The Commonwealth of Virginia v. McKesson Corporation et al

Filing 69

ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT 57 (Illston, Susan) (Filed on 3/28/2013)

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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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THE COMMONWEALTH OF VIRGINIA,

No. C 11-02782 SI

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Plaintiff,
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United States District Court
For the Northern District of California

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ORDER GRANTING DEFENDANTS’
MOTION FOR SUMMARY JUDGMENT

v.
MCKESSON CORPORATION, ROBERT
JAMES, and GREG STEPHEN YONKO.
Defendants.

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On February 22, 2013, the individual defendants, Robert James and Greg Stephen Yonko, filed

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a motion for summary judgment, arguing that plaintiff’s claims are barred by the statute of limitations.
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The motion is set for hearing on March 29, 2013. Pursuant to Civil Local Rule 7-1(b), the Court finds
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the matter appropriate for resolution without oral argument and hereby VACATES the hearing. After
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considering the papers and arguments of the parties, the Court GRANTS the motion for summary
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judgment, for the reasons set forth below.
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BACKGROUND
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Robert James is McKesson’s Vice President of Brand Product Management; Greg Stephen
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Yonko is McKesson’s Senior Vice President of Purchasing and Pharma Finance. Plaintiff, the
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Commonwealth of Virginia, alleges that the individual defendants and McKesson engaged in a
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conspiracy with First DataBank, Inc. (“FDB”) to inflate the amount that Virginia’s Medicaid program
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paid for brand-name prescription drugs. Compl. ¶ 1-2. The general subject of this litigation has been
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discussed in detail in several orders issued in connection with In re: Pharmaceutical Industry Average
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Wholesale Price Litigation, MDL-1456 (Hon. Patti B. Saris, D. Mass.).
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Under the current pharmaceutical drug pricing structure, pharmacies buy drugs from wholesalers
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(such as McKesson) at the wholesale acquisition cost (“WAC”) and are reimbursed for the distribution

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of the drugs by Virginia’s Medicaid agency at the average wholesale price (“AWP”). Id. ¶ 4. The

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AWPs are compiled and published by data companies, including FDB. Id. ¶¶ 10-11. Virginia alleges

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that, starting in late 2001, the individual defendants, as agents of McKesson, constructed a scheme with

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FDB to mark up the AWPs of drugs to extract excess payments from Virginia’s Medicaid agency to

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McKesson’s pharmacy customers. Because the margin between the WACs and the AWPs represents

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the pharmacies’ profits, this artificial mark-up resulted in increased profits for the pharmacies at

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Virginia’s expense. Id. ¶¶ 15, 26, 41-42.
On June 8, 2011, Virginia filed this case, alleging seven causes of action. Virginia asserts two

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United States District Court
For the Northern District of California

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against the individual defendants: violation of the Virginia Fraud Statute and common law civil

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conspiracy to defraud (Counts VI and VII). The individual defendants argue that these claims are barred

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by the statute of limitations.

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LEGAL STANDARD

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Summary adjudication is proper when “the pleadings, depositions, answers to interrogatories,

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and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any

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material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P.

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56(c).

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In a motion for summary judgment, “[if] the moving party for summary judgment meets its

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initial burden of identifying for the court those portions of the materials on file that it believes

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demonstrate the absence of any genuine issues of material fact, the burden of production then shifts so

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that “the non-moving party must set forth, by affidavit or as otherwise provided in Rule 56, ‘specific

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facts showing that there is a genuine issue for trial.’” See T.W. Elec. Service, Inc. v. Pacific Elec.

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Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp. v. Catrett, 477 U.S. 317

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(1986)).

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In judging evidence at the summary judgment stage, the Court does not make credibility

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determinations or weigh conflicting evidence, and draws all inferences in the light most favorable to the

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nonmoving party. See T.W. Electric, 809 F.2d at 630-31 (citing Matsushita Elec. Indus. Co., Ltd. v.
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Zenith Radio Corp., 475 U.S. 574 (1986)); Ting v. United States, 927 F.2d 1504, 1509 (9th Cir. 1991).

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The evidence presented by the parties must be admissible. Fed. R. Civ. P. 56(e). Conclusory,

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speculative testimony in affidavits and moving papers is insufficient to raise genuine issues of fact and

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defeat summary judgment. See Falls Riverway Realty, Inc. v. City of Niagara Falls, 754 F.2d 49 (2d

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Cir. 1985); Thornhill Publ’g Co., Inc. v. GTE Corp., 594 F.2d 730, 738 (9th Cir. 1979).

