Roche Diagnostics Corp. v. Smith

• Decision Date: 30 September 2022
• Docket Number: Civil Action 2:19-CV-08761,2:17-CV-05552
• Parties: ROCHE DIAGNOSTICS CORP., et al., Plaintiffs, v. JEFFREY C. SMITH, et al., Defendants. LIFESCAN, INC., et al., Plaintiffs, v. JEFFREY C. SMITH, et al., Defendants.
• Court: U.S. District Court — District of New Jersey

1

ROCHE DIAGNOSTICS CORP., et al., Plaintiffs, v. JEFFREY C. SMITH, et al., Defendants.

LIFESCAN, INC., et al., Plaintiffs, v. JEFFREY C. SMITH, et al., Defendants.

Civil Action Nos. 2:19-CV-08761; 2:17-CV-05552

United States District Court, D. New Jersey

September 30, 2022

OPINION

CLAIRE C. CECCHI, U.S.D.J.

I. INTRODUCTION

These matters come before the Court on motions to dismiss Plaintiffs Roche Diagnostics Corporation and Roche Diabetes Care, Inc.'s (“Roche”) First Amended Complaint (19-08761 ECF No. 170, “Roche FAC”) and Plaintiff LifeScan, Inc.'s (“LifeScan”) (collectively “Plaintiffs”) Second Amended Complaint (17-05552 ECF No. 245, “LifeScan SAC”) pursuant to Federal Rules of Civil Procedure 12(b)(2) 12(b)(3), and 12(b)(6), as well as motions to transfer these actions to the District of Utah, filed by Defendants.^[1] Defendants are former employees and business partners of non-party Alliance Medical Holdings, LLC^[2] and its network of retail pharmacies (“Alliance”), including:

• Former CEO Jeffrey Smith, former CFO Justin Leavitt, former General Counsel David Grant, former Director of Pharmacy Operations Steven L. Hadlock, former Chief Pharmacy Officer Sahily Paoline, and former Chief Revenue Officer Blaine Smith (collectively, the “Officer Defendants”) (No. 19-08761, ECF Nos. 191, 231, 251, 190; No. 17-05552, ECF Nos. 360, 351, 349, 344);

• Travis Hughes, Lee H. Rosebush, Adam Koopersmith, and Alison Wistner - all former members of the Board of Directors and alleged major investors in Alliance (collectively, the “Director Defendants”) (No. 19-08761, ECF Nos. 230, 232, 229; No. 17-05552, ECF Nos. 346, 348);

• Zions Bancorporation, N.A., a national banking association alleged to have provided funding and credit to Alliance (the “Bank Defendant”) (No. 19-08761, ECF No. 233; No. 17-05552, ECF No. 345); and

• Several investment groups including shareholders and private equity firms - HS Medsource Holdco, LLC, Kesman Hughes & Company, LLC, Hughes & Company and Hughes & Company Investment Partners, LLC, (the “Hughes Entities”); Mercato Management, LLC, Mercato Partners, LLC, Mercato Partners Growth II GP, LLC, Mercato Partners Growth II, L.P., Mercato Partners Growth Affiliates II, L.P., Mercato Partners AI II, L.P., Mercato Partners Ingram, LLC, and Mercato Partners Ingram Co-Invest, LLC (the “Mercato Entities”); and Jabodon PT Company d/b/a Pritzker Group Venture Capital (the “Pritzker Group”) (collectively, the “Shareholder Defendants”) (No. 19-08761, ECF No. 234; No. 1705552, ECF No. 350) (“Defendants” hereinafter refers collectively to Shareholder Defendants, Officer Defendants, Director Defendants, and the Bank Defendant).

Plaintiffs opposed these motions (No. 19-08761, ECF No. 235 (“Roche Opp.”); No. 1705552, ECF No. 379 (“LifeScan Opp.”)), and Defendants replied. No. 19-08761, ECF Nos. 23642; No. 17-05552, ECF Nos. 403-06, 408-11. The Court held oral argument. For the reasons set forth below, Defendants' motions are denied.

II. BACKGROUND

a. Factual Background

The instant actions arise out of claims by Plaintiffs, manufacturers of two types of diabetes test strips (“Wholesale Strips” and “Retail Strips”), against Defendants regarding numerous alleged instances of insurance fraud that took place between 2013 and 2017 (the “Relevant Period”). In their complaints, Plaintiffs allege that Alliance, operating through a group of wholesalers and affiliated pharmacies, purchased Plaintiffs' Wholesale Strips from third-party distributors on the secondary market and then distributed these strips directly to individuals to further its alleged fraudulent scheme. According to Plaintiffs, Alliance fraudulently marketed and sold these Wholesale Strips to individuals guised as Retail Strips, which enabled Alliance to allegedly collect inflated reimbursement payments from the insurance providers. In other words, Defendants dispensed Wholesale Strips that they purchased on the secondary market to individuals, and allegedly collected a fraudulent Retail Strip reimbursement from insurance companies of up to three times the amount paid for the Wholesale Strips. Ultimately, the insurance companies that paid the purportedly fraudulent reimbursements to Defendants then collected rebates from Plaintiffs to offset the costs incurred through payment of these allegedly false reimbursements. Thus, Plaintiffs claim that they were injured by this alleged fraudulent scheme because the rebate payments they made to insurers on each allegedly fraudulent claim for a box of Retail Strips would not have occurred had Alliance disclosed that they were in fact distributing and seeking reimbursement for Wholesale Strips. Put differently, Plaintiffs assert that Defendants' alleged scheme caused Plaintiffs “to wrongfully issue [millions of dollars] in rebates . . . as a direct result of Defendants' fraudulent submission of insurance claims for Retail Strips. The rebates were wrongfully issued because only retail strips were eligible for rebate and Defendants did not dispense retail strips, despite submitting insurance claims saying they had.” Roche FAC ¶ 386; see also LifeScan SAC ¶¶ 339-40.

