Warren Prescriptions, Inc. et al v. Walgreen Co.

Filing 36

ORDER Granting in part and Denying in part 28 Motion to Dismiss Counts IV and V of the Amended Complaint - Signed by District Judge Nancy G. Edmunds. (LBar)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

Warren Prescriptions, Inc., M.P.K., Inc., and
Sax Discount Pharmacy, Inc.,

Case No. 17-10520
Honorable Nancy G. Edmunds

Plaintiffs,
v.
Walgreen Co.,
Defendant.
/

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANT’S MOTION TO DISMISS COUNTS IV AND V OF THE AMENDED
COMPLAINT AND TO EXTEND TIME FOR ANSWERING THE REMAINING COUNTS
[28]

This matter is before the Court on Defendant’s motion to dismiss counts IV and V of
the amended complaint and to extend time for answering the remaining counts. (Docket
28.) On August 4, 2017, the Court issued an opinion and order (dkt. 23) denying in part and
granting in part Defendant’s motion to dismiss Plaintiffs’ original complaint, which consisted
of four claims for breach of contract (counts I-IV) and one claim for silent fraud (count V).
At that time, the Court denied Defendant’s motion to dismiss as to counts I (breach of
indemnification provisions) and III (breach of the covenant of good faith and fair dealing).
The Court granted Defendant’s motion to dismiss with respect to count II (breach of the
covenants, agreements and obligations under the Agreement) and dismissed it with
prejudice. Finally, the Court granted Defendant’s motion and dismissed without prejudice
counts IV (breach of representations) and V (silent fraud). Plaintiffs filed a first amended

complaint as to counts IV and V (dkt. 34) and Defendant again seeks to dismiss those
counts. The Court heard this matter on November 1, 2017.
I.

FACTS
The facts, as set forth in the Court’s prior order, are as follows. Plaintiff Warren

Prescriptions, Inc. (“Warren”), operated a retail store that included a pharmacy in
Farmington Hills, Michigan (the “Farmington Hills Drugstore”). (Am. Compl. ¶ 10.) Plaintiff
Sax Discount Pharmacy, Inc. (“Sax”), operated a pharmacy in Taylor, Michigan (the “Taylor
Drugstore”), and Plaintiff M.P.K., Inc. (“MPK”) operated the front-end non-pharmacy retail
business of the Taylor Drugstore (the Taylor Drugstore and Farmington Hills Drugstore
together, the “Pharmacies”). (Am. Compl. ¶ 11.) On or about May 1, 2014, Warren, Sax
and MPK (together, “Plaintiffs”) entered into an asset purchase agreement (the “APA”) with
Defendant Walgreen Co. (Am. Compl. ¶ 8; Def.’s Mot. Ex. A-1, dkt. 19-1, filed under seal.)
The APA was amended on or about July 31, 2014 by Amendment No. 1 to the Asset
Purchase Agreement (the “Amendment”, together, the “Agreement” or “APA”). (Am. Compl.
¶ 9; Def.’s Mot., Ex. A-2, dkt. 19-2, filed under seal.) Defendant provided both documents
under seal to the Court with its first motion to dismiss. Plaintiffs agree that the APA is
referred to in the Complaint, is integral to Plaintiffs’ claims, and should be considered with
the instant motion. (Pls.’ Resp. 1, dkt. 20.)
The sale for the two drugstores closed on or about August 6, 2014 (the “Closing”).
(Am. Compl. ¶ 19.) The parties agree that $6.7 million was paid at the Closing. (Am. Compl.
¶ 23; Def’s. Br. 3.) The APA contains the following Purchase Price provision at section 4.1:
The purchase price (the “Purchase Price”) for the Purchased Assets and the
covenants and agreements set forth herein shall be an amount equal to Ten
Million Eight Hundred Thousand Dollars ($10,800,000.00) (the “Base Amount”),
2

