The United States of America et al v. Safeway, Inc.

Filing 71

OPINION: The Motion of Defendant Safeway, Inc. to Dismiss the Relator and Plaintiffs' Amended Complaint 53 is DENIED. The Defendant's Motion to Strike certain information 53 is also DENIED. (SEE WRITTEN OPINION.) Entered by Judge Richard Mills on 11/30/2016. (GL, ilcd)

E-FILED

Thursday, 01 December, 2016 10:27:06 AM
Clerk, U.S. District Court, ILCD

IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
UNITED STATES OF AMERICA,
and THE STATES OF CALIFORNIA,
COLORADO, DELAWARE,
HAWAII, ILLINOIS, MONTANA,
NEVADA, NEW JERSEY, NEW
MEXICO, VIRGINIA, and the
DISTRICT OF COLUMBIA, ex rel.
THOMAS PROCTOR,
Plaintiffs and Relator,
v.
SAFEWAY, INC.,
Defendant.

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NO. 11-3406

OPINION
RICHARD MILLS, U.S. District Judge:
This is a qui tam action.
The Relator alleges that Defendant Safeway, Inc. and all pharmacies
under its operation and control knowingly perpetrated a false “usual and
customary” pricing fraud scheme against government health programs as
company policy to increase profits.
The Plaintiffs and Relator assert violations of the Federal False Claims

Act (“FCA”), 31 U.S.C. §§ 3729 et seq., and related acts under the
applicable state laws.
Pending is Safeway’s Motion to Dismiss.
I. BACKGROUND
This is an action for damages and civil penalties on behalf of the
United States of America and the Plaintiff States by the Relator against
Defendant Safeway, Inc., arising from Safeway’s alleged fraudulent pricing
scheme perpetrated in its pharmacies nationwide against government health
programs.
According to the Complaint, Relator Thomas Proctor is a resident of
the State of Texas. The Relator holds a BS in Pharmacy and Masters in
Healthcare Administration and is a licensed pharmacist in the States of
Texas, Oklahoma, Arkansas, Louisiana, Kentucky, Virginia, Arizona and
Nebraska. The Relator has knowledge of, and experience in, the retail
pharmacy industry through his many years of working as a pharmacist.
Safeway is one of the largest food and drug retailers in the United
States. At the time of the events in this case, Safeway operated under the

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trade name Safeway or through various Safeway-affiliated store banners
across the United States including but not limited to: Vons, Pavilions,
Dominick’s, Genuardi’s, Randalls, Tom Thumb, Pak’n’Save Foods and
Carrs Quality Centers. In Illinois, for example, Safeway operated under the
Dominick’s banner. The Relator alleges that the policies, practices and
procedures for all of the pharmacies are centrally managed and controlled
by the national administration and upper corporate management.
Most of the Defendant’s stores include a pharmacy department. At
the end of 2013, the Defendant operated 1041 pharmacies across 20 states
and the District of Columbia. The Relator was employed as a pharmacist
at Safeway’s Tom Thumb #3625 in Grapevine, Texas between June and
October of 2011.
The Relator alleges Safeway violated the FCA and caused its
subsidiaries to violate the FCA by routinely charging government health
programs more than the general public for the same drugs. The scheme was
conceived and directed by Safeway to fraudulently report inflated prices for
prescription drugs sold to government health plan beneficiaries. Safeway

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knowingly failed to report its actual low drug prices in order to obtain
higher reimbursements from government health programs than Safeway was
legally and contractually entitled to receive.
The Relator alleges that Safeway’s fraud scheme was carried out
nationwide at its affiliated pharmacies which are located in multiple states
and jurisdictions, several of which are Plaintiffs in this case. The scheme
began in or around 2007 and continues to the present. The Relator asserts
Safeway administered the scheme in a uniform and consistent manner
across the country through centralized policies and pharmaceutical pricing,
using interconnected pharmacy and claims-processing computer systems
shared by its subsidiaries.
The Relator further contends that through this usual and customary
pricing fraud scheme, Safeway submitted false claims and caused its
subsidiaries and third parties to submit false claims in violation of the
Federal False Claims Act, 31 U.S.C. § 3729 et seq., as amended (Count I).
Moreover, Safeway’s conduct violated the analogous false claims acts and
health care fraud remedial statutes of the ten Plaintiff States and the

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District of Columbia (Counts II - XII). Like the FCA, the state statutes
impose liability for defined conduct in the nature of fraud, for the
submission of false claims, the use of false records and documents and the
failure to disclose material information in presenting claims to each
respective sovereign’s Medicaid programs.
The Relator asserts that Safeway has knowingly submitted or caused
to be submitted fraudulent, inflated pricing information on tens of
thousands of prescription drug reimbursement claims to government health
plans, including Medicare, Medicaid, TRICARE, the Federal Employees
Health Care Benefits Program (“FEHBP”) and other federal health care
programs for the purpose of unlawfully obtaining reimbursement payments
higher than those authorized by law.
The Relator alleges venue is appropriate in this district pursuant to 31
U.S.C. § 3732(a) because the Defendant committed acts proscribed by 31
U.S.C. § 3729 in this judicial district. The material events pled here
include Safeway causing the submission of false Illinois Medicaid claims,
which are processed in this judicial district in Springfield, Illinois.