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DISCUSSION
I.

Choice of Law for Statute of Limitations
First, this Court must decide whether to apply the Virginia or California statute of limitations

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United States District Court
For the Northern District of California

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to the claims against the individual defendants. Originally under Virginia law, there was no statute of

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limitations for claims under the Virginia Fraud Statute, but in 2007, the act was amended to include a

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six-year statute of limitations. VA. CODE ANN. § 32.1-312. Under California law, the statute of

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limitations is three years for fraud claims. Cal. Civ. Proc. Code § 338.

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“In a federal question action where the federal court is exercising supplemental jurisdiction over

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state claims, the federal court applies the choice-of-law rules of the forum state.” Paracor Fin., Inc. v.

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Gen. Elec. Capital Corp., 96 F.3d 1151, 1164 (9th Cir. 1996). Even if the substantive law is a foreign

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state’s statute, California courts apply the “governmental interest” test to determine which state’s statute

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of limitations applies. Deutsch v. Turner Corp., 324 F.3d 692, 716 (9th Cir. 2003). The “governmental

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interest” test is “an analysis of the respective interests of the states involved.” Id. (quoting Hurtado v.

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Superior Court, 11 Cal. 3d 574, 579 (1974)). First, the court must determine if both states have an

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interest in the law; if there is a true conflict, then the court must determine which state has the greater

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interest. Liew v. Official Receiver & Liquidator, 685 F.2d 1192, 1195-96 (9th Cir.1982).

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California has “a substantial interest in preventing the prosecution in its courts of claims which

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it deems to be ‘stale.’” Deutsch, 324 F.3d at 716 (quoting Restatement (Second) of Conflict of Laws

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§ 142, cmt. f (1988)). Statutes of limitations protect both California courts and California residents from

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“‘the burdens associated with the prosecution of stale cases in which memories have faded and evidence

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has been lost.’” Nelson v. International Paint Co., 716 F.2d 640, 644-45 (9th Cir. 1983) (quoting

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Ashland Chemical Co. v. Provence, 129 Cal. App. 3d 790, 794 (1982)). Therefore, California courts
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will almost uniformly apply California law if the statute of limitations is shorter, unless there is an

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“extraordinarily strong interest of a foreign state.” Deutsch, 324 F.3d at 716. Compare Nelson, 716

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F.2d at 645 (holding that the California statute of limitations applied when the foreign state had no

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defendants and was not the forum, because it had no interest in applying its statute of limitations), with

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Ledesma v. Jack Stewart Produce, Inc., 816 F.2d 482, 485 (9th Cir. 1987) (distinguishing Nelson

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because the California residents were the plaintiffs, not the defendants, the one year difference between

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the limitations period of California and the foreign state was insubstantial, and the foreign state had an

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interest in protecting its highways).
Plaintiff argues that Virginia in this case has a strong interest in protecting its citizens; its interest

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United States District Court
For the Northern District of California

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is so strong that it is litigating its claims in its sovereign capacity. However, California has an interest

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in both conserving judicial resources and protecting its citizens from stale claims. Nelson, 716 F.2d at

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644-45 . This case parallels Nelson since the forum is in California, and the defendants are California

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residents. Virginia’s interest in enforcing its laws does not overcome California’s greater interest in

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protecting its citizens and its courts. Therefore, the Court shall apply the California statute of

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limitations.

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II.

Last Overt Act

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The statute of limitations runs from the “last overt act of a conspiracy.” Pace Indus., Inc. v.

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Three Phoenix Co., 813 F.2d 234, 237 (9th Cir. 1987). Virginia argues that its claims are within

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California’s three-year limitations period, because the last overt act of the conspiracy occurred within

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three years of the filing of this suit (i.e., after June 8, 2008). Defendants argue that the conspiracy ended

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when FDB withdrew from the conspiracy in its settlement agreement, which occurred in October,

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2006,outside the statute of limitations period.