i. Sales of Wholesale and Retail Strips

Plaintiffs allege that, during the Relevant Period, individuals purchased Retail Strips at retail pharmacies (including Alliance's stores) pursuant to pharmacy benefit insurance plans, and Wholesale Strips from mail-order vendors, pursuant to wholesale insurance plans. Roche FAC at ¶¶ 45-77; LifeScan SAC at ¶¶ 61-94. When a patient with insurance purchased either Retail or Wholesale Strips, the seller was paid by the patient's insurer. Id. These insurers covered the patient's purchasing costs through a process known as “adjudication.” Id. In particular, while retail pharmacies and mail-order vendors distributed Plaintiffs' test strips to individuals, they would then “adjudicate” and submit reimbursement claims directly to these individuals' insurance providers to receive payment for the cost of the strips. Id. Plaintiffs further allege that the rate of reimbursement that the retail pharmacies and mail-order vendors received from insurers depended on the type of test strip reportedly sold, e.g., reported sales of Retail Strips demanded higher reimbursement payments from insurance providers than reported sales of Wholesale Strips. Id.

As alleged in the pleadings, Plaintiffs were compensated for sales of their strips in a different manner depending on whether the strips were Retail or Wholesale. As for Retail Strips, Plaintiffs were compensated by selling them directly to distributors at various listed prices ranging from $46 to $78 per box. Id. The distributors then sold the Retail Strips on the secondary market to retail pharmacies at a small markup above the wholesale price. Id. Then, as noted above, after individuals obtained Retail Strips from retail pharmacies, their insurance providers reimbursed the pharmacies at an additional markup. Id. Thereafter, once the insurance companies reimbursed the retail pharmacies, Plaintiffs paid the insurance providers rebates ranging from $30 to $70 for every box of Retail Strips. Id.

With respect to Wholesale Strips, Plaintiffs sold them exclusively to mail-order vendors for under $24 per strip box, and insurance providers subsequently reimbursed the mail-order vendors at a small markup on this price following their sales to individuals. Id. Given that Plaintiffs sold Wholesale Strips for far less on the secondary market to third-party distributors than Retail Strips, Plaintiffs did not pay rebates to insurance providers in connection with reported sales of Wholesale Strips. Id.

Accordingly, Plaintiffs' net profit was the difference between the revenue generated through sales of both Retail Strips and Wholesale Strips to distributors less the amount Plaintiffs paid to insurance providers in rebates for the downstream reported sale of Retail Strips. As such, Plaintiffs allege that it was critical for their profits that retail pharmacies-including Alliance's stores-and mail-order vendors accurately reported the type of test strip sold to insurance providers for reimbursement as these sale reports would ultimately determine how much Plaintiffs paid to the insurance companies in rebates, and, therefore, their profits. Id.

ii. Alliance's Fraudulent Scheme

Plaintiffs allege that Alliance exploited the adjudication process to recoup fraudulent reimbursement payments from insurance providers that were funded by Plaintiffs' rebate payments. Plaintiffs claim that Alliance's stores purchased Plaintiffs' Wholesale Strips on the secondary market. Id. Plaintiffs further contend that these same stores adjudicated millions of false reimbursement claims to insurance providers wherein they sold Wholesale Strips to individuals but reported that they had sold Retail Strips. Id. Plaintiffs allege that the fraudulent scheme produced a windfall for Alliance because, as discussed above: (1) Wholesale Strips were less expensive to purchase on the secondary market than Retail Strips, and (2) the company's reported sales of Retail Strips demanded higher reimbursement payments from insurance providers than reported sales of Wholesale Strips. Id. Indeed, Alliance employees described this scheme as “foundational,” with over 90% of the Company's revenues deriving from it during the Relevant Period. Roche FAC at ¶¶ 98, 353; LifeScan SAC at ¶ 9.

Plaintiffs assert that an Alliance-affiliated pharmacy located in New Jersey played a particularly “primary role” in the fraud by submitting millions of false reimbursement claims. Roche FAC at ¶ 33; LifeScan SAC at ¶ 48. In support, Plaintiffs contend that Defendants established Peterson Pharmacy in New Jersey, through which they allegedly submitted...