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The amended complaint states that the Relator believes there has
been no prior public disclosure of the allegations and transactions on which
the action is based. If the Court determined otherwise and the question
arises, however, the Relator is an original source of the information on
which the allegations and transactions in the Complaint are based, pursuant
to 31 U.S.C. § 3730(e)(4)(B).
The federal and state government health programs at issue, including
Medicare, Medicaid, TRICARE and the FEHBP, among others, offer
pharmaceutical benefits to their respective beneficiaries. These programs
do not buy drugs. Instead, they reimburse providers who dispense covered
drugs to program beneficiaries.
The Relator alleges the reimbursement methodologies for different
government health programs are functionally equivalent. The amended
complaint generically refers to the usual and customary fraud scheme,
which encompasses pricing fraud affecting Medicaid, TRICARE, FEHBP
and Medicare. The Relator asserts truthful determination and reporting of
the usual and customary or negotiated price by the pharmacy provider is a

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material component of the government health program’s payment
calculation. When a dispensing pharmacy knowingly charges above the
usual and customary or negotiated price to government health plan
beneficiaries, the reported pricing information is fraudulent since the lower
usual and customary or negotiated prices were not provided to the
government health plans. That is the gravamen of the Relator’s amended
complaint.
The Defendant contends the amended complaint suffers from a
number of deficiencies and, therefore, must be dismissed.
II. DISCUSSION
After a lengthy investigation, the federal government declined to
intervene in this case. When the United States declines to intervene in a
qui tam FCA suit, the relator may pursue the case on his own, though the
action is still technically on behalf of the United States. See Thulin v.
Shopko Stores Operating Co., 771 F.3d 994, 998 (7th Cir. 2014) (citing 31
U.S.C. § 3730(c)(3)).
The United States also advised that the States of Maryland and

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Colorado decline to intervene. Accordingly, all claims asserted on behalf of
Maryland and Colorado have been dismissed with prejudice.
A. Venue
Safeway first contends the amended complaint must be dismissed
because venue is improper in this district and service of process is flawed.
The applicable statute provides:
Any action under section 3730 may be brought in any
judicial district in which the defendant or, in the case of
multiple defendants, any one defendant can be found, resides,
transacts business, or in which any act proscribed by section
3729 occurred. A summons as required by the Federal Rules of
Civil Procedure shall be issued by the appropriate district court
and served at any place within or outside the United States.
31 U.S.C. § 3732(a). Safeway does not transact business in this judicial
district and has never done so. Neither Safeway nor any of its subsidiaries
has ever operated a Safeway store in this judicial district.

Although

Safeway once operated 72 Dominick’s stores under its banner, all of those
stores were located in the Northern District of Illinois. Because Safeway is
not found and does not reside or transact business in the Central District
of Illinois, venue would be improper under the first part of § 3732(a).

8

The question thus is whether this judicial district is one “in which any
act proscribed by section 3729 occurred.” The Relator alleges Safeway’s
scheme to defraud government health programs was carried out at 72
Dominick’s stores in Illinois.

The Relator also asserts Dominick’s

pharmacies submitted Illinois Medicaid claims.

Paragraph 33 of the

amended complaint provides that false claims for payment submitted by the
Dominick’s stores to Illinois Medicaid are sent to and processed in
Springfield, Illinois. An individual who “knowingly presents, or causes to
be presented, a false or fraudulent claim for payment” is liable under the
FCA. 31 U.S.C. § 3729(a)(1)(A).
Given the allegations in the amended complaint, the Relator has
sufficiently asserted that Safeway violated the FCA by causing false claims
to be submitted in this district. Based on the plain language of § 3729, that
is enough under the venue provision. This Court recently held that the
Central District of Illinois was an appropriate forum for FCA actions under
similar circumstances. See U.S. ex rel. Dismissed Relator v. Wilder, No. 11cv-3286, 2012 WL 2503098, at *2 (C.D. Ill. June 28, 2012) (noting that

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the material events included the processing of allegedly false Medicaid
claims in Springfield, Illinois, thus making the Central District a more
convenient (and necessarily proper) forum.).

Safeway has cited no

controlling authority which holds that causing the submission of false
claims in this district is insufficient to establish venue.
Accordingly, the Court will deny the motion to dismiss for improper
venue.

Because the motion to dismiss for insufficient summons and

insufficient service of process is based on the alleged lack of venue, the
motion will be denied to that extent as well.
B. Failure to state a claim
(1) Legal standard
In reviewing a motion to dismiss, the Court generally accepts the
truth of the factual allegations of the complaint. Vinson v. Vermilion
County, Illinois, 776 F.3d 924, 925 (7th Cir. 2015). In order to avoid
dismissal under Rule 12(b)(6), “the complaint must state a claim that is
plausible on its face.” Id. at 928.
Because the FCA is an anti-fraud statute, however, the “claims under

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it are subject to the heightened pleading requirements of Rule 9(b).”
United States ex rel. v. AIDS Research Alliance-Chicago, 415 F.3d 601, 604
(7th Cir. 2005). Therefore, “a party must state with particularity the
circumstances constituting fraud.” Fed. R. Civ. P. 9(b). “The requirement
of pleading fraud with particularity includes pleading facts that make the
allegation of fraud plausible.” U.S. ex rel. Grenadyor v. Ukranian Village
Pharmacy, Inc., 772 F.3d 1102, 1106 (7th Cir. 2014). “The complaint
must state the identity of the person making the misrepresentation, the
time, place and content of the misrepresentation, and the method by which
the misrepresentation was communicated to the plaintiff.” Id. (internal
quotation marks and citations omitted).
(2) HIPAA disclosure and alleged violation
The Defendant claims that Count I is fundamentally flawed.
Paragraphs 186 to 188 of the amended complaint provide descriptions of
18 claims for drugs dispensed in Colorado. Safeway alleges these are the
only relevant transaction-level details provided in support of Count I.
Safeway asserts these transactions which rely on personal health

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information were obtained and disclosed in violation of the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”) and
cannot be used for that reason. Safeway moves to strike under Federal Rule
of Civil Procedure 12(f) on that basis.
The Relator claims he is protected by the HIPAA Whistleblower
exception, which provides in part:
(1) Disclosures by whistleblowers. A covered entity is not
considered to have violated the requirements of this subpart if
a member of its workforce or a business associate discloses
protected health information, provided that:
(i) The workforce member or business associate believes in good
faith that the covered entity has engaged in conduct that is
unlawful or otherwise violates professional or clinical standards,
or that the care, services, or conditions provided by the covered
entity potentially endangers one or more patients, workers, or
the public; and
(ii) The disclosure is to:
...
(B) An attorney retained by or on behalf of the workforce
member or business associate for the purpose of determining the
legal options of the workforce member or business associate
with regard to the conduct described in paragraph (j)(1)(I) of
this section.

