North Jackson Pharmacy Inc v. McKesson Corporation et al

Filing 61

MEMORANDUM OPINION. Signed by Magistrate Judge Staci G Cornelius on 10/12/17. (MRR, )

FILED
2017 Oct-12 PM 02:12
U.S. DISTRICT COURT
N.D. OF ALABAMA

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
NORTHEASTERN DIVISION
NORTH
INC.,

JACKSON

PHARMACY, )
)
)
Plaintiff,
)
)
v.
)
)
MCKESSON CORPORATION,
)
)
Defendant.
)

Case No.: 5:14-cv-02371-SGC

MEMORANDUM OPINION1
This matter was removed from the Circuit Court of Jackson County,
Alabama, on December 9, 2014. (Doc. 1). On August 24, 2015, the court denied
the motion to remand filed by the plaintiff, North Jackson Pharmacy, Inc. ("NJP"),
and ordered that Tom Smith be dismissed from this action as fraudulently joined.
(See Doc. 33). This matter is now before the court on the motion for summary
judgment filed by the remaining defendant, McKesson Corporation ("McKesson").
(Doc. 52). The motion is fully briefed and ripe for review. (Docs. 53, 57, 60). As
explained below, the motion is due to be granted.

1

The parties have previously consented to the exercise of dispositive jurisdiction by a magistrate
judge pursuant to 28 U.S.C. § 636(c). (Doc. 19).

I.

FACTS
NJP is an independent pharmacy located in Stevenson, Alabama, owned and

operated by Bryan Hicks. (Doc. 57 at 4). McKesson is a pharmaceutical supplier.
(See id.). McKesson supplied prescription drugs to NJP for approximately ten
years prior to December 2014. (See id.). NJP asserts claims for breach of contract
and tortious interference with business relations against McKesson arising from
McKesson's December 3, 2014 termination of its relationship with NJP. (Doc. 1-1
at 6-8).
The contract in question is a vendor agreement (the "Agreement") between
McKesson and the American Pharmacy Cooperative, Inc. ("APCI"), of which NJP
is a member. (See generally Doc. 57-1). The version of the Agreement governing
at the time of McKesson's termination was executed by McKesson and APCI in
May 2013, and is governed by Alabama law. (Id. at 2, 26). Under the Agreement,
McKesson was the exclusive supplier of products for APCI's members. (Doc. 57-1
at 4).

Paragraph 40 of the Agreement, entitled "Controlled Substance

Requirements," provides:
Nothing in this Agreement shall be construed as requiring McKesson
to perform any obligations hereunder or engage in any action or
omission that McKesson reasonably determines as violating any
applicable federal, state or local law, rule, regulation or government
requirement ("Laws") or putting McKesson in jeopardy of violating
any such Laws. . . . In the event that performance of the terms of this
Agreement would cause McKesson to be noncompliant with or in
jeopardy of being noncompliant with any Laws or any governmental
2

guideline or pronouncement involving Controlled Substances . . .
including the Drug Enforcement Administration's regulatory
requirements for verifying its customers and reporting suspicious or
excessive orders, McKesson shall have the right, within its sole and
absolute discretion, to do any of the following with respect to any
APCI Member: (A) limit or deny any order for Controlled Substances
or other regulated products as warranted by any established diversion
monitoring program of McKesson; and/or (B) immediately terminate
this Agreement, in whole or in part, as to an APCI Member without
liability if: (i) continued performance of any part of this Agreement
with respect to an APCI Member would . . . put McKesson in
jeopardy of violating any Laws regarding Controlled Substances or
any other regulated products or activities . . . .
(Id. at 32).
On October 15, 2014, Chris Sanderson, a manager in McKesson's regulatory
affairs department, visited NJP and later prepared a report regarding its
pharmacists and disbursement of controlled substances. (See Doc. 1-3 at 4-10).
After reviewing the report, Jerry Carmack, also in McKesson's regulatory affairs
department, prepared a report recommending termination of McKesson's
relationship with NJP.

(Id. at 1-3).

