Moeckel v. Caremark Rx Inc.

• Decision Date: 29 August 2005
• Docket Number: No. 3:04-0633.,3:04-0633.
• Citation: 385 F.Supp.2d 668
• Parties: Robert E. MOECKEL, individually and on behalf of the John Morell Employee Benefits Plan, similarly situated Plans, and other participants and beneficiaries similarly situated, Plaintiff, v. CAREMARK RX INC., and Caremark Inc., Defendants.
• Court: U.S. District Court — Middle District of Tennessee

385 F.Supp.2d 668

Robert E. MOECKEL, individually and on behalf of the John Morell Employee Benefits Plan, similarly situated Plans, and other participants and beneficiaries similarly situated, Plaintiff, v. CAREMARK RX INC., and Caremark Inc., Defendants.

No. 3:04-0633.

United States District Court, M.D. Tennessee, Nashville Division.

August 29, 2005.

COPYRIGHT MATERIAL OMITTED

David A. McKay, Herman, Mathis, Casey, Kitchens & Gerel, LLP, Atlanta, GA, Stacey E. Tjon, Solberg Stewart Miller & Tjon, Fargo, ND, Mike Miller, Maury A. Herman, Stephen J. Herman, Herman, Herman, Katz & Cotlar, L.L.P., New Orleans, LA, John A. Day, Branham & Day, P.C., Brentwood, TN, for Plaintiff.

Robert H. Griffith, Frank E. Pasquesi, Ungaretti & Harris, Chicago, IL, Jennifer L. Weaver, Mark H. Wildasin, Joseph A. Woodruff, Waller Lansden Dortch & Davis, Nashville, TN, for Defendants.

MEMORANDUM

TRAUGER, District Judge.

Pending before the court is Defendants' Amended and Restated Motion to Dismiss or Transfer Plaintiff's Complaint (Docket No. 45) filed by defendants Caremark Rx Inc. and Caremark Inc., to which the plaintiff Robert E. Moeckel has responded (Docket No. 40), and defendants have replied (Docket No. 41).

Factual Background and Procedural History¹

The plaintiff is a participant in and beneficiary of the John Morrell Employee Benefits Plan ("the John Morrell Plan"), a plan that is alleged to be an "employee benefit plan" within the meaning of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq. The John Morrell Plan is a prescription drug plan, funded by contributions by the plan sponsors as well as co-insurance, deductibles, co-payments, and other contributions made by the plaintiff and other plan participants and beneficiaries. The plaintiff alleges that the John Morrell Plan is self-funded by the participants' direct, bi-monthly payroll contributions and by participants' co-payments calculated on a percentage basis relative to the cost of the prescription drugs.

According to the plaintiff's complaint, an employer who adopts a self-funded plan typically hires a third-party administrator to administer the plan and pay prescription drug claims for the employer using the Plan's money. In this case, the plaintiff alleges that the John Morrell Plan's prescription drug benefits are administered by defendant Caremark,² a pharmacy benefits manager ("PBM"). Caremark's relationship with the John Morrell Plan is governed by the Prescription Benefit Management Agreement ("Service Contract") between John Morrell & Company and Caremark Inc., first entered into on January 1, 1997. (Docket No. 31, Declaration of James F. Hogan, Exhibit A, Service Contract.)³ The plaintiff alleges that, in return for comprehensive drug processing services, Caremark receives dispensing and administrative fees, which are disclosed and negotiated with its plan clients. The activity central to this case is the additional compensation that the plaintiff claims Caremark receives in excess of the administrative fees negotiated with its plan clients, by virtue of Caremark's secret self-dealing with pharmacies, drug manufacturers, and other entities. Plaintiff asserts that Caremark fails to disclose this compensation to the plans and fails to pay it to the plans as plan assets.

In sum, Moeckel claims that Caremark exercises discretion or control over the pricing of prescription drugs through its control over the terms of its contracts with its network of retail pharmacies (which control the reimbursement rates for retail drugs) and with drug manufacturers (which control the actual cost of drugs dispensed through Caremark's mail order pharmacies). Plaintiff alleges that Caremark manipulates the terms of its undisclosed contracts by creating hidden "pricing spreads" that yield significant revenue to Caremark that it fails to pass through to the plans. By failing to disclose to the plans the discounted price it pays for drugs purchased by the plans' participants and beneficiaries at retail pharmacies, Caremark is allegedly able to conceal from the Plans the fact that Caremark secretly exercises its discretion to create a "spread" between the discounted price that Caremark pays retail pharmacies and the discounted price that Caremark contracts to be reimbursed by the plans, a "spread" it retains. Similarly, by buying drugs from drug manufacturers to stock mail-order pharmacies, through which Caremark sells prescriptions to participants and beneficiaries, Caremark arranges significant discounts on those drugs but creates a "spread" (which it retains) between the price that Caremark agrees to pay the manufacturers and the prices that Caremark contracts to be reimbursed by the plans.