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45 C.F.R. § 164.502(j).
Federal regulations define “[p]rotected health information” as
“individually identifiable health information . . . [m]aintained in electronic
media; or . . . [t]ransmitted or maintained in any other form or medium.”
45 C.F.R § 160.103. In order to qualify as individually identifiable health
information, the information either “identifies the individual” or provides
enough details so “there is a reasonable basis to believe the information can
be used to identify the individual.” 42 U.S.C. § 1320d; 45 C.F.R. §
160.103.
The Court has reviewed the allegations in paragraphs 186 through
188 of the amended complaint.

None of those paragraphs contain

information which identifies the individual. The Claims Data utilizes alias
initials to identify the individual, such as AA, MM, etc. The applicable
regulation permits a covered entity to utilize a coding system unrelated to
the identity of the patient so long as the code is not capable of being
translated in order to identify the individual. See 45 C.F.R. § 164.514(c).
Although several of the Claims Data examples relate to the same

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patient, the identities of the patients are not disclosed by the use of alias
initials. The fact that the Claims Data identifies the dates the prescriptions
were filled and/or billed, the store where they purchased, the drug
purchased, as well as the alias initials does not provide any information that
could be utilized to identify the individuals. “Health information that does
not identify an individual and with respect to which there is no reasonable
basis to believe that the information can be used to identify an individual
is not individually identifiable health information.”

45 C.F.R. §

164.514(a).
Because the information in the amended complaint does not qualify
as individually identifiable health information or protected health
information, there is no HIPAA violation even if the Relator qualified as a
“covered entity” subject to its terms. Under the HIPAA whistleblower
exception, see 45 C.F.R. § 164.502(j)(1), the Relator was authorized to
disclose protected health information to his attorneys. The motion to
dismiss or strike on this basis is denied.

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(3) Allegations of FCA violations
In the amended complaint, the Relator alleges that Safeway submitted
fraudulent, inflated pricing information to four government health
programs–Medicare, Medicaid, TRICARE and FEHBP–in connection with
the prescription drug claims, thus violating the FCA and the false claims
statutes of California, Delaware, District of Columbia, Hawaii, Illinois,
Montana, New Jersey, New Mexico, Nevada and Virginia.
The

Medicare,

TRICARE

and

FEHBP

programs

cap

the

reimbursement payable to pharmacy providers at the providers’ usual and
customary prices. Third-party payers such as private insurance companies
are generally excluded from usual and customary calculations, making the
usual and customary price equal to the amount cash customers pay for the
drug. Instead of usual and customary prices, Medicare regulations require
Part D beneficiaries to be offered “Negotiated Prices” “reduced by those
discounts” or “other price concessions” available at the “point of sale.”
The Relator alleges that government health program prescription drug
reimbursement rules for Medicaid, TRICARE and FEHBP prohibit

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pharmacy providers, such as Safeway, from being reimbursed for drugs at
amounts greater than what the provider otherwise charges members of the
general public, known as their usual and customary price. “Negotiated
Prices” impose a similar ceiling on Medicare reimbursements. The purpose
of these price regulations is to ensure that government health programs do
not pay more for prescribed drugs than what the government health
program beneficiary would have paid the beneficiary not covered by a
government health program.
The amended complaint states that government health programs
reimburse providers such as Safeway for prescriptions dispensed to program
beneficiaries at the lesser of: (1) the pharmacy provider’s usual and
customary price; or (2) negotiated price; or (3) one or more alternative price
types.

As for government health programs with reimbursement

methodologies that provide for the payment of the lesser of usual and
customary price or an alternative price type, the government health
program compares the provider’s submitted usual and customary price with
no dispensing fee against the alternative price types–each alternative price

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type consisting of both the ingredient cost and dispensing fee–and
reimburses the provider the lesser of the provider’s usual and customary
price or alternative price type.
In its motion to dismiss, Safeway cites the amended complaint in
noting that the Relator’s “central allegation is that Safeway was legally
required to pass along the benefit of certain discount prescription programs
in its reimbursement claims to [government health programs] but failed to
do so.” Doc. No. 54, at 3. Safeway points to paragraph 192 of the
amended complaint, which provides that it “has knowingly engaged, and
continues to engage, in the fraudulent pattern and practice of submitting
and causing to be submitted false claims for reimbursement to Federal
Health Care Programs and State Medicaid Programs with inflated [Usual
and Customary] and Negotiated Prices that deny the United States the
discounted [Usual and Customary] and Negotiated Prices offered by
Defendant to the general public.” In citing these portions of the amended
complaint, Safeway essentially acknowledges that the Relator has provided
fair notice based on the current state of the law.

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The Relator alleges that beginning in or about 2007, Safeway, through
its pharmacies, knowingly perpetrated a multi-faceted false usual and
customary pricing fraud scheme against government health programs as
corporate company policy.

In order to stay competitive and attract

customers, Safeway created and publicly promoted a series of prescription
drug discount programs. These programs were rolled out nationwide and
across all Safeway banners and offered deep discounts on prescription
drugs.
Beginning in or about 2007, Safeway offered a discount drug
formulary of approximately 300 drugs sold at $4 for a 30 days’ supply, $8
for a 60 days’ supply and $12 for a 90 days’ supply. Safeway also offered
to match prices for drugs on Wal-Mart’s or other competitors’ discount
lists. In addition, Safeway created a “membership club” that was free to
join that offered across the board percentage discounts of 10% of all
branded medications and 20% of all non-formulary generics. Because of
Safeway’s actions, virtually all drugs sold by Safeway were offered at
everyday deep discount prices nationwide and across all of Safeway’s

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brands.
Safeway’s corporate promotional materials explicitly stated that the
offered “Discounts and Incentives are not available to patients whose
prescriptions are paid in whole or part by Medicare, Medicaid or other
federal health care programs.” However, if the customers’ co-payment
exceeded the discount price and the customer asked for the discount, then
the transaction was sometimes reprocessed as a cash transaction, though
Safeway’s normal policy was to process prescriptions through government
health program insurance, reporting the usual and customary price when
possible to obtain the higher reimbursement.
Government health program reimbursement rules and regulations
prohibit pharmacy providers from being reimbursed at amounts greater
than what they otherwise charge members of the general public and
government health program prescription drug reimbursement rules require
that discounts offered to the general public at the point of sale must also be
provided to government health program beneficiaries. The Relator alleges
Safeway defrauded government health programs through a centrally-