After citing aspects of NJP's practices,

discussed in more detail below, Carmack's report concluded NJP was not
performing its duties under federal law regarding disbursement of controlled
substances. (Id.).
Gary Boggs, McKesson's senior director of regulatory compliance, was
employed as a Special Agent with the Drug Enforcement Administration ("DEA")
from 1985 to 2012, and was assigned to the Office of Diversion Control for the last
3

six years of his employment by the DEA. (Doc. 54-3 at 2-3). Boggs reviewed
Sanderson's and Carmack's reports, as well as NJP's purchasing data, and—based
on numerous "red flags"—made the decision to "suspend any further supply" of
controlled substances to NJP. (Id. at 4-6). Sanderson's and Carmack's reports
noted: (1) the disciplinary record of three NJP pharmacists, one of which "was
caught taking and consuming pain pills while working as a pharmacist"; (2)
approximately 30% of NJP's total prescription sales were paid in cash; (3) NJP's
failure to utilize the state's voluntary prescription drug monitoring program; and (4)
over 45% of the prescriptions dispensed by NJP during the previous six months
were for controlled substances. (Id. at 4). The reports also noted the relatively
high volume of controlled substances dispensed by NJP, including: (1) two
standard deviations above the mean for morphine and oxycodone doses: (2) three
standard deviations above the mean for alprazolam; (3) more than four standard
deviations above the mean for hydrocodone, 76.3% of which was dispensed in the
higher 10 mg dosage; and (4) NJP's purchase of 1,268,000 doses of
phendimetrazine in 2014, which was more than 1000 times the threshold
established by McKesson.

(Id. at 4-5).

Finally, the reports noted red flags

regarding NJP's filling of phendimetrazine prescriptions written by the Cumberland
Center, a weight loss clinic located next door to NJP. In particular, the reports
noted the Cumberland Center employed physicians that had been disciplined by
4

licensing boards in Alabama or Tennessee for "improper prescribing of controlled
substances." (Id. at 4). The reports also noted the suspicion that the Cumberland
Center was prescribing phendimetrazine—which is illegal in Tennessee—to
Tennessee residents who filled their prescriptions at NJP and paid in cash. (Id.).
Based on the red flags revealed by NJP's purchasing data and identified in
Carmack's and Sanderson's reports, Boggs decided to suspend any further delivery
of controlled substances to NJP. (Doc. 54-3 at 5-6). Boggs made this decision
"because of a concern that a continued performance of the Agreement as to NJP
would violate laws regarding controlled substances, or could put McKesson in
jeopardy of violating laws regarding controlled substances." (Id. at 6). During his
deposition, Boggs testified that NJP's "inability to appropriately exercise" its
responsibility under 21 C.F.R. § 1306.04 put McKesson at risk of violating its
requirement to maintain effective controls against diversion under 21 U.S.C. § 823.
(Doc. 56-4 at 42).
McKesson's Dale Harris relayed the termination to NJP via a telephone call
to Bryan Hicks on December 3, 2014. (See Doc. 57 at 5). Harris stated McKesson
was terminating the Agreement due to the ratio of controlled to non-controlled
pharmaceutical orders, the amount of cash sales, and concerns about the number of
prescriptions written by the Cumberland Center. (See id.). During his deposition,
Hicks testified that NJP was never in violation of any law, rule, or regulation
5

governing pharmacy practices. (Id. at 36). Hicks further testified that McKesson
never warned NJP that it could be in possible violation of any rule, regulation, or
law prior to termination. (Id.). Finally, Hicks testified there was a "linked"
business relationship between NJP, its customers, and McKesson. (See Doc. 53 at
17).
II.