Moeckel also alleges that Caremark contracts with drug manufacturers in ways that enrich Caremark to the detriment of the plans. Plaintiff alleges that Caremark is delegated discretionary control and authority to decide which manufacturers' drugs should be included in its formularies, including which will be included in its standardized formulary, which drugs on the formularies will be "preferred," and which relative cost indicators will be placed next to each included drug. Plaintiff also alleges that Caremark is delegated discretionary authority and control to create "formulary compliance programs," or drug-switching programs, which enable Caremark to switch plan participants and beneficiaries from higher-cost therapeutically equivalent drugs to lower-cost therapeutically equivalent drugs. The plaintiff alleges that Caremark uses the market power it gains from this level of control to enrich itself at the expense of the plans, by negotiating with manufacturers to favor more expensive therapeutically equivalent drugs, which increase the plans' costs, in exchange for monies which it retains and does not pass on to the plans. Having negotiated with a plan or a plan's sponsor to share some of the rebates or other compensation, the plaintiff alleges that Caremark also engages in self-dealing by characterizing (and sometimes intentionally mischaracterizing) payments, credits, or other compensation in ways to maximize its own profit at the expense of the plans. Moeckel also alleges that Caremark generates and retains interest on the "float" prior to disbursement of any rebates to the plans.⁴

Plaintiff filed this case on July 19, 2004 as a putative class action on behalf of the John Morrell Plan and all other similarly situated self-funded prescription drug plans utilizing the services of defendants Caremark Rx Inc. and Caremark Inc.⁵ Plaintiff's original Complaint was superseded by the Amended Complaint, filed November 9, 2004. (Docket No. 44.) In it, plaintiff asserts multiple counts against Caremark Rx Inc. and/or Caremark Inc. under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., bringing claims in his capacity as a participant in the John Morrell Plan, on behalf of the John Morrell Plan under Section 502(a)(2) and/or 502(a)(3) of ERISA, 29 U.S.C. §§ 1132(a)(2) and (a)(3), and on his own behalf and on behalf of other participants in, and/or beneficiaries of, the John Morrell Plan and other prescription drug Plans administered by Caremark who have made percentage co-payments when purchasing prescription drugs, under Section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3). Plaintiff alleges that the defendants, whom plaintiff asserts are fiduciaries within the meaning of ERISA, violated ERISA in the following ways: (1) Count I — breach of fiduciary duty under 29 U.S.C. § 1104; (2) Count II — breach of fiduciary duty under 29 U.S.C. § 1106(b)(1); (3) Count III — breach of fiduciary duty under 29 U.S.C. § 1106(b)(2); (4) Count IV — breach of fiduciary duty under 29 U.S.C. § 1106(b)(3); (5) CountV — breach of the duty of care under 29 U.S.C. § 1104(a)(1)(B); (6) Count VI — a cause of action for appropriate equitable relief from Caremark as a "party-in-interest" pursuant to 29 U.S.C. § 1106(A)(1)(D) and § 1132(a)(3); and (7) Count VII — an accounting of the amount of plan assets Caremark retained for its own benefit (and to the detriment of the plans) and of the profits earned by Caremark through its unlawful activities. Oral argument was heard on January 20, 2005 regarding Defendants' Amended and Restated Motion to Dismiss or Transfer Plaintiff's Complaint (Docket No. 45), which is currently before the court. The parties have filed supplemental authority that they assert is relevant.

Discussion

I. Standard of Review

The defendants move to dismiss plaintiff's complaint pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction due to lack of standing or pursuant to Rule 12(b)(6) for failure to state a claim, on various grounds. A motion to dismiss for lack of standing is properly analyzed under Rule 12(b)(1), since "[s]tanding is thought of as a `jurisdictional' matter, and a plaintiff's lack of standing is said to deprive a court of jurisdiction." Ward v. Alternative Health Delivery Sys., 261 F.3d 624, 626 (6th Cir.2001).

The defendants contend that, in addressing their motion to dismiss pursuant to Rule 12(b)(1), the court is not required to accept all of the plaintiff's factual allegations as true, the moving party may submit evidence indicating that the court lacks subject matter jurisdiction, and the plaintiff bears the burden of proving that jurisdiction exists, under the authority of RMI Titanium Company v. Westinghouse Electric Corporation, 78 F.3d 1125, 1133-35 (6th Cir.1996). This is partially correct. "A Rule 12(b)(1) motion can either attack the claim of jurisdiction on its face, in which case all allegations of the plaintiff must be considered as true, or it can attack the factual basis for jurisdiction, in which case the trial court must weigh the evidence and the plaintiff bears the burden of proving that jurisdiction exists." DLX, Inc. v. Kentucky, 381 F.3d 511, 516 (6th...