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organized scheme, promoted across multiple states and banners, that was
knowingly and intentionally structured to avoid reporting Safeway’s actual
everyday low discount prices to government health programs as Safeway’s
required usual and customary prices, materially causing government health
programs to overpay claims.
The Relator further asserts that, through its centralized policies and
its centrally-managed interconnected computer system, Safeway set and
dictated to its subsidiaries the actual low price of discounted drugs that
were offered to the general public as well as the falsely inflated prices that
were reported to government health programs for the same drugs. Safeway
knowingly submitted and caused to be submitted falsely inflated claims for
reimbursement to government health programs for all pharmacies it
controlled through a centrally-managed, interconnected computer claims
processing system.
Safeway has submitted and caused to be submitted (to the federal and
state governments, government health programs, pharmacy benefit
managers and private prescription drug plans) many thousands of false

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claims for prescriptions filled for government health program beneficiaries
across the nation, based on the public promotions of its national discount
program, the number of pharmacies it operates, the number of drugs
involved, the number of government health program prescription drug
transactions at each pharmacy and during the relevant time period which
began as early as 2007 and continues to the present.
(4) Fair notice of claim
The Relator alleges that beginning no later than 2007, Safeway was
facing competition for pharmacy customers from traditional grocery
retailers, from non-traditional competitors such as supercenters and club
stores and from specialty supermarkets and drug stores. Safeway and its
competitors engaged in price competition, which adversely affected
Safeway’s operating margins in its markets. Around this time, Wal-Mart,
Kmart and other pharmacies were offering discount drug programs.
Safeway began offering its own discount programs across its banners in the
various states in which it operated, including: price matching; an automatic
$4 generic program; and, a membership club discount program. Due to the

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magnitude of the project, it was rolled out over time across banners and
states. Safeway characterized its discount drug programs as point of sale
discounts, not insurance. Terms and conditions of the offers were provided
in stores and posted on its various websites.
The amended complaint states that Safeway first offered, across its
banners in multiple states, to match any competitor’s price for a
prescription drug, most notably those on the Wal-Mart list. In 2008,
Safeway began offering across Western states a free pharmacy “membership
club” program that price matched competitors’ prices. In or around June
2008, Safeway announced, promoted and launched in its East Coast and
Midwest banners an automatic $4 discount drug program modeled after the
Wal-Mart program.

The announcement was publicized in major

newspapers and industry publications. Safeway offered a formulary of
approximately 300 generic drugs priced at $4 for a 30 days’ supply, $8 for
a 60 days’ supply, and $12 for a 90 days’ supply. The formulary discount
list and terms of the discounts offered were published and publicly
available. Safeway continued to offer to price match any competitor’s price

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for a prescription drug not on its formulary list.

All customers

automatically received the reduced formulary pricing.
In price match situations, however, Safeway would always honor the
lower price to its customer but would submit its higher usual and customary
price to government health program insurance and collect an inflated claim
from the government health program.
The amended complaint states that, in or about July 2010, Safeway
discontinued the automatic $4 generic program in the places it operated
and replaced it with Safeway’s membership club program which was also
available to the general public.

To continue receiving the discounts,

customers were required to join the no-cost club. In addition to the price
matching and $4 discounts customers had already been receiving in the
automatic $4 program, club members received the same 10% discounts on
all brand name drugs and the 20% discounts on all non-formulary generic
drugs. Safeway did not offer government health program beneficiaries or
other third party payers the benefit of the discount price unless their copayment exceeded the discount price and the customer asked for the lower

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price.
The $4 generic program and membership club were part of a centrally
organized scheme that Safeway knowingly and intentionally structured to
avoid offering and reporting its actual everyday low discount prices to
government health programs, materially causing government health
programs to overpay claims. Almost all of the Defendant’s pharmacies
nationwide operated under the membership program where cash customers
were offered discount prices but government health program beneficiaries
were offered inflated prices, unless their co-payment exceeded the discount
price and the customer asked for the lower price. Through its computer
systems, Safeway submitted the same fraudulent usual and customary price
information to all government health programs, including Medicare,
TRICARE, FEHBP and State Medicaid programs, as part of a corporatewide scheme to defraud government health programs. The “standard” price
Safeway submitted nationwide to government health programs for drugs,
otherwise offered to cash customers at $4, was $11.99.
The Relator alleges the Defendant’s executives understood that the

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sole purpose of the membership club program was to manipulate the usual
and customary price in order to overcharge third party insurance, including
government health programs. In price match situations, Safeway would
honor the lower price to its customer but would bill its higher usual and
customary price to government health program insurance and collect an
inflated claim from the government health program.
In an effort to avoid offering and reporting its everyday low discount
prices to government health programs, Safeway discontinued its automatic
$4 discount plan in favor of a membership club program.

For those

pharmacies operating under the membership club program, Safeway did not
offer customers with government health program insurance the $4 price or
the program’s other offered discounts (price matching or 10% off brand and
20% off non-formulary generics) unless their co-payment exceeded the
discount price and the customer asked for the lower price. Safeway did not
truthfully report the discount prices as its usual and customary prices. As
a result, claims were paid by insurance, including government health
programs, at inflated prices.

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The amended complaint includes allegations which meet the standard
of Rule 9(b). The Relator has identified the who: Safeway and its affiliated
banners. The amended complaint clearly describes the nature of the alleged
fraud: the overcharging of government health plans by Safeway and its
subsidiaries by engaging in a centrally controlled scheme to charge
government health plans more than the general public for the same drugs,
in order to receive a higher reimbursement than it was legally and
contractually entitled to receive. The alleged fraud occurred from at least
2007 to the present. The Relator alleges it took place nationwide and cites
examples from Safeway or Safeway affiliates in Grapevine, Texas, Colorado
Springs, Colorado and Fountain, Colorado.