STANDARD OF REVIEW
"The court shall grant summary judgment if the movant shows that there is

no genuine dispute as to any material fact and the movant is entitled to judgment as
a matter of law." FED. R. CIV. P. 56(a). To demonstrate there is a genuine dispute
as to a material fact that precludes summary judgment, a party opposing a motion
for summary judgment must cite "to particular parts of materials in the record,
including depositions, documents, electronically stored information, affidavits or
declarations, stipulations (including those made for purposes of the motion only),
admissions, interrogatory answers, or other materials." FED. R. CIV. P. 56(c)(1)(A).
When considering a summary judgment motion, the court must view the evidence
in the record in the light most favorable to the non-moving party. Hill v. Wal-Mart
Stores, Inc., 510 F. App'x 810, 813 (11th Cir. 2013). "The court need consider
only the cited materials, but it may consider other materials in the record." FED. R.
CIV. P. 56(c)(3).

6

III.

DISCUSSION
NJP's claims for breach of contract and tortious interference with business

relations are discussed in turn.
A. Breach of Contract
To prevail on a claim for breach of contract under Alabama law, a plainiff
must show: "(1) the existence of a valid contract binding upon the parties in the
action, (2) the plaintiff's own performance, (3) the defendant's nonperformance, or
breach, and (4) damage." Armstrong Business Services, Inc. v. AmSouth Bank, 817
So. 2d 665, 673 (Ala. 2001). A contract provision giving a party "sole discretion"
amounts to the "absolute reservation of a right." See Shoney's LLC v. MAC East,
LLC, 27 So. 3d 1216, 1220 (Ala. 2009). As explained below, NJP's claim for
breach of contract fails because it cannot demonstrate McKesson's breach.
Unsurprisingly, McKesson's arguments regarding the breach of contract
claim rely heavily on the terms of Paragraph 40, which gave it sole and absolute
discretion to terminate the Agreement if NJP's conduct could place McKesson in
jeopardy of regulatory non-compliance. McKesson asserts its termination of the
Agreement does not amount to a breach because it determined, within its "sole
discretion" and pursuant to Paragraph 40, that NJP's conduct placed McKesson at
risk of regulatory noncompliance. (Doc. 53 at 13-14; Doc. 60 at 5-10). Although
McKesson contends the Agreement does not impose a reasonableness requirement
7

on the determination regarding risks of regulatory noncompliance, McKesson
further argues its decision to terminate was reasonable. (Doc. 60 at 9).
In general terms, NJP's opposition contends McKesson's termination was
unreasonable and violated the Agreement's terms regarding notice and termination.
Regarding reasonableness, NJP argues it never placed McKesson in danger of
regulatory non-compliance and that McKesson used improper and/or unknown
methods to determine the ratio of controlled to non-controlled substances it
dispensed. (Doc. 57 at 11-17). The arguments are addressed in turn.
1.

Notice and Termination

As to the Agreement's provisions regarding notice and termination, NJP
points to paragraphs 3 and 28 of the Agreement and contends it was entitled to
written notice and an opportunity to cure any deficiencies. (Doc. 57 at 11-14).
(Doc. 57 at 7, 11-12). Paragraph 28 provides that notices of certain actions must
be delivered to specified parties in writing. ([Doc. 57-1 at 26-27). However,
individual APCI members, like NJP, are not parties entitled to notice under
Paragraph 28. (Id.). Accordingly, to the extent NJP relies on Paragraph 28, its
arguments fail.
Paragraph 3 does impose duties on McKesson to provide APCI members
with written notice of material breaches and an opportunity to cure. (Doc. 57-1 at
6-7). However, the breaches contemplated under Paragraph 3 include a member's
8

failure to make timely payments, declaration of bankruptcy, or appointment of a
receiver. (Id. at 7). In contrast to Paragraph 3's notice requirements concerning
fiscal issues, Paragraph 40 grants McKesson the sole and absolute discretion to
terminate the entire Agreement "immediately" and "without liability." (Doc. 57-1
at 32). Indeed, Paragraph 40 contemplates a unilateral and immediate termination
of the Agreement in the event a member pharmacy's conduct is deemed to create a
risk of legal noncompliance. Accordingly, the court finds nothing in Paragraph 3
which raises a dispute as to whether McKesson violated the Agreement's
provisions regarding notice and termination.
2.