as adjusted in accordance with Sections 4.2(c) plus the Employment Bonus
Payment and the Inventory Amount. The parties further agree that the Base
Amount will decrease in the event there is a Material Reduction (as defined
below) in the daily prescription count at the Pharmacies between the date of
this Agreement and the Closing Date, which decrease shall be calculated as
follows: (a) on a date within fifteen (15) days of Closing (such date the
“Verification Date”) the parties shall measure, using the same procedures as
used in measuring the Current Volume, the average daily prescription count
over a six (6) month period ending on the Verification Date at the Pharmacies
(such count, the “Verification Date Volume”); and (b) in the event the
Verification Date Volume is less than the Current Volume by five (5) percent
or more, then such shall constitute a “Material Reduction” and the Base
Amount shall be reduced by an amount to be mutually agreed upon by the
parties. Buyer’s calculation of the Verification Date Volume shall be conclusive
absent manifest error.
(APA § 4.1; Amendment No.1 To APA, Section 3.) Prior to the closing, the two drugstores
were filling an average of approximately 820 prescriptions per day. (Am. Compl. ¶ 12, dkt.
1; APA §§ 1.1, 6.9 as amended, Ex. K, dkt. 19-1.)
Section 4.2 provides that a portion of this Base Amount would be paid out after closing
and pursuant to a schedule set forth at Exhibit L, on the basis of the retention of a certain
average amount of prescriptions per day; filling less than an average of 610 prescriptions
per day would result in a Retention Earnout Termination as follows:
(c) An amount up to Four Million Dollars and No/100 ($4,000,000.00) of the
Records Amount (the “Retention Earnout”), shall be paid pursuant to Exhibit
K within thirty (30) days after the date that is the last day of the month during
which the twelve (12)-month and twenty-four (24)-month anniversaries of the
Closing Date falls (the “Retention Earnout Termination Dates”), by wire transfer
. . . ; provided, that in the event of a Retention Earnout Termination (as defined
below), Buyer will be permitted to retain any unpaid portion of the Retention
Earnout, with no further obligation to Sellers. As used in this Section 4.2(c),
“Retention Earnout Termination” means a determination by Buyer, based on
the procedures set forth below, that the Average Customer Prescriptions is
less than six hundred ten (610). On or promptly after each of the Retention
Earnout Termination Dates, Buyer will identify, through its pharmacy computer
system, the total number of prescriptions filled at pre-existing Walgreens drug
stores and at the Premises for patients of the Pharmacies since the Closing
Date (the “Customer Prescriptions”). Buyer shall then divide the Customer
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Prescriptions by the number of days from the Closing Date to each of the
Retention Earnout Termination Dates (the “Average Customer Prescriptions”).
Buyer’s calculation of the Average Customer Prescriptions shall be conclusive.
(APA § 4.2(c); Am. Compl. ¶¶ 24-27.)
On September 3, 2015, little more than one year after the Closing, Defendant sent
an email to Plaintiffs’ agent, stating the following:
Pursuant to the Asset Purchase Agreement dated May 1, 2014, and
Amendment No. 1 to the Asset Purchase Agreement dated July 31, 2014, by
and among WALGREEN CO., SAX DISCOUNT PHARMACY, INC., MPK INC.
and WARREN SAV-MOR PRESCRIPTIONS, the amount of $4,000,000.00
(the ‘Twelve Month Prescription Earnout’) was withheld from the Purchase
Price, and payable upon Sellers [sic] retaining an average of at least six
hundred ten (610) prescriptions per day for the twelve (12)-month period
following Closing. According to Buyer’s calculations, 253 Rx/Day were retained
from Sax Pharmacy and 143 Rx/Day were retained from Warren Pharmacy
and Sellers did not retain the required number of prescriptions necessary for
payment of the Prescription Earnout. Therefore, no full or partial payment of
the Twelve Month Prescription Earnout shall be made, and Buyer shall have
no further obligations for payment.
(Am. Compl. ¶ 28; Pls.’ Resp. 2-3.) Plaintiffs’ claims arise from Defendant’s position that
it is not obligated to pay a remaining amount of $4,000,000 to Plaintiffs. Plaintiffs bring
claims for breach of contract (breach of the indemnification provisions– Count I); breach
of the covenant of good faith and fair dealing (Count III); breach of representation (Count
IV) and silent fraud (Count V). (Dkt. 34.)
II. LEGAL STANDARD
Defendant brings this motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), alleging
the "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). The
Sixth Circuit noted that under the United States Supreme Court's heightened pleading
standard laid out in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v.
Iqbal, 556 U.S. 662 (2009), “a complaint only survives a motion to dismiss if it contains
4

sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its
face.” Estate of Barney v. PNC Bank, Nat'l Ass’n, 714 F.3d 920, 924 (6th Cir. 2013)
(internal quotations and citations omitted). The court in Estate of Barney goes on to state
that under Iqbal, “[a] claim is plausible when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Id. (internal quotations and citations omitted). Furthermore, while the "plausibility
standard is not akin to a ‘probability requirement,’ . . . it asks for more than a sheer
possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678. “[W]here the
well-pleaded facts do not permit the court to infer more than the mere possibility of
misconduct, the complaint has alleged—but it has not ‘show[n]’—‘that the pleader is entitled
to relief.’” Estate of Barney, 714 F.3d at 924 (citing Iqbal, 556 U.S. at 679 (quoting Fed. R.
Civ. P. 8(a)(2)).

If the plaintiffs do "not nudge[ ] their claims across the line from

conceivable to plausible, their complaint must be dismissed." Twombly, 550 U.S. at 570.
Finally, the Court must keep in mind that “on a motion to dismiss, courts are not bound to
accept as true a legal conclusion couched as a factual allegation.” Id. at 555 (quotation and
citation omitted).
“[D]ocuments attached to the pleadings become part of the pleadings and may be
considered on a motion to dismiss.” Commercial Money Ctr., Inc. v. Ill. Union Ins. Co., 508
F.3d 327, 335 (6th Cir. 2007) (citing Fed.R.Civ.P. 10(c)). "A court may consider matters of
public record in deciding a motion to dismiss without converting the motion to one for
summary judgment.” Id. at 336. "In addition, when a document is referred to in the
pleadings and is integral to the claims, it may be considered without converting a motion
to dismiss into one for summary judgment." Id. at 335-36; see also Greenberg v. Life Ins.
5

Co. of Va., 177 F.3d 507, 514 (6th Cir.1999)(documents not attached to the pleadings may
still be considered part of the pleadings when the “document is referred to in the complaint
and is central to the plaintiff's claim”) (internal quotation marks and citations omitted).
III.

ANALYSIS
A. Whether Plaintiffs State A Claim For Breach of Contract Predicated Upon
Defendant’s Breach Of The Representation - Count IV
In Count IV, Plaintiffs allege that Defendant breached APA, section 7.2,

Representations and Warranties of Buyer:
7.2. No Conflicts. The execution, delivery and performance of this Agreement
by Buyer does not and will not constitute a breach of any contract to which it
is a party, the effect of which breach could reasonably be expected to have an
adverse effect on Buyer’s ability to consummate the transactions contemplated
by this Agreement.
(APA § 7.2; Am. Compl. ¶¶ 13, 81.) Plaintiffs allege that Defendant did not inform them that
it had entered into a Settlement Agreement with the United States Department of Justice
(“DOJ”) and the United States Drug Enforcement Administration (“DEA”) in which
Defendant acknowledged that certain of its retail Pharmacies did on some occasions
dispense certain controlled substances in a manner not fully consistent with federal
regulations. (Am. Compl. ¶¶ 53-55.) Plaintiffs allege that pursuant to the Settlement
Agreement, Defendant was required to operate pursuant to a compliance program, the
obligations or restrictions of which caused the pharmacies to lose customers and to not fill
prescriptions at the rate at which prescriptions were filled prior to Closing. (Am. Compl. ¶
56, 74.) This is one of the two counts which the Court dismissed without prejudice in its
August 4, 2017 opinion and order. (Dkt. 23.) The Court found that while these allegations
raised a possibility of Defendant being party to an undisclosed contract which would hinder
6