The amended complaint

describes in detail how Safeway is alleged to have carried out the fraud
scheme.
For all of these reasons, the Court concludes that the Relator has
provided fair notice to Safeway of the circumstances it alleges to be fraud.
(5) Specificity and viability of fraud allegations
The Defendant further asserts that the descriptions of the 18 claims

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for drugs dispensed in Colorado–as alleged in paragraphs 186 through
188–would not be sufficient to state a viable federal FCA claim because: (1)
as to the Medicare Part D claims, they were reimbursed according to
contract, and the Relator does not point to any contractual term Safeway
violated; (2) as to State Medicaid claims, the Relator’s claims do not
demonstrate that Safeway failed to comport with the Colorado statute
governing price reporting or any relevant Medicaid reimbursement formula;
and (3) as to FEHBP and TRICARE, the Relator lacks the requisite claims
detail. As for Counts II-XII alleging violations of state law False Claims Act
statutes, Safeway contends those counts must be dismissed for failure to
provide any factual detail and failure to comport with state statutory
requirements.
Medicare Part D is a government program that provides public
benefits through private prescription drug plans. Regardless of whether the
claims were reimbursed according to contract or whether any contract term
or state law was violated, “[t]he [usual and customary price] term is
included in state regulations, plans, and contracts related to Medicare Part

27

D because the Medicare and Medicaid regulations demand that it be.” See
U.S. ex rel. Garbe v. Kmart Corp., 824 F.3d 632, 644 (7th Cir. 2016).
The Relator details 13 transactions which purportedly were
fraudulently submitted to Medicare Part D. Safeway alleges, however, that
he fails to identify any operative Part D contract or describe with detail
how Safeway purportedly violated any contractual obligations such that it
caused false and fraudulent claims to be submitted to the relevant
pharmacy benefits manager. Reimbursement for such claims are made
pursuant to contractual terms.
Safeway asserts the Relator does not explain the basis upon which he
concludes that: (1) the usual and customary price provided was false
according to the contractual definition of usual and customary; (2) the
usual and customary price was material to the pharmacy benefits manager’s
contractual reimbursement formula; or (3) the pharmacy benefits manager
or Part D plan were defrauded. Safeway contends these failures render the
allegations of the amended complaint insufficient. Although all are contract
dependent, no contracts are provided.

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In

a

recent

case,

the

United

States

Court

of

Appeals

considered–among other issues–whether the district court had correctly
identified the “usual and customary” price for purposes of the FCA. See
Garbe, 824 F.3d at 637. The Seventh Circuit observed:
Our reading of “general public” is consistent with the regulatory
structure that gave rise to the “usual and customary” price term.
Under 42 C.F.R. § 423.100, the usual and customary (U & C)
price means the price that an out-of-network pharmacy or a
physician’s office charges a customer who does not have any
form of prescription drug coverage for a covered Part D drug.
The term is included in state regulations, plans, and contracts
related to Medicare Part D because the Medicare and Medicaid
regulations demand that it be. Id. § 447.512(b). Its meaning in
many state regulations, plans, and contracts is lifted from the
federal regulations without significant modification.
Id. at 644 (internal quotation marks and citation omitted). The court
interpreted the applicable regulations to mean that state agencies are not
to pay more for prescribed drugs than the prevailing market retail price.
See id. Accordingly, “[r]egulations related to ‘usual and customary’ price
should be read to ensure that where the pharmacy regularly offers a price
to its cash purchasers of a particular drug, Medicare Part D receives the
benefit of that deal.” Id. Safeway may not charge state agencies more than

29

they charge the general public.
The court further stated:
Allowing Kmart to insulate high “usual and customary” prices
by artificially dividing its customer base would undermine a
central purpose of the statutory and regulatory structure. The
“usual and customary” price requirement should not be
frustrated by so flimsy a device as Kmart’s “discount programs.”
Because Kmart offered the terms of its “discount programs” to
the general public and made them the lowest prices for which
its drugs were widely and consistently available, the Kmart
“discount” prices at issue represented the “usual and
customary” charges for the drugs.
Id. at 645. Accordingly, the court determined that the relator’s claims were
sufficient to withstand summary judgment. See id. If Medicare Part D did
not receive the benefit of such a deal in this case, then the Relator’s claims
are sufficient to withstand Safeway’s motion to dismiss.
As for the State Medicaid claims, Safeway contends the Relator’s
allegations are insufficient to assert an FCA claim because they do not
demonstrate that Safeway failed to comport with the Colorado statute
governing price reporting or any relevant Medicare reimbursement formula.
Safeway asserts that contrary to the allegations in the amended complaint,
Medicaid does not restrict prices to the usual and customary price for
30

generic drugs. Under the reasoning of Garbe, however, the usual and
customary price imposes a cap on the reimbursement Safeway is entitled to
when it sells drugs to government health program beneficiaries.

The

program funds must be expended in the most “economical manner
feasible.” See id. at 644. Thus, Medicaid restricts reimbursement for drug
sales to Safeway’s discount club prices. The usual and customary price for
generic drugs is the limit. Based on the allegation that Safeway received
more than the usual and customary price, the Court concludes at this stage
that the Relator has alleged a viable claim.
To the extent that Defendant alleges the Relator’s allegations are not
sufficiently specific, the Relator contends that Rule 9(b) does not demand
specificity for every instance of fraud. The Relator alleges with particularity
Safeway’s and its affiliates’ nationwide fraudulent scheme. It further alleges
claims for payment on an individualized transaction level and provides
specific examples of the Defendant’s fraudulent conduct. The Relator need
not plead redundant examples for every State or Federal program that
Safeway defrauded. The Relator simply needs “some firsthand information

31

to corroborate [his] suspicions.”

