may rely on exhibits to the complaint whenever the allegations of the complaint are materially inconsistent with those exhibits). Under each of these contracts, Caremark was obliged to provide a variety of services to the covered union members. For example, Caremark was obliged to provide a mail service pharmacy, access to a network of retail pharmacies, claims processing, a formulary program, customer service phone lines, and maintenance of records. Caremark contracts with 55,000 retail pharmacies and operates four automated and nineteen mail-order pharmacies in order to process prescriptions for its clients. Each contract also provided that Caremark was not a fiduciary as that term is defined by ERISA, and that Carpenters possessed the sole authority to control and administer the plan.

Nonetheless, Carpenters alleges that, under the three contracts, Caremark has discretionary authority over the management and administration of Carpenters' drug benefit plan and also exercises discretion and control over Carpenters' assets. This discretionary authority gives rise to fiduciary duties under ERISA, Carpenters reasons. In particular, Carpenters alleges that Caremark has discretion (and therefore fiduciary duties) in four specific areas: (1) in negotiations with drug retailers over drug prices; (2) in negotiations with drug manufacturers over rebates and other discounts; (3) in the management of the formulary program; and (4) in the management of the drug switching program. We turn to the contracts to set out the terms in each of these areas.

1. Drug Prices

Each contract contains a similar paragraph setting out the costs associated with retail pharmacy services. The 1996 Contract provided:

Retail Pharmacy. For each prescription, a total net effective rate of the lesser of (x) the retail pharmacy's usual and customary prices or (y) AWP less 13% for brand-name drugs or (ii) HCFA MAC, as expanded by Caremark, for generic substitutes, as appropriate, plus a dispensing fee of $2.25, less the Covered Member co-payment as established by [Carpenters]. The above prices are based on the participation of a full and complete Caremark pharmacy network. Caremark will use its best commercially reasonable efforts to negotiate these rates with existing pharmacies in [Carpenters'] network. In the event of changes in the marketplace beyond Caremark's control resulting in a reduction in the number of participating pharmacies or in contract reimbursement rates for this network, pricing will be adjusted to reflect these changes.

1996 Contract, ¶ 4(a)(ii). The 1999 Contract similarly provided:

Retail Pharmacy. For each Prescription billed to [Carpenters], electronically processed and dispensed to a Covered Member through Caremark's retail pharmacy network, [Carpenters] shall pay Caremark AWP less 13.5% for brand-name drugs or AWP less 55% for MAC generic substitutes, as appropriate, plus a dispensing fee of $2.50, less the Covered Member copayment as established by [Carpenters]. [Carpenters] shall also pay any applicable sales or use tax. The above prices are based on the participation of a full and complete Caremark retail pharmacy network. Caremark shall use commercially reasonable efforts to negotiate these rates with existing pharmacies in [Carpenters'] retail network. In the event of changes in the marketplace beyond Caremark's control resulting in a reduction in the number of participating pharmacies or in contract reimbursement rates for this retail network, pricing shall be adjusted to reflect these changes.

1999 Contract, Ex. A, ¶ 2. Finally, the 2003 Contract sets out a similar set of terms:

Retail Pharmacy. For each Prescription billed to [Carpenters], electronically processed and dispensed to a Covered Member through Caremark's retail pharmacy network, [Carpenters] shall pay Caremark: (i) for Brand Drugs, the lower of Usual and Customary Price or AWP less 15%, or (ii) for Generic Drugs AWP less 55%; plus in each case a dispensing fee of $2.05 for Brand Drugs and $2.20 for Generic Drugs, and less the Covered Member Copayment as established by [Carpenters]. [Carpenters] shall also pay any applicable sales or use tax. The Covered Member Copayment for each electronically processed retail Prescription shall be the lesser of the Covered Member Copayment as established by [Carpenters] or the pharmacy's usual and customary charge. The above prices are based on the participation of a full and complete Caremark retail pharmacy network. Caremark shall use commercially reasonable efforts to negotiate these rates with existing pharmacies in [Carpenters'] retail network. In the event of changes in the marketplace beyond Caremark's control resulting in a reduction in the number of participating pharmacies or in contract reimbursement rates for this retail network, pricing shall be adjusted to reflect these changes. Such pricing adjustments will take effect only after Caremark provides at least thirty (30) days written notice of its intention to adjust pricing and upon Coalition's written agreement of such price increases.

2003 Contract, Ex. A, Section 1, ¶ 2.

There are a number of defined terms in these provisions that require explanation. "AWP" refers to the average wholesale price for a prescription drug as reported in First Data Bank or other nationally available reporting service of pharmaceutical prices. "Usual and Customary Price" refers to the retail price charged by a participating pharmacy for the particular drug in a cash transaction on the date the drug is dispensed as reported by the participating pharmacy to Caremark. "HCFA" is the Health Care Financing Administration, a federal agency that administers Medicare and Medicaid services. It is now known as the Centers for Medicare and Medicaid Services. "MAC" is the maximum allowable cost that the federal government will pay under Medicare and Medicaid for a generic drug. HCFA did not list a MAC price for every available generic drug. Carpenters avers in its Complaint that the phrase "HCFA MAC, as expanded by Caremark" obligated Caremark to calculate the price for these unlisted generic drugs using the formula that HCFA used to generate MAC pricing and offer Carpenters at least as favorable a price as an HCFA calculation would yield. According to Carpenters, these provisions gave Caremark the duty and the discretion to use commercially reasonable efforts to negotiate the prices Carpenters would pay retailers for filling union members' prescriptions.

2. Rebates

The 1996 Contract provided that Caremark would pay Carpenters a $1.50 rebate for each mail order prescription and a $0.75 rebate for each...

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