Defendant’s performance under the APA, Plaintiffs’ allegations lacked the factual content
from which the Court could “infer more than the mere possibility of misconduct,” and the
Court allowed Plaintiffs to amend the claim. It is this amended claim which Defendant now
seeks to dismiss.
Defendant summarizes Plaintiffs’ claim as follows: “ . . . Walgreens violated this
provision [7.2] because it had entered into a Settlement Agreement with the federal
government and could not have achieved the prescription count necessary to entitle
Plaintiffs to the Retention Earnout without breaching that Agreement.” (Def.’s Mem. in
Support of Mot. Dismiss 4.) Plaintiffs response is “Yes, exactly.” (Pl.s’ Resp. 7.)
According to Plaintiffs, “[t]he performance of the Agreement by Defendant included
the payment of the Deferred Portion of the Purchase Price.” (Am. Compl. ¶¶ 25, 75.) Yet
the performance or duty of payment by Defendant to Plaintiffs of a portion or all of the
Retention Earnout (the Deferred Portion of the Purchase Price) is not automatic; it is
conditioned upon the filling of 610 or more Average Customer Prescriptions after the
Closing Date, with payment amounts to be calculated pursuant to APA section 4.2 and Ex.
L. (APA 4.2; Am. APA Ex. L.) Plaintiffs allege facts to support a finding that Defendant (and
the Pharmacies after the Closing) were subject to additional restrictions that “caused the
[P]harmacies . . . to lose customers/patients and to not fill prescriptions at the rate filled
prior to the Closing.” (Am. Compl. ¶ 74.) Plaintiffs allege:
76. In order to so perform the Agreement, Defendant would need to continue
selling controlled substances at the pharmacies at the Two Drugstores in a
manner similar to the way controlled substances were sold at the pharmacies
at the Two Drugstores prior to the Closing (i.e., subject to compliance
restrictions imposed by applicable law -- but not subject to the additional
compliance restrictions imposed pursuant to the Settlement Agreement).
7

77. If Defendant continued to sell controlled substances in a similar manner
as the pharmacies at the Two Drugstores had been operated prior to the
Closing, such would have been a breach of the Settlement Agreement,
because Defendant could not operate the pharmacies at the Two Drugstores
in such a manner because it was subject to the restrictions contained in the
Settlement Agreement and Walgreen Compliance Obligations.
(Am. Compl. ¶¶ 76-77.) In the amended complaint, Plaintiffs now allege specific details
about the additional steps that Defendant must take in filling prescriptions for controlled
substances. The procedure includes the pharmacist engaging in Four Mandatory Steps
(ranging from reviewing drug history maintained by a state Prescription Drug Monitoring
Program, to answering seven questions designed to elicit red flags of potential prescription
drug abuse). (Am. Compl. ¶¶ 68-70.) The pharmacist then determines whether to call a
prescribing doctor to ask more questions. (Am. Compl. ¶¶ 71-72.) The term of the
Settlement Agreement, including the compliance program obligations, was for three years
and included approximately twenty-two months following the Closing. (Am. Compl. ¶¶ 57,
60.) Plaintiffs allege that such restrictions, among others, caused the Pharmacies to lose
customers/patients and to fill fewer prescriptions. (Am. Compl. ¶¶ 73-74.)
Defendant’s first argument, that Plaintiffs “failed to plead facts showing that the
‘performance of [the APA]’ by Walgreens ‘constitute[d] a breach of’ the settlement
agreement” and that Plaintiffs do not attempt to allege that Walgreen’s breached the
Settlement Agreement, is its strongest. (Def.’s Mem. 4.) At the heart of Defendant’s
argument is its position that the APA does not obligate Defendant to operate the
Pharmacies in any particular manner after closing.1 (Def.’s Reply 3.)