Pirelli Armstrong Tire Corp. Retiree

Medical Benefits Trust v. Walgreen Co., 631 F.3d 436, 446 (7th Cir. 2011)
(observing that Pirelli did not necessarily need Illinois data to sufficiently
allege the existence of a fraudulent scheme).
The Relator cites examples alleging that Defendant was reporting
falsely high pricing information to government health programs that
excluded low cash prices. This corroborates allegations that Defendant was
committing usual and customary price fraud against multiple government
health programs in the same manner and across state lines. In its motion to
dismiss, moreover, Safeway does not dispute that it did not pass price
match discounts to cash customers on to government health programs. The
Defendant simply alleges this practice was legal. Regardless of whether that
was once a permitted practice, it is no longer legal under Garbe.
Safeway notes that Garbe does not directly address this factual
scenario and it should not be interpreted broadly. In certain settings,
moreover, a state has some flexibility in determining reimbursement. See
Garbe, 824 F.3d at 643 (noting the definition of “usual and customary”

32

price that applies “[u]nless state regulations provide otherwise”). At this
stage, however, the Court concludes that the Relator’s allegations are
sufficient to assert a claim under Garbe.
The Relator claims that the fraud scheme asserted here has occurred
throughout the country and with every government health program. The
amended complaint includes specific, representative examples of the scheme
which has put the Defendant on notice of the allegations. The Court
concludes that the Relator’s allegations are sufficiently specific to comply
with the requirements of Rule 9(b).
(6) Transactions and internal communications
Paragraph 186 references thirteen Medicare Part D transactions which
took place at Tom Thumb Pharmacy in Grapevine, Texas or Safeway
Pharmacy in Colorado Springs, Colorado. Paragraph 187 references five
specific TRICARE transactions that took place at Tom Thumb Pharmacy
in Grapevine, Texas; Safeway Pharmacy in Colorado Springs, Colorado or
Safeway Pharmacy in Fountain, Colorado. Paragraph 188 references 20
Medicaid transactions that took place at Tom Thumb Pharmacy in

33

Grapevine, Texas1 or Safeway Pharmacy in Colorado Springs, Colorado.
Each transaction referenced in paragraphs 186, 187 and 188 lists drug
name, quantity dispensed, date and amounts paid by patient and
government health plan reimbursement. The patients are identified by alias
initials. The reported usual and customary price is an “inflated” negotiated
price that the Defendant reported to government health programs. The
actual usual and customary price listed is the true cash price offered to the
general public. “GHP Allowable” represents what the government health
program should have paid, after applying the patient co-pay to the actual
usual and customary price.

The “Overpayment” is listed as to each

transaction, which refers to the amount overpaid by the government health
program due to the “manipulation” of the usual and customary price.

The Plaintiffs state they do not seek to enforce and recover on claims for
alleged unlawful actions committed by the Defendants against the Texas
Medicaid program. They include these allegations regarding the submission of
fraudulent, inflated usual and customary prices to Texas Medicaid for
illustrative purposes in order to show that Safeway’s fraudulent conduct was
pervasive across all government health plans and that it knowingly submitted
false claims to Texas Medicaid as part of a larger, carefully designed and
orchestrated corporate-wide policy to defraud government health programs
generally and it did not engage in this practice through accident or through
inadvertence.
1

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Safeway argues that allegations of a fraudulent scheme are insufficient
and the Relator must allege facts on an individualized level. The Relator
has alleged no less than 31 individualized pharmacy transactions as
representative examples of the false claims. Moreover, the Relator alleges
Safeway has employed a nationwide fraudulent scheme which includes
transactions over a five-year period. In paragraphs 186-188 of the amended
complaint, the Relator cites examples of Safeway’s alleged false claims and
fraudulent conduct.
Significantly, Safeway’s own internal documents and communications
reveal that Safeway corporate officials engineered the centrally controlled
scheme which resulted in the submission of false claims. The Relator
alleges that, in 2009 Jose Alcaine, Safeway Corporate Pharmacy Category
Manager, in Pleasanton, California, proposed an extension of the
membership program fraud scheme to Michael Topf, Safeway’s Director of
Finance Pharmacy, Main Meals & Ingredients, and Jesse Talamantez,
Director–Pharmacy Supply Chain & Category Management, Safeway
Corporate Operations, as follows:

35

Hypothetical: We pull the $4 programs in Texas, Eastern,
Genuardi’s and Dominick’s and offer the same program;
however, as a membership (FREE but customers need to sign
up) program:
1.
What is the current cost of the $4 program in the
divisions mentioned above?
2.
What is the potential savings if we make this a
membership program? Thereby not affecting our
insurance reimbursements.
Mr. Alcaine performed the calculations with Safeway’s Finance Department
and reported back to Mr. Topf and Mr. Talamantez that by transitioning
to membership for just the named divisions, Safeway would realize $8
million in savings per year.
The amended complaint states that Mr. Alcaine and Mr. Talamantez
worked out the details of the scheme and reported back to Mr. Topf,
explaining among other things that membership club “Discounts and
Incentives are not available to patients whose prescriptions are paid in
whole or part by Medicare, Medicaid or other federal health care
programs.” The Relator alleges that the communications of Safeway’s
upper corporate management show those officials clearly understood the
intent and purpose of the transition to the membership program was to

36

overcharge government health programs.
In an email exchange between Mr. Topf and Brian Baer, Safeway’s
Chief Financial Officer (“CFO”), Mr. Topf explained the program details as
follows:
[A]bout 40% of customers have copays under $4 to begin with
so the hope is that these people definitely won’t take us up on
the $4 offer. Another 20% should have $5 copays so a large
portion of them will essentially be indifferent.
Mr. Baer responded to the email as follows: “I am still a bit hazy on a few
pts–as is Jeff . . . . look forward to discussing with you more . . . . it seems
like to me this whole thing revolves @ the insurance angle – to get the $10
per item from them vs the $4 cash price . . . . am I off?” The Relator alleges
Mr. Baer understood perfectly “this whole thing” was a scheme intended to
overcharge customers’ insurance, including government health programs.
Mr. Topf directed Mr. Talamantez to brief Mr. Baer on the details of the
program.
The amended complaint states that Mr. Alcaine, Mr. Talamantez and
their corporate staff directed and supervised the transition from the
automatic $4 program to the membership program with division heads.
37

Once the transition was complete, virtually all of Safeway’s pharmacies
nationwide operated under the fraudulent membership program. As part
of the implementation of the membership program, Mr. Alcaine directed
that Defendant’s corporate claims adjudication software be reprogrammed
with new higher usual and customary pricing for all pharmacies,
transitioning from the $4 program to the membership program so
government health programs and other insurance would not receive the
discounted prices. Mr. Topf was informed of this.
The Relator alleges that Safeway’s corporate officials understood that
the purpose of the transition to the membership program from the
automatic $4 program was to manipulate usual and customary prices in
order to overcharge third party insurance, including government health
programs. Safeway’s membership club program was deliberately structured
to ensure that government health program beneficiaries would always pay
the discount price or less if they “elect” for the lower price but the
government, as third-party payor of the majority of the cost, would never
receive the benefit of the discounts.