Reasonableness

The parties disagree regarding whether the Agreement imposed a
reasonableness requirement on McKesson's determination that NJP's practices
created a risk of regulatory noncompliance. NJP contends the Agreement required
McKesson to act reasonably in determining termination was appropriate under
Paragraph 40, while McKesson contends it had sole and absolute discretion
regarding this determination. McKesson is entitled to summary judgment on the
breach of contract claim in either event. As explained in more detail below: (1) to
the extent Paragraph 40 gave McKesson the sole and absolute discretion to
determine a termination under Paragraph 40 was appropriate, McKesson is entitled
to judgment as a matter of law; and (2) to the extent Paragraph 40 required a
9

reasonable determination that NJP's practices placed McKesson in jeopardy of
regulatory noncompliance, McKesson acted reasonably.
NJP argues genuine issues of material fact regarding the reasonableness of
McKesson's termination of the Agreement preclude summary judgment. (Doc. 57
at 12, 14-16).

The first sentence of Paragraph 40 does include the word

"reasonably" in the following context:
Nothing in this Agreement shall be construed as requiring McKesson
to perform any obligations hereunder or engage in any action or
omission that McKesson reasonably determines as violating any
applicable federal, state or local law, rule, regulation or government
requirement ("Laws") or putting McKesson in jeopardy of violating
any such Laws.
(Doc. 57-1 at 32).

However, the sentence contemplating termination of the

Agreement does not explicitly incorporate a reasonableness requirement:
In the event that performance of the terms of this Agreement would
cause McKesson to be . . . in jeopardy of being noncompliant with any
Laws or any governmental guideline . . . including the Drug
Enforcement Administration's regulatory requirements for verifying
its customers and reporting suspicious or excessive orders, McKesson
shall have the right, within its sole and absolute discretion, to . . . (B)
immediately terminate this Agreement, in whole or in part, as to an
APCI Member without liability if: (i) continued performance of any
part of this Agreement with respect to an APCI Member would . . .
put McKesson in jeopardy of violating any Laws regarding Controlled
Substances or any other regulated products or activities.
(Id.).
McKesson notes that the portion of Paragraph 40 providing for termination
reserves McKesson's sole and absolute discretion to immediately terminate the
10

Agreement without liability. Accordingly, McKesson contends that imposing a
reasonableness requirement would be inconsistent with its sole and absolute
discretion to terminate due to regulatory compliance issues. (Doc. 60 at 8-9). To
the extent McKesson's interpretation of Paragraph 40 is correct, it is entitled to
summary judgment under Alabama law. Shoney's LLC, 27 So. 3d at 1220 ("sole
discretion" amounts to the "absolute reservation of a right").
As NJP would have it, Paragraph 40 requires McKesson to act reasonably in
determining a risk of regulatory non-compliance.

NJP takes issue with

McKesson's factual determinations regarding NJP's practices and points to
supposed inconsistencies regarding the reasons McKesson gave for terminating the
Agreement. (Doc. 57 at 11-16). NJP also contends genuine issues of material fact
preclude summary judgement because information regarding the formula
McKesson employed to calculate the ratio of controlled to uncontrolled
pharmaceuticals does not appear on the record. (Doc. 57 at 17). These arguments
are addressed in turn.
First, NJP takes issue with McKesson's determination that it was in jeopardy
of regulatory non-compliance.

These arguments essentially dispute the facts

McKesson cited in making this determination and rely on NJP's contentions that it:
(1) was in compliance with all applicable laws and regulations; (2) employed
licensed pharmacists acting within their authority; (3) legitimately accepted cash
11