1

The Court agrees that neither party has identified an APA provision requiring the
pharmacies to be operated in a substantially similar manner to that in which they were
operated prior to Closing. Yet Defendant is not completely without limitations on its
8

In the amended complaint, Plaintiffs included details about the procedures to which
Defendant and the Pharmacies were subject under the Settlement Agreement, yet Plaintiffs
have not plead facts to support a finding that Defendant’s performance pursuant to the
APA, including the conditional duty to pay the retention earnout, or the condition upon
which it is based (filling at least 610 prescriptions, and, optimally, 810), breached or would
have constituted a breach of the Settlement Agreement. Plaintiffs cited in detail the
Compliance Program and Defendant’s resultant Good Faith Dispensing Policy checklist,
including a list of questions to the patient/client requiring possible follow-up with the
prescribing doctor, yet the amended complaint does not correct the deficiency in Plaintiffs’
claim for breach of the Representation at APA section 7.2. (Am. Compl. ¶¶ 66-72.) Plaintiffs
allege that in order to perform under the APA, “Defendant would need to continue selling
controlled substances at the pharmacies . . . in a manner similar to the way controlled
substances were sold at the pharmacies . . . prior to the Closing.” (Am. Compl. ¶ 76.)
Despite concluding that Defendant “implicitly agreed to: ‘conduct the Business after Closing

performance under the APA; in the August 2017 opinion and order, the Court denied
Defendant’s motion to dismiss Plaintiffs’ claim for breach of good faith and fair dealing.
One of the transactions contemplated by the APA was that Defendant would pay to
Plaintiffs the Retention Earnout of up to $4,000,000, pursuant to Exhibit L of the APA,
as long as Average Customer Prescriptions were not less than 610 at the Retention
Earnout Termination date 12 months following closing. (APA 4.2.) The only party to the
APA with discretion to affect the happening of this occurrence after the Closing is
Defendant. “Where a party to a contract makes the manner of its performance a matter
of its own discretion, the law does not hesitate to imply the proviso that such discretion
be exercised honestly and in good faith.” Ferrell v. Vic Tanny Int’l, Inc., 357 N.W.2d 669,
672 (Mich. App. 1984) (citing Burkhardt v. City National Bank of Detroit, 226 N.W.2d
678 (Mich. App. 1975) and 3A Corbin, Contracts, § 644, pp. 78-84). Defendant has
pending with the Court a motion for reconsideration of the Court’s August 4, 2017
opinion and order, and, in the alternative, motion for certification to the Michigan
Supreme Court.
9

in substantially the same manner as the Business is being currently operated . . .,” Plaintiffs
do not identify a contractual provision requiring Defendant to run the Pharmacies in the
same manner as they were run under Plaintiffs’ ownership. (Am. Compl. ¶ 14.) There is no
allegation that simply filling a specific number of prescriptions, or filling prescriptions at the
same rate as under Plaintiffs’ ownership, constitutes a violation of the Settlement
Agreement.
Second, Defendant argues that “Plaintiffs do not allege facts to support the
conclusion that ‘the effect of [Walgreens’] breach [of the Settlement Agreement] could
reasonably be expected to have an adverse effect on [Walgreens’] ability to consummate
the transactions contemplated by [the APA].” (Def.’s Memo in Support 5.) Plaintiffs
specifically allege that
78.
A breach of the Settlement Agreement by Defendant (among other
penalties) would have caused Defendant to no longer be able to sell the
controlled substances which were the subject of the Settlement Agreement.
79.
To consummate the transactions contemplated by the Agreement,
Defendant would have had to pay the Deferred Portion of the Purchase
Price.
80.
A breach of the Settlement Agreement could reasonably be expected
to have an adverse effect on Defendant’s ability to consummate the
transactions contemplated by the Agreement, including the payment of the
Deferred Portion of the Purchase Price, because without the filling of
prescriptions of the controlled substances which were the subject of the
Settlement Agreement, Defendant could not have retained an average of 810
prescriptions a day at the Two Drugstores after Closing.
(Am. Compl. ¶¶ 78-80.) The Court need not reach this portion of the argument where
Plaintiffs have failed to plead facts that could support finding that the execution, delivery
or performance of the APA would constitute a breach of the Settlement Agreement. Yet it
is worth noting that should Defendant breach the Settlement Agreement, and as a result,
10

become ineligible to fill an entire or part of a category of drugs during the 12 to 24-month
period following the Closing Date, such a limitation could reasonably be expected to have
an adverse effect on the condition to payment of the Retention Earnout: the filling of a
specific average number of prescriptions.
Defendant’s motion to dismiss as to Count IV will be granted and the claim
dismissed with prejudice.
B.