38

In a 2008 email from Mr. Talamantez to Safeway’s western state
divisions explaining the membership scheme, he noted that:
Q. What if a customer is on an insurance plan?
A. Based on the customer’s current insurance co-pay for
generics, a customer may elect to enroll in our membership
program to get the better pricing. Once enrolled, if you are
matching a generic price from a competitor, Complete the
information in PDX, Override the price to match competitor,
and Submit transaction online using our membership program
and not primary insurance.
Steve Scalzo, Director of Pharmacy Operations at Dominick’s Pharmacy
(Illinois),

understood

that

although

government

health

program

beneficiaries would always pay the discount price or less if they “opt” to pay
the lower price, the government would never receive the benefit of the
discounts: “Patients may opt to not have their insurance billed if $4 is less
than their copay.” Julie Spier, Director of Pharmacy Operations Texas, also
understood that government health program beneficiaries would always pay
the discount price or less but the government would never receive the
benefit of the discounts: “[T]he pharmacy will need to process first on the
patients regular insurance to see what their copay is and if it is more than
the $4 generic – the pharmacy will need to reverse the claim and then move
39

it over to the membership.”
Safeway’s internal communications show that its directors understood
the alleged scheme as a means to manipulate the usual and customary price
and charge government health programs more than the general public, in
violation of the FCA.
(7) Original source and public disclosure bar
The Defendant alleges that the allegations of the Relator, Thomas
Proctor, are substantially similar to a previously filed qui tam complaint
that was reported in the news media before the amended complaint was
filed and, therefore, the amended complaint must be dismissed on the
grounds of the public disclosure bar and the original source requirement.
Safeway states that Tiffany Huckels, a former pharmacist at its
pharmacies in Colorado, filed a qui tam complaint against Safeway in
Colorado state court on August 5, 2014. On or about March 13, 2016,
after the complaint was unsealed and the case was removed to federal court,
the legal news website Law360 (www.law360.com) reported and linked to
the action. The amended complaint in this case was filed on March 31,

40

2016.
The FCA directs courts “to dismiss an action or claim . . . if
substantially the same allegations or transactions as alleged in the action or
claim were publicly disclosed,” as relevant here, by “the news media, unless
the action is brought by the Attorney General or the person bringing the
action is an original source of the information.” 31 U.S.C. § 3730(e)(4)(A).
The public disclosure “bar is designed to deter parasitic qui tam actions.”
See Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 913 (7th
Cir. 2009). Safeway contends that Law360 constitutes news media and
because it publicly disclosed the Colorado qui tam action, the only issue is
whether the Relator’s factual allegations or transactions are substantially
similar to those advanced by Huckels and, if so, whether he is otherwise an
original source.
To determine whether the public disclosure bar applies, courts employ
a three-step analysis. See United States ex rel. v. Wisconsin Bell, Inc., 760
F.3d 688, 690 (7th Cir. 2014). The Court first “examines whether the
relator’s allegations have been publicly disclosed.” Id. (internal quotation

41

marks omitted). “If so, it next asks whether the lawsuit is based upon those
publicly disclosed allegations. If it is, the court determines whether the
relator is an original source of the information upon which his lawsuit is
based.” Id.
Safeway asserts the allegations in the amended complaint are
substantially similar to public disclosures in the Colorado case in that both
are against the same party and allege the same FCA violation–that Safeway
failed to give government health programs the benefit of certain discounts
and submitted allegedly fraudulent, inflated pricing information in its
prescription drug claims. Moreover, both actions describe the same means,
cover the same general time frame and allege Safeway defrauded virtually
the same government health programs. Safeway further contends that the
claims level detail is also substantially similar, given that both relators allege
Safeway submitted a $37.17 usual and customary price to Medicare Part
D for a 90-day count of L-thyroxine on May 3, 2014, even though
Safeway’s normal, low case price for the same drug was $10.00 for a 90-day
supply. For these reasons, Safeway asserts the first amended complaint is

42

“substantially similar” to the Colorado qui tam action.
The Relator’s amended complaint does include more detail than the
original complaint–the latter is 68 pages while the former is just 29 pages.
However, the Relator in the original complaint filed in November 2011 did
allege that Safeway had engaged in a nationwide scheme to falsely inflate
usual and customary prices reported to government health programs by
excluding everyday low prices from its usual and customary price
calculations. The original complaint contained allegations that Safeway
violated the Colorado False Claims Act in that manner.
The public disclosure “bar applies only when information exposing the
fraud has already entered the public domain prior to the relator’s suit.” See
U.S. ex rel. Beauchamp v. Academi Training Center, 816 F.3d 37, 43 (4th
Cir. 2016). It was the Relator’s original complaint that first alleged–at least
on a general basis–the relevant fraud claim. See id. at 45 (noting that the
district court erred because it “failed to evaluate the relevant fraud claim,”
which was “the first amended complaint;” the “second-amended complaint
merely added further detail about a claim already alleged.”). “Where the

43

relevant fraud is first alleged before the public disclosure, as occurred here,
the suit is plainly not ‘parasitic.’” Id. at 45-46 (citing Graham Cty. Soil &
Water Conservation Dist. v. U.S. ex rel. Wilson, 559 U.S. 280, 296 n.16
(2010)).
The Relator here made allegations of a general fraud scheme in
November 2011. That was almost three years before Huckels asserted that
Safeway engaged in a scheme in Colorado to falsely inflate usual and
customary prices reported to government health programs by excluding
everyday low cash prices from its usual and customary price calculations.
Obviously, some of the Relator’s allegations in this case–such as the 2014
claim submitted to Medicare Part D for L-thyroxine– could not have been
included in the 2011 complaint.
Although Huckels’ complaint may include more specificity, it does
not constitute a prior public disclosure. The Relator in this case was first
to allege the relevant fraud claim. Accordingly, the Court concludes that
the public disclosure bar does not preclude the Relator from proceeding in
this case.