payments for prescriptions; (4) has, since termination, begun to participate in
voluntary state prescription drug monitoring programs; and (5) faced no regulatory
issues, inquiries, or violations. (Doc. 57 at 14-16).
Even accepting NJP's reading of Paragraph 40 as requiring McKesson to act
reasonably, the key question would be whether McKesson reasonably determined
NJP's practices placed it in jeopardy of regulatory noncompliance. Gary Boggs
terminated the Agreement, concluding NJP's practices placed McKesson in
jeopardy of violating 21 C.F.R § 1306.04 and 21 U.S.C. § 823. (Doc. 54-3 at 5-6).
While NJP asserts McKesson's findings do not amount to regulatory violations—
and that NJP never violated any laws or regulations or faced regulatory inquiries—
Paragraph 40 requires only potential regulatory non-compliance. Moreover, NJP
offers no evidence to show that McKesson's decision to terminate the Agreement
was unreasonable, especially in light of the myriad issues identified by Boggs in
determining NJP failed to "maintain effective controls against diversion." (Doc.
56-4 at 42). Accordingly, to the extent NJP attacks McKesson's determinations
regarding the risk of regulatory noncompliance, its arguments miss the mark.
Next, NJP contends McKesson offered varying rationales for terminating the
Agreement; it argues these inconsistencies create genuine issues of material fact.
(Doc. 57 at 12-13, 16-17). In particular, NJP points to the reasons for McKesson's
termination offered by: (1) Dale Harris during the December 3, 2014 telephone
12

call; and (2) the deposition testimony of Gary Boggs, McKesson's regional
Director of Compliance and Regulatory Affairs. (See Doc. 57 at 12-13). Dale
Harris told Bryan Hicks that McKesson was terminating the Agreement due to the
ratio of controlled to non-controlled pharmaceutical orders, the amount of cash
sales, and concerns about the number of prescriptions written by the Cumberland
Center. (See id.). Meanwhile, Gary Boggs testified the Agreement was based on
"regulatory jeopardy." (Id.). NJP fails to explain how Dale Harris's statements are
inconsistent with the testimony of Gary Boggs. Moreover, the court can discern no
inconsistency.
Finally, NJP contends a genuine issue of material fact exists because
information regarding the formula McKesson used to determine the ratio of
controlled to non-controlled pharmaceuticals is "completely unknown." (Doc. 57
at 17). In advancing this argument, NJP relies on the deposition of Dale Harris, in
which he testified that he was unaware of the formula used to determine the ratio.
(Id.). The absence in the record of a specific formula McKesson employed cannot
be used to create a genuine issue of material fact here, where McKesson has
presented evidence that its termination of the Agreement was proper.

See

Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir. 1993).
McKesson has presented evidence that a review of NJP's practices revealed
a number of red flags regarding compliance with laws and regulations pertaining to
13

controlled substances. While the undersigned has not located a precise formula
used to calculate the ratio of controlled to uncontrolled substances, the sealed
deposition of Gary Boggs contains information regarding the review process and
analyses McKesson employed. (Doc. 54-4). NJP has not presented any evidence
to contradict the facts—whether included in Sanderson's and Carmack's reports or
gleaned from NJP's purchasing history—Boggs relied on in deciding to terminate
the Agreement. Nor did NJP move to compel production of any formula prior to
the discovery deadline or move for additional discovery following McKesson's
motion for summary judgment. Under the circumstances of this case, NJP must
present evidence to overcome McKesson's properly supported motion; NJP cannot
create a genuine issue of material fact by pointing to the formula's non-appearance
in the record. Moreover, even if the absence of the formula McKesson used to
determine the ratio of controlled to non-controlled substances could create a factual
question, NJP has not presented any evidence to refute the other areas of concern
identified by McKesson as justifying termination under Paragraph 40.
For all of the foregoing reasons, there are no genuine issues of material fact
and McKesson is entitled to judgment as a matter of law on NJP's claim for breach
of contract.

14

B. Tortious Interference With Business Relations
Under Alabama law, a plaintiff claiming tortious interference with
contractual or business relations must show: "(1) the existence of a protectible
business relationship; (2) of which the defendant knew; (3) to which the defendant
was a stranger; (4) with which the defendant intentionally interfered; and (5)
damage." White Sands Group, LLC v. PRS II, LLC, 32 So. 3d 5, 14 (Ala. 2009).2
As relevant here, "a plaintiff asserting a tortious-interference claim bears the
burden of proving that the defendant is a 'third party' or 'stranger' to the contract or
business relationship with which the defendant allegedly interfered." Waddell &
Reed, Inc. v. United Investors Life Ins. Co., 875 So. 2d 1143, 1154 (Ala. 2003).
An entity is not a stranger if it is a "participant" in a relationship. Id. at 1157. A
participant is one involved "in a business relationship arising from interwoven
contractual arrangements that include the contract."