Whether Plaintiffs State a Claim For Silent Fraud - Count V

In Count V, Plaintiffs allege silent fraud. Defendant argues that Plaintiffs’ silent fraud
claim is barred by the APA’s integration clause and the economic-loss doctrine and that it
fails to meet Fed. R. Civ. P. 9(b)’s heightened pleading standard. Plaintiffs rely on their prior
response to the first motion to dismiss for their arguments regarding the integration clause
and the economic loss doctrine.2 Silent fraud “holds that when there is a legal or equitable
duty of disclosure, ‘[a] fraud arising from the suppression of the truth is as prejudicial as
that which springs from the assertion of a falsehood, and courts have not hesitated to
sustain recoveries where the truth has been suppressed with the intent to defraud.” Titan
Ins. Co. v. Hyten, 817 N.W.2d 562, 569 (Mich. 2012) (citing Tompkins v. Hollister, 27 N.W.
651 (Mich. 1886)). To recover, Plaintiffs need “to show that [Defendant] had a duty to
disclose a material fact and failed to do so.” Westfield Ins. Co. v. Enterprise 522, LLC, 34
F. Supp. 3d 737, 747 (E.D. Mich. 2014) (citing Lorenzo v. Noel, 522 N.W.2d 724, 725

2

With respect to both the indemnity clause and economic loss doctrine arguments,
Plaintiffs assert that Defendant’s arguments are simply a motion for reconsideration of
the Court’s prior ruling on these issues. The Court’s August 4, 2017 opinion and order
allowed Plaintiffs to replead two counts. Defendant’s motion to dismiss and these two
arguments respond to the newly amended claims and the Court will address them.
11

(Mich. App. 1994)); see also Cassidy v. Cassidy, 899 N.W.2d 65, 88 (Mich. App. 2017) (“In
order for the suppression of information to constitute silent fraud there must be a legal or
equitable duty of disclosure.”).
The elements of silent fraud are: (1) the defendant failed to disclose a
material fact about the subject matter at issue; (2) the defendant had actual
knowledge of the fact; (3) the failure to disclose the fact gave the plaintiff a
false impression; (4) when the defendant failed to disclose the fact, he or she
knew that the failure to disclose would create a false impression; (5) when
the defendant failed to disclose the fact, he or she intended that the plaintiff
rely on the resulting false impression; (6) the plaintiff indeed relied on the
false impression; and (7) the plaintiff suffered damages resulting from his or
her reliance.
City of Dearborn v. Burton-Katzman Dev. Co., 2014 WL 7212895, at *10 (Mich. Ct. App.
Dec. 18, 2014) (citing Hord v. Envtl. Research Inst. of Michigan, 579 N.W.2d 133 (Mich. Ct.
App. 1998)); see also Clement-Rowe v. Michigan Health Care Corp., 538 N.W.2d 20, 23
(Mich. App. 1995) (“The false material representation needed to establish fraud may be
satisfied by the failure to divulge a fact or facts the defendant has a duty to disclose.”).
1. Integration Clause
Defendant relies on Hamade v. Sunoco, Inc., and UAW-GM Human Resource
Center v. KSL Recreation Corp., for the premise that under Michigan law, an integration
clause bars fraud claims unless the alleged fraud invalidates the integration clause itself.
See Hamade v. Sunoco Inc., 721 N.W.2d 233, 249 (Mich. Ct. App. 2006) (“when a contract
contains a valid merger clause, the only fraud that could vitiate the contract is fraud that
would invalidate the merger clause itself, i.e., fraud relating to the merger clause or fraud
that invalidates the entire contract including the merger clause); UAW-GM Human Res. Ctr.
v. KSL Recreation Corp., 579 N.W.2d 411, 419 (Mich. Ct. App. 1998). The APA contains