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The Defendant also contends that Relator Proctor does not qualify as
an original source for the allegations in the amended complaint. The FCA
defines “original source” as an individual who either:
(i) prior to a public disclosure . . . has voluntarily disclosed to
the Government the information on which allegations or
transactions in a claim are based, or
(ii) who has knowledge that is independent of and materially
adds to the publicly disclosed allegations or transactions, and
who has voluntarily provided the information to the
Government before filing an action.
31 U.S.C. § 3730(e)(4)(B). Safeway alleges the Relator did not provide
sufficient details to qualify as an original source.
In order to be an original source, “[a] relator need not have seen the
claims submitted to the federal government . . . but must know enough to
make fraud a likely explanation for any overbilling . . . and under §
3730(e)(4)(B) must furnish that information to the United States, not just
assert that there is a basis to be revealed eventually.” U.S. ex rel. Baltazar
v. Warden, 635 F.3d 866, 870 (7th Cir. 2011).
In the original complaint, the Relator alleged that Safeway “knowingly
presented or caused to be presented false or fraudulent claims for payment

45

to the United States” through a nationwide scheme to falsely inflate its
reported usual and customary prices. The Relator’s claim was supported by
“information on which his allegations were based,” including specific details
of the alleged fraud, internal communications from Safeway officials and
specific false claims showing the scheme was being carried out. In both
complaints, the Relator alleges he is an original source of the information.
The Relator alleges that he voluntarily disclosed this information to the
Government prior to filing the action.
Upon accepting the truth of the allegations of the amended
complaint, the Court concludes that the Relator qualifies as an original
source.
The Court further finds that the Relator would qualify as an
independent source because he has knowledge that is “independent of”
Huckels’ alleged “publicly disclosed allegations.” Safeway acknowledges
that 17 of the 18 Colorado pharmacy transactions alleged in Relator
Proctor’s amended complaint were not disclosed in Huckels’ filings.
There is also a basis for concluding that information in Proctor’s

46

amended complaint “materially adds to” the alleged publicly disclosed
transactions. This information includes information the Relator claims to
have learned while working at Safeway’s Tom Thumb pharmacy in 2011
and as corroborated by internal communications from Safeway executives
discussing the usual and customary price fraud scheme at Safeway and its
subsidiaries.
Based on the allegations contained in the complaints, the Court
concludes there has been no prior public disclosure and Relator Proctor is
the original source of his allegations.
(8) Remaining claims
Additionally, Safeway claims the allegations as to FEHBP and
TRICARE do not assert viable claims because they lack sufficient detail.
However, the Relator makes the same type of allegations with respect to
FEHBP and TRICARE claims. Paragraphs 54 to 59 and 61 to 64 address
how TRICARE and FEHBP establish usual and customary pricing
requirements. Because these pricing terms are alleged to exceed Safeway’s
usual and customary charges to the general public, the Court concludes that

47

the Relator has alleged plausible claims based on Garbe.
Safeway further asserts the state law claims which are based on state
FCA statutes fail for lack of detail and because they do not comply with
statutory requirements. As the Relator asserts, however, a claimant need
not plead redundant examples for every state or federal program it is alleged
to have defrauded. The Relator simply needs “some firsthand information”
in those circumstances. See Pirelli, 631 F.3d at 446 (noting that plaintiff
did not necessarily need Illinois data to establish the existence of a
fraudulent scheme in Illinois). This is particularly true when, as here, the
nature of the fraud scheme alleged here is the same in every state and with
every government health program. The representative examples contained
in the amended complaint support the Relator’s assertion that government
health programs were charged significantly higher prices for prescription
drugs than were its cash customers. The Court concludes that this is
sufficient to allege claims for each of the Plaintiff states.
Safeway also alleges that the California, Delaware, District of
Columbia, Illinois, New Mexico, Nevada and Virginia claims should be

48

dismissed because the False Claims Act in each of those States authorize a
relator to bring qui tam claims only in the State’s own courts or in federal
court in that State.
As the Relator asserts, however, this Court has supplemental
jurisdiction under 28 U.S.C. § 1367(a) because the state law claims are
related to the federal FCA. The FCA also has a provision authorizing
supplemental jurisdiction of related state law claims: “The district courts
shall have jurisdiction over any action brought under the laws of any State
for the recovery of funds paid by a State or local government if the action
arises from the same transaction or occurrence as an action brought under
section 3730.” 31 U.S.C. § 3732(b). Accordingly, the Court concludes it
has jurisdiction over the subject matter.
Additionally, the Relator alleges in paragraph 34 of the amended
complaint that, prior to the filing of this action, he served a copy of the
complaint and a written disclosure of substantially all material evidence and
information he possessed on the United States and on the Plaintiff States.
Therefore, the Court rejects Safeway’s argument that he failed to comply

49

with these provisions as to the New Mexico and Virginia statutes and the
motion to dismiss Counts X and XII are denied.
III. CONCLUSION
Based on the foregoing, the Court concludes at this stage that the
Relator’s allegations are sufficient under Rule 9(b) to assert claims under
the FCA and the applicable state laws. The Court further finds that the
information was not illegally obtained in light of HIPAA. Accordingly, the
motion to dismiss and motion to strike will be denied.
Ergo, the Motion of Defendant Safeway, Inc. to Dismiss the Relator
and Plaintiffs’ Amended Complaint [d/e 53] is DENIED.
The Defendant’s Motion to Strike certain information [d/e 53] is also
DENIED.
This action is referred to United States Magistrate Judge Tom
Schanzle-Haskins for further proceedings related to discovery and entry of
a scheduling order.
ENTER: November 30, 2016
FOR THE COURT:

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/s/ Richard Mills
Richard Mills
United States District Judge

51