Id. A plaintiff claiming

tortious interference must show not only a defendant's distance from the contract
but also distance from "the business relationship giving rise to and underpinning
the contract." Id. at 1154-55 (emphasis omitted) (quoting Atlanta Mkt. Ctr. Mgmt.
Co. v. McLane, 503 S.E.2d 278, 283 (Ga. 1998).
2

The tort of tortious interference with business relations substantially overlaps with tortious
interference with contractual relations. Glenn Const. Co., LLC v. Bell Aerospace Servs., Inc.,
785 F. Supp. 2d 1258, 1279 (M.D. Ala. 2011); Hope for Families & Cmty. Serv. v. Warren, 721
F. Supp. 2d 1079, 1177 (M.D. Ala. 2010) (explaining that tortious interference with a business
relationship is a separate tort from tortious interference with a contractual relationship because
the latter "presupposes the existence of an enforceable contract but that otherwise, the elements
of both torts overlap") (quotations and alterations omitted).
15

The Alabama Supreme Court has stated that "[a] defendant is a party in
interest to a business or contractual relationship if the defendant has any beneficial
or economic interest in, or control over, that relationship." Tom's Foods, Inc. v.
Carn, 896 So. 2d 443, 454 (Ala. 2004)). Additionally, "[p]arties to an interwoven
contractual arrangement are not liable for tortious interference with any of the
contracts or business relationships."

Waddell, 875 So. 2d at 1157 (emphasis

omitted) (quoting LaSonde v Chase Mortg. Co., 777 S.E.2d 822, 824 (Ga. App. Ct.
2003)).

Furthermore, a third-party "involved in creating th[e] relationship"

between two other parties is not a stranger to that relationship. Tom's Foods, 896
So. 2d at 455.
The Eleventh Circuit has recognized the Alabama Supreme Court's
enumeration of several circumstances in which a party is not a stranger for
purposes of tortious interference. MAC East, LLC v. Shoney's, 535 F.3d 1293,
1297 (11th Cir. 2008).
A defendant is not a "stranger" to a contract or business relationship
when: "(1) the defendant is an essential entity to the purported injured
relations; (2) the allegedly injured relations are inextricably a part of
or dependent upon the defendant's contractual or business relations;
(3) the defendant would benefit economically from the alleged injured
relations; or (4) both the defendant and the plaintiff are parties to a
comprehensive interwoven set of contract relations."
Id. (quoting Waddell, 875 So. 2d at 1156).

16

Here, McKesson asserts it was not a stranger to NJP's business relationship
with its customers because: (1) McKesson was essential to the relationship; (2) the
injured relationship was dependent on the relationship between McKesson and
NJP; and (3) McKesson and NJP are parties to a comprehensive and interwoven set
of relations. (Doc. 53 at 15-18). The undisputed facts support all of McKesson's
contentions. Indeed, NJP's corporate representative testified there was a "linked"
business relationship between NJP, its customers, and McKesson. (Id. at 17).
Moreover, NJP has not presented any evidence contradicting the facts offered by
McKesson and has not responded to McKesson's legal arguments regarding the
tortious interference claim. (See generally Doc. 57).
For the foregoing reasons, there are no general issues of material fact and
McKesson is entitled to judgment as a matter of law regarding the claim for
tortious interference with business relations.
IV.

CONCLUSION
For all of the foregoing reasons, there are no genuine issues of material fact

and McKesson is entitled to judgement as a matter of law on the claims asserted in
this matter. A separate order will be entered.
DONE this 12th day of October, 2017.

______________________________
STACI G. CORNELIUS
U.S. MAGISTRATE JUDGE
17