Cash & Henderson Drugs, Inc. v. Johnson & Johnson

• Decision Date: 27 August 2015
• Docket Number: No. 12–4689–cv.,12–4689–cv.
• Citation: 799 F.3d 202
• Parties: CASH & HENDERSON DRUGS, INC., Omega Pharmacy, LLC, Discount Drugs of Ellijay, GA, Inc., Klein's Pharmacy & Orthopedic Appliances, Inc., Monroe Pharmacy, Inc., Triangle Pharmacy, Inc., The Troutman Drug Co., Graves Drug Store Emporia, Inc., R.H. Moore Drug Company of Franklin, Inc., Pelta Drug, Inc., Ackal's Iberia Pharmacy, Inc., Northpark Pharmacy, Ltd., Miller Drugs, Inc., Rickman & Haile, Inc., Collinwood Drugs, Thrifty Drug Store, Inc., Pharma–Card, Inc., Creech Drug Co., Inc., Feldman, Inc., Family Prescription Center, Inc., Harrah Pharmacy, Inc., David W. Garber, Marjorie H. Lamar, Lively Drug Co., Inc., Plaintiffs–Appellants, Drug Mart Pharmacy Corp., et al., Plaintiffs, v. JOHNSON & JOHNSON, Caremark L.L.C., Express Pharmacy Services of PA, L.L.C., Defendants–Appellees, American Home Products Corp., et al., Defendants.
• Court: U.S. Court of Appeals — Second Circuit

799 F.3d 202

CASH & HENDERSON DRUGS, INC., Omega Pharmacy, LLC, Discount Drugs of Ellijay, GA, Inc., Klein's Pharmacy & Orthopedic Appliances, Inc., Monroe Pharmacy, Inc., Triangle Pharmacy, Inc., The Troutman Drug Co., Graves Drug Store Emporia, Inc., R.H. Moore Drug Company of Franklin, Inc., Pelta Drug, Inc., Ackal's Iberia Pharmacy, Inc., Northpark Pharmacy, Ltd., Miller Drugs, Inc., Rickman & Haile, Inc., Collinwood Drugs, Thrifty Drug Store, Inc., Pharma–Card, Inc., Creech Drug Co., Inc., Feldman, Inc., Family Prescription Center, Inc., Harrah Pharmacy, Inc., David W. Garber, Marjorie H. Lamar, Lively Drug Co., Inc., Plaintiffs–Appellants

Drug Mart Pharmacy Corp., et al., Plaintiffs

v.JOHNSON & JOHNSON, Caremark L.L.C., Express Pharmacy Services of PA, L.L.C., Defendants–Appellees

American Home Products Corp., et al., Defendants.¹

No. 12–4689–cv.

United States Court of Appeals, Second Circuit.

Argued: Feb. 4, 2015.

Decided: Aug. 27, 2015.

Nicholas A. Gravante, Jr. (Steven I. Froot, Michael I. Endler, Robert C. Tietjen, Benjamin D. Battles, on the brief), Boies Schiller & Flexner LLP, New York and Albany, N.Y.; (Wyatt B. Durrette, Jr., Kenneth D. McArthur on the brief), DurretteCrump PLC, Richmond, VA, for Plaintiffs–Appellants.

William F. Cavanaugh Jr. (Kathleen M. Crotty, Reed C. Bienvenu, on the brief), Patterson Belknap Webb & Tyler LLP, New York, N.Y., for Defendant–Appellee Johnson & Johnson.

Michael Sennett (Paul W. Render, Erin L. Shencopp, on the brief), Jones Day, Chicago, IL, for Defendant–Appellees Caremark, LLC, and Express Pharmacy Services of PA, LLC.

John M. Faust, Law Offices of John M. Faust, Washington, DC, for Amicus Curiae National Community Pharmacists Association.

David A. Balto, Law Offices of David A. Balto, Washington, DC, for Amicus Curiae Organization for Competitive Markets.

Before: PARKER, HALL, and LOHIER, Circuit Judges.

Opinion

BARRINGTON D. PARKER, Circuit Judge.

Plaintiffs-appellants, a group of twenty-eight retail pharmacies, appeal from a judgment of the United States District Court for the Eastern District of New York (Gold, M.J. ) dismissing their claims for money damages and injunctive relief under subsections 2(a), 2(d), and 2(f) of the Robinson–Patman Act, 15 U.S.C. § 13(a), 13(d), 13(f), and Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15, 26.

Defendants-appellees are primarily pharmaceutical manufacturers. It is undisputed that, since the early 1990s, the defendants have offered lower prices—typically through rebates or discounts—on brand name prescription drugs to “favored purchasers.” These purchasers include entities such as staff-model health maintenance organizations (HMOs) and pharmacy benefit managers. HMOs provide comprehensive, managed health care by their member physicians with limited referral to outside specialists. As with traditional health insurers, members make regular payments to the organization. Staff-model HMOs offer services provided by the HMO's own staff, rather than by third-party providers that contract with the HMO. Pharmacy benefit managers manage benefits for insurers and HMOs. The pharmacy benefit managers sometimes engage in retail sales directly or through mail-order pharmacies that they control. The drugs in question include a wide variety of brand name medicines, such as Lipitor

, Celebrex, and Zoloft, used to treat high cholesterol, arthritis, and depression, respectively.