12

an integration clause at section 13.5, providing in part that
This Agreement and the Exhibits and Schedules referred to herein and the
documents delivered pursuant hereto contain the entire understanding of the
parties hereto with regard to the subject matter contained herein or therein,
and supercede all prior agreements, understandings or letters of intent
between or among any of the parties hereto, including any confidentiality
agreement between the parties or their Affiliates. This Agreement shall not
be amended, modified or supplemented except by a written instrument
signed by an authorized representative of each of the parties hereto.
(APA § 13.5.)
According to Plaintiffs, this argument does not take into account a distinction
between information suppressed in the making of the contract versus a contractual term.
Plaintiffs allege that prior to the time the APA was executed, Defendant had actual
knowledge of material facts, including Defendant’s compliance program obligations
pursuant to its Settlement Agreement with DOJ and DEA, which it did not disclose to
Plaintiffs.3 This is a relevant distinction. Plaintiffs allege that by such failure to disclose, they
were given a false impression that there would not be a meaningful reduction in the number
of Average Customer Prescriptions after the Closing. (Am. Compl. ¶ 88.)
Silent fraud . . . involves information that has been deliberately and
deceptively withheld by one of the contracting parties. Undisclosed material
facts that were never the subjects of precontractual negotiations are not
absorbed by a contract. A contrary ruling would immunize from liability a
contracting party who suppressed information that it was duty-bound to

3

Alleged material facts “relating to the likelihood that the Average Customer
Prescriptions would substantially decline after the Closing” include “(a) Defendant’s
intent to not maintain sufficient inventories at the pharmacies at the Two Drugstores in
order to meet customer/patient needs; (b) Defendant’s intent to operate the pharmacies
at the Two Drugstores without sufficient staff to meet customer/patient needs; (c)
Defendant’s intent to eliminate lottery sales at the Two Drugstores; (d) the existence of
the Settlement Agreement and the Walgreen Compliance Obligations pursuant to the
Settlement Agreement; and (e) the implementation of the GFD Checklist.” (Am. Compl.
¶ 84.)
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include in the parties' discussions.
Abbo v. Wireless Toyz Franchise, L.L.C., 2014 WL 1978185, at *5 (Mich. Ct. App. May 13,
2014). In Abbo, the Michigan Court of Appeals considered the language of the merger
agreements, noting that they applied to “any and all prior or contemporaneous agreements,
whether oral, written, express or implied, between the parties with respect to the subject
matter” and “all previous written and oral agreements or understandings between the
parties,” noting that it would “enforce this unambiguous contractual language according to
its plain terms.” Id. at *6. The court also noted that neither of the merger clauses at issue
made “reference to prior ‘representations’ or ‘inducements.’” Id. The court concluded that
“[w]hile the merger clauses disclaimed ‘any and all prior agreements or understandings,’
they did not preclude the admission of factual representations regarding matters
unaddressed by the contract.” Id.
Similarly, the merger clause at issue provides that the APA, Exhibits and Schedules
contain the “entire understanding of the parties hereto with regard to the subject matter
herein” and “supercede[s] all prior agreements, understandings or letters of intent” and its
plain language does not preclude the admission of parol evidence that Defendant
fraudulently concealed the Settlement Agreement with DOJ and DEA or its intent to operate
without sufficient staff or inventory, and eliminate lottery sales. (APA § 13.5; Am. Compl.
¶ 84.) Unlike those cases on which Defendant relies, Plaintiffs do not allege an agreement
collateral to the APA. See Hamade, 721 N.W.2d at 249 (agreement contained a merger
clause; the plaintiff elected to forgo a term that would have given him an exclusive territory
on the basis of the defendant’s alleged representation and the plaintiff knew the term was
not included in the agreement when he signed it; the plaintiff’s “only claim on appeal is that
14

he was led to believe that he did not need such a clause”; the alleged oral representation
by the defendant regarding the authorization of future service stations was also expressly
nullified by language in the integration clause); UAW-GM Human Res. Ctr., 579 N.W.2d at
419 (“fraud that relates solely to an oral agreement that was nullified by a valid merger
clause would have no effect on the validity of the contract”). Instead, as set forth in further
detail below, Plaintiffs allege that the failure to disclose material facts gave Plaintiffs a false
impression “that there would not be a meaningful reduction in the number of Average
Customer Prescriptions after the Closing.” (Am. Compl. ¶ 88.) Plaintiffs have plead enough
to state a plausible fraud claim that would not be barred by the inclusion of the integration
clause.
2. Economic Loss Doctrine
As in the first motion to dismiss, Defendant argues that the silent fraud claim is
barred by the economic loss doctrine. “Generally, under Michigan law, a plaintiff ‘[may] not
maintain an action in tort for nonperformance of a contract.’” DBI Investments, LLC v.
Blavin, 617 Fed. Appx. 374, 381 (6th Cir. 2015) (quoting Ferrett v. Gen. Motors Corp., 475
N.W.2d 243, 247 (Mich. 1991)). A tort claim is available where it is “extraneous to the
contractual dispute.” Huron Tool & Eng’g Co. v. Precision Consulting Servs., Inc., 532
N.W.2d 541, 545 (Mich. Ct. App. 1995). “Michigan courts must inquire whether the legal
duty allegedly violated by a defendant ‘arise[s] separately and distinctly from a defendant’s
contractual obligations.’” DBI Invs., LLC, 617 Fed. Appx. at 381. For example, claims have
been allowed for “negligence resulting in physical harm to third parties” or “retaliatory
discharge of an at-will employee contrary to public policy.” Id. However, “tort claims based
on negligent performance or nonperformance of a contract resulting in only economic
15

harm” have been rejected under the economic loss doctrine. Id. Defendant argues that the
damages Plaintiffs claim are wholly interwoven with the terms of the APA and Plaintiffs’
agreement to a prescription-based compensation structure. (Def.’s Br. 10.)
In response to the prior motion to dismiss, Plaintiffs likened their silent fraud claim
to one for fraud in the inducement, in that both related to the procurement of contractual
promises through fraud. (Pls.’ Resp. 24-25, dkt. 20.) As the Court pointed out in its prior
opinion and order, DBI Investments recognized that in Michigan, fraudulent inducement is
an exception to the economic loss doctrine, where, as alleged here, it is extraneous to the
contract. Defendant argues that Plaintiffs have not plead fraud in the inducement and that
it is a defense to contract.
Although Plaintiffs’ claim is that of silent fraud, it is similar in theory and
consequence to fraud in the inducement.
Fraud in the inducement presents a special situation where parties to a
contract appear to negotiate freely -- which normally would constitute
grounds for invoking the economic loss doctrine-- but where in fact the ability
of one party to negotiate fair terms and make an informed decision is
undermined by the other party’s fraudulent behavior. In contrast, where the
only misrepresentation by the dishonest party concerns the quality or
character of the goods sold, the other party is still free to negotiate warranty
and other terms to account for possible defects in the goods.
Huron Tool and Eng’g Co., 532 N.W.2d at 545, 546 (The court, finding that plaintiff’s claims
do not fall “outside the ambit of the economic loss doctrine,” noted that the “fraudulent
representations alleged by plaintiff concern the quality and characteristics of the software
systems sold by defendants. These representations are indistinguishable from the terms
of the contract and warranty that plaintiff alleges were breached. . . . Because plaintiff’s
allegations of fraud are not extraneous to the contractual dispute, plaintiff is restricted to
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its contractual remedies under the UCC.”) The reasoning behind allowing fraud in the
inducement as an exception to the economic loss doctrine, as discussed in Huron Tool,
contemplates a situation similar to that alleged by Plaintiffs. For example, Plaintiffs’ ability
to negotiate the terms of compensation under the agreement was hindered or undermined
by not knowing that Defendant, and the Pharmacies by association, would be subject to
additional procedures that would result in fewer prescriptions being filled and that
Defendant would take other steps to reduce both customer traffic and the number of
prescriptions filled. Here, the suppression of information related to a reduced likelihood of
Defendant continuing to fill prescriptions at the Pharmacies’ pre-Closing levels and led
Plaintiffs to agree to the compensation structure that put nearly 40% of the purchase price
at risk. Plaintiffs argue that Defendant’s failure to