Pirelli Armstrong Tire Corp.. Retiree Med. Benefits Trust v. Walgreen Co.

• Decision Date: 21 January 2011
• Docket Number: No. 10–1686.,10–1686.
• Parties: PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL BENEFITS TRUST, Plaintiff–Appellant,v.WALGREEN COMPANY, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

631 F.3d 436

78 Fed.R.Serv.3d 771

50 Employee Benefits Cas. 1962

PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL BENEFITS TRUST, Plaintiff–Appellant,

v.WALGREEN COMPANY, Defendant–Appellee.

No. 10–1686.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 30, 2010.Decided Jan. 21, 2011.

Patrick E. Cafferty (argued), Cafferty Faucher, Chicago, IL, for Plaintiff–Appellant.Robert M. Andalman (argued), Loeb & Loeb, Chicago, IL, for Defendant–Appellee.Before FLAUM, MANION, and TINDER, Circuit Judges.FLAUM, Circuit Judge.

The plaintiff in this case, Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust (“Pirelli”), initiated a putative class action under the Illinois Consumer Fraud and Deceptive Business Practices Act. For tax law purposes, Pirelli is a voluntary employees' beneficiary association, a tax exempt trust that exists to provide specified benefits to members of its related association. For our purposes, however, Pirelli is a third-party payor (typically one's insurance company) that pays pharmacies for the portion of a drug price that exceeds its members' co-payments. Pirelli's lawsuit maintains that the defendant, Walgreen Company (“Walgreens”), systematically took prescriptions that were written for cheap forms of two popular drugs and illegally filled the prescriptions with expensive forms. The district court granted Walgreens' motion to dismiss, ruling that Pirelli failed to meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b). We affirm the judgment of the district court.

I. Background

When a patient takes a prescription to a pharmacy, the pharmacy has some maneuvering room: it generally can fill the prescription with either the specified drug or a generic, “bioequivalent” version of the drug. Under Illinois law, however, a pharmacy cannot take a prescription for the tablet form of a drug and fill it with the capsule form of the drug, or vice-versa—the practice is forbidden by statute and the differences in form might affect how a person absorbs the active ingredients. Warner–Lambert Co. v. Shalala, 202 F.3d 326, 327–28 & n. 2 (D.C.Cir.2000) (providing an overview of the regulatory regime and its implications); 225 ILCS 85/25 (a pharmacist may substitute only drugs that the Food and Drug Administration (“FDA”) has determined to be therapeutically equivalent); cf. also B.G. Charles & G.A.G. Mogg, Comparative in Vitro and in Vivo Bioavailability of Naproxen from Tablet and Caplet Formulations, 15 Biopharm. & Drug Disposition 121, 125 & Figure 1 (1994).

Pirelli alleges that Walgreens, a company that operates roughly 7,000 pharmacies nationwide, violated the regulatory regime in Illinois with respect to two different drugs. One drug was generic Zantac (“Ranitidine”). The other was generic Prozac (“Fluoxetine”). Walgreens allegedly took prescriptions that called for the less costly form of each drug and filled them with the more costly form. Consumers, responsible for only the co-pay, were none the wiser. But Pirelli unwittingly reimbursed Walgreens for costly forms of drugs that were never prescribed.

That is the shorthand version; to explain how the alleged scheme worked, Pirelli's complaint provides considerable detail about the drug approval process before the FDA, the drug reimbursement process, and the industry actors involved. We can summarize. Pirelli, as a third-party payor, used a Pharmacy Benefit Manager (“PBM”) to process, settle disputes over, and pay pharmacies for prescriptions. Essentially, the PBM is a go-between that processes and smoothes over transactions between the third-party payor (Pirelli) and the pharmacy (Walgreens). The PBM is not only a middleman, however; it establishes a list of Maximum Allowable Costs (“MAC”) for various drugs. The MAC list gets turned over to pharmacies like Walgreens. The list sets a reimbursement price—effectively placing a ceiling on the price of specified drugs. For drugs, or dosage forms of drugs, that are not on the MAC list, the reimbursement price is based on a benchmark, called the Average Wholesale Price (“AWP”), which comes directly from a drug's manufacturer. Predictably, when a drug is priced based on the AWP, the reimbursement is higher than when reimbursement is based on the MAC price. Put another way, a pharmacy makes more money when it sells a drug whose reimbursement is governed by the AWP rather than by the MAC list.

According to Pirelli, Walgreens took advantage of the pricing scheme to commit fraud. Both Ranitidine tablets and Fluoxetine capsules were the most popularly prescribed forms of their respective drugs and were subject to reimbursement based on the cheaper MAC list. But, because the more expensive forms of the drugs were rarely prescribed, there were no MAC-list prices for Ranitidine capsules and Fluoxetine tablets. Since mid–2001, Walgreens adopted a policy of filling prescriptions for Ranitidine tablets with the more costly capsule form. Likewise, Walgreens filled prescriptions for Fluoxetine capsules with the more costly tablet form. Each time it filled a prescription, the theory goes, Walgreens represented to the PBM that it had received a prescription for the costly form of the drug; the PBM passed on the misrepresentation to Pirelli, who then reimbursed Walgreens at the more expensive AWP price—two to four times higher than the MAC price.

That is a lot of detail ¹, although detail (“particularity”) is what a plaintiff needs in alleging fraud to satisfy the requirements of the Federal Rules of Civil Procedure. The particularity requirement ensures that plaintiffs do their homework before filing suit and protects defendants from baseless suits that tarnish reputations. And the requirement dovetails with lawyers' ethical obligations to ensure they conduct a pre-complaint inquiry before signing off on their clients' contentions. What sort of pre-complaint inquiry is evidenced by Pirelli's complaint? The complaint points to three grounds for its suspicion that Walgreens defrauded it. The first ground is a “preliminary review” of Pirelli's reimbursement data: during the course of the (apparently nationwide) review, Pirelli discovered “several instances in which [Pirelli] paid Walgreens for the more expensive dosage forms, when lesser [sic] expensive dosage form [sic] were available.” That allegation, at least in a vacuum, is not impressive. The data include a five-year window, and one would expect some number of instances when the more expensive forms of the drugs were prescribed: Pirelli found 11 members on whose behalf it reimbursed Walgreens for the more expensive form of Ranitidine and just a single member on whose behalf it reimbursed Walgreens for the more expensive form of Fluoxetine. Only one member's reimbursements occurred in Illinois. Moreover, the fact that the drug companies make multiple forms suggests that there are markets for them. And since the body may absorb capsules and tablets differently, there could be medical reasons for preferring one form of the drug over another in specific cases.

The more interesting aspect of Pirelli's preliminary look comes from a subset of its data. Pirelli found three members—one in Illinois, one in Louisiana, and one in Iowa—who filled some prescriptions at Walgreens and others at different pharmacies. The data are presented in tables for each of the three members; the tables list the date of each transaction, the pharmacy involved in the transaction, and the dosage form for which Pirelli reimbursed the pharmacy. The three histories show that non-Walgreens pharmacies filled each member's Ranitidine prescription with tablets, while Walgreens filled the same member's prescription with more costly capsules. For example, Pirelli's exhibit shows that its single Illinois patient had 16 prescriptions for Ranitidine filled at 3 different pharmacies. Only Walgreens filled prescriptions with the more costly form of the drug. In each case, one cannot see if the reimbursements were made under the same prescription, although it does appear that something suspicious was happening: the transactions involving Walgreens are sandwiched between transactions from other pharmacies, and no one has suggested that a person might receive prescriptions for both the tablet form of a drug and the capsule form.² The pattern of reimbursements suggests that the three members were supposed to get the cheaper form of Ranitidine and they did not, either the result of a prescription-filling error or fraud.

The second ground for Pirelli's suspicion, and where Pirelli gets most of its information about how the alleged fraud worked, is a complaint filed in a 2003 qui tam action in the Northern District of Illinois (the “ qui tam case”). The allegations in that whistleblower suit, based on accusations made by a pharmacist, indicate that “[u]pon receiving a [Ranitidine] tablet prescription, Walgreens' pharmacy personnel could not process the orders as written, but instead filled the prescriptions with capsules.” The pharmacist in question did not actually work for Walgreens. Rather, the pharmacist worked for other pharmacies; when he would receive prescriptions that were being transferred from Walgreens to one of the pharmacies where he worked, the Walgreens pharmacists “regularly indicated” how their prescription-filling system functioned. See Compl. ¶¶ 16–17, United States ex rel. Lisitza v. Walgreens Co., No. 03–cv744 (N.D.Ill. Jan. 31, 2003).

The third ground for Pirelli's suspicion comes from an investigation that was conducted by another PBM, not the one that Pirelli used. The PBM looked at transactions that it had facilitated with Walgreens, drawing most of its data from St. Louis, Boston, and Phoenix. The investigation indicated that, for the transactions that the PBM facilitated, Walgreens filled an overwhelmingly large percentage (97 percent) of Ranitidine prescriptions with capsules, while every other pharmacy filled...