Plaintiffs' main contentions are that the lower prices offered by manufacturers violate the Robinson–Patman Act by harming their ability to compete, and that favored purchasers violated the Act by using their drug formularies to extract the lower prices.² Plaintiffs sought to prove that the discounts caused them to lose customers to the favored purchasers, and that as a consequence they suffered injury under the antitrust laws. Defendants contended that the plaintiffs could prove neither the competitive injury required to establish a prima facie claim under the Robinson–Patman Act, nor the antitrust injury required to recover damages. Following discovery that lasted many years, the defendants moved for summary judgment. The district court concluded that plaintiffs could prove neither type of injury and granted defendants summary judgment. See Drug Mart Pharmacy Corp. v. Am. Home Products Corp., No. 93–CV–5148 (ILG)(SMG), 2012 WL 3544771 (E.D.N.Y. Aug. 16, 2012). This appeal followed.

This case has a complicated history. Plaintiffs opted out of a class action filed against drug manufacturers in the early 1990s that was part of a multi-district litigation consolidated in the Northern District of Illinois. The class action alleged Sherman Act violations on the part of the manufacturers due to a two-tier pricing system. These claims ultimately failed. In re Brand Name Prescription Drugs Antitrust Litigation, Nos. 94–CV–897, 94–MDL–997 (CPK), 1999 WL 33889 (N.D.Ill. Jan. 19, 1999), aff'd in part & vacated in part, 186 F.3d 781 (7th Cir.1999). The opt-out plaintiffs' cases were remanded. Those filed in the Eastern District of New York were consolidated and assigned to Judge I. Leo Glasser. Plaintiffs settled their Sherman Act claims, but litigated their Robinson–Patman Act claims before Judge Glasser and Magistrate Judge Steven M. Gold.

In those proceedings, certain plaintiffs and certain defendants were designated to move forward with discovery, and the designated defendants sought summary judgment. The district court denied summary judgment on the designated plaintiffs' Section 2(a) and 2(d) liability claims, of which competitive injury was an element. Drug Mart Pharmacy Corp. v. Am. Home Products Corp., 472 F.Supp.2d 385, 406, 420 (E.D.N.Y.2007)amended by No. 93–CV–5148 (ILG), 2007 WL 4526618 (E.D.N.Y. Dec. 20, 2007). However, it granted summary judgment on claims for damages and injunctive relief because the designated plaintiffs failed to show that they, individually, suffered antitrust injury. Id. at 430–32 ; Drug Mart Pharmacy Corp. v. Am. Home Products Corp., No. 93–CV–5148 (ILG), 2007 WL 4526618 (E.D.N.Y. Dec. 20, 2007). After these judgments, 3,700 non-designated plaintiff pharmacies at 3,987 locations remained.³ Drug Mart Pharmacy Corp., 2012 WL 3544771, at *1 n. 2. Of the plaintiff locations, 3,101 concluded that they would not be able to identify lost customers and filed stipulations of dismissal with prejudice. Id.

In an attempt to cure the fatal defect in the designated plaintiffs' case, these remaining plaintiffs devised, under court supervision, a matching process under which plaintiffs would attempt to identify customers they had lost to the favored purchasers. Thirty plaintiffs were randomly selected to participate in the matching process. After two additional plaintiffs dismissed their claims, there were twenty-eight remaining plaintiffs—who are the plaintiffs-appellants here. Id. at *4. Plaintiffs believed (and assured the court) that the matching process would yield a “material number” of lost customers. Id. The process went forward between March 2010 and May 2011, during which time plaintiffs obtained extensive discovery from five favored purchasers: Caremark, LLC, Advance PCS, Express Scripts, Medco, and Omnicare. Id. at *4–5. This process was pivotal to the resolution of the litigation because if plaintiffs could not show they lost customers to the favored purchasers during the years the rebates were in place, then they would be hard pressed to show competitive injury or damages.

The process was overseen by Magistrate Judge Gold and carefully designed and supervised to produce reliable matches. The parties focused their efforts on patients purchasing drugs used for chronic conditions, a population likely to continue to need the same or substantially similar drugs. The twenty-eight plaintiffs identified customers they had lost from among this group. They compared their databases of lost customers with the five favored purchasers' customer lists over a period from 1998 to 2010. Under this system, a “matched customer” was one who filled a prescription for one of the specified drugs, or a common substitute, at one of the five favored purchasers' pharmacies within six months of the last time they filled that prescription at one of the twenty-eight plaintiff pharmacies. Drug Mart, 2012 WL 3544771, at *5. At the conclusion of the matching process, the parties stipulated that it had been used to “determine the universe of potential lost customers that Plaintiffs claim they lost as a result of the pricing practices of Defendants.” Id. at *7.⁴ In contrast to what plaintiffs had anticipated, the matching process showed exceedingly few lost customers.

Based on the results of the matching process, defendants moved for summary judgment against the twenty-eight matching process plaintiffs, which the district court granted on all claims.⁵ Critical to this conclusion was the fact that the elaborate matching process showed that the plaintiffs had lost a minuscule number of customers to favored purchasers. As the district court noted, only approximately three percent of potential lost customers in plaintiffs' records could be identified as a customer who later filled his or her prescription with a favored purchaser. Id. at *5. National Community Pharmacists Association data showed that independent retail pharmacies filled between 22,000 and 28,000 prescriptions per year during the relevant time period. The district court contrasted these figures with the matching process data that showed an average of approximately eighteen lost customers and fifty-four lost transactions per pharmacy per year, a number of transactions that represented only one quarter of one percent of the average number of transactions of such pharmacies during that period. Id. at *6. It observed that many pharmacies lost no more than ten customers per defendant during the entire twelve-year period covered by the process. Id.

The district court noted plaintiffs' initial representations that they were ...