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In New England Carpenters Health Benefits Fund v. First DataBank, Inc., No. 05-11148-PBS

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(D. Mass.) (“NEC”), the class of plaintiffs alleged the same conspiracy between McKesson and FDB

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to artificially inflate the amount paid for prescription drugs by increasing the AWPs of the drugs. Flum

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Decl. Ex. 1 (“NEC Compl.”). On October 4, 2006, FDB filed a joint motion for preliminary approval

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of a settlement with the class plaintiffs in NEC. See Nat’l Ass’n of Chain Drug Stores v. NEC, 582 F.3d
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30, 37 (1st Cir. 2009) (“NACDS”); NEC, 602 F. Supp. 2d 277, 278 (D. Mass. 2009). “[T]he central

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provision” of the settlement “was that First DataBank agreed to ‘rollback’ its published AWP figures

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for all drug products . . . with a mark-up higher than 1.2 down to a 1.2 mark-up.” NACDS, 582 F.3d at

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37. The district court granted preliminary approval of the NEC settlement on November 22, 2006; after

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several amendments, the district court issued its final approval order on March 17, 2009. Id. at 37-38;

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NEC, 602 F. Supp. 2d at 277-79.
A defendant can establish withdrawal from a conspiracy in various ways. One way is through

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proof of (1) “[a]ffirmative acts inconsistent with the object of the conspiracy,” (2) which were

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“communicated in a manner reasonably calculated to reach co-conspirators.” United States v. U.S.

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United States District Court
For the Northern District of California

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Gypsum Co., 438 U.S. 422, 464-65 (1978). In Drug Mart Pharmacy Corp. v. Am. Home Products

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Corp., 288 F. Supp. 2d 325, 329 (E.D.N.Y. 2003), the court found that the “conclusion is inescapable”

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that the defendants had withdrawn from a discriminatory pricing conspiracy when they committed to

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changing their pricing scheme in a settlement agreement. The court found that both prongs of Gypsum

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were met: “[i]t is difficult to conceive of a more explicit disavowal of allegedly conspiratorial conduct

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than is expressed by the terms of the Amended Settlement Agreement . . . . That the Agreement was

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made known to the other defendants in the proceeding required by Rule 23 Fed. R. Civ. P. is not in

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dispute.”

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The Court finds that FDB withdrew from the conspiracy when it reached a settlement agreement

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in NEC. First, filing the settlement agreement is an “affirmative act” that is “inconsistent” with the

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alleged object of the conspiracy, because FDB agreed to “rollback” the prices to the levels prior to the

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inflated markups. Second, the settlement agreement was calculated to reach McKesson as a co-

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defendant and the individual defendants because is was a public filing. Therefore, the requirements

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under Gypsum are met, and FDB withdrew from the conspiracy on October 4, 2006, more than three

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years before Virginia filed this suit.

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Virginia argues that, unlike the defendants in Drug Mart, there is insufficient evidence for

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defendants in this case to show that they did not return to the illegal acts of the conspiracy after the

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announcement of the settlement agreement. It argues that the case is more similar to In re TFT-LCD

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(Flat Panel) Antitrust Litig., 820 F. Supp. 2d 1055 (N.D. Cal. 2011). In In re TFT-LCD, the defendant
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argued that it was entitled to summary judgment because it had informed the government of the

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conspiracy outside of the statute of limitations period. This Court denied the motion for summary

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judgment in part because plaintiffs had been denied discovery for the period after defendant had

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informed the government of the conspiracy. 820 F. Supp. 2d at 1061 (“Given that plaintiffs have had

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no means of exploring this information, the Court cannot justify removing this issue from the jury’s

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consideration on such a scant record.”). Virginia argues that a jury could similarly find that defendants

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re-engaged in the conspiracy after the settlement agreement.
However, all of Virginia’s evidence regarding the conspiracy dates from before the settlement

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agreement in 2006. Virginia therefore has no factual basis for the assertion that a jury may find that the

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United States District Court
For the Northern District of California

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conspiracy continued after the announcement of the settlement. This bare allegation of a continued

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conspiracy after a clear withdrawal is insufficient. “Courts should not permit an inference of a

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conspiracy when such an inference is not reasonable to draw.” Drug Mart, 288 F. Supp. 2d at 333

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(citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 593 (1986)). Here, unlike in

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In re TFT-LCD, plaintiff has had an ample opportunity to discover affirmative evidence of continued

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violations after the withdrawal, and it has found nothing. Moreover, the settlement process was

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overseen by the district court in Massachusetts, and no one has contended that FDB breached the

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settlement agreement. See NACDS, 582 F.3d at 37-38 (describing the process leading to the approval

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of the settlement). Therefore, the Court finds that there is no material issue of fact that FDB withdrew

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from the conspiracy more than three years before Virginia filed its suit.

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Accordingly, the Court finds that Virginia’s claims against the individual defendants are barred
by the statute of limitations.

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CONCLUSION
For the foregoing reasons and for good cause shown, the Court hereby GRANTS the individual
defendants’ motion for summary judgment.

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IT IS SO ORDERED.
Dated: March 28, 2013
SUSAN ILLSTON
United States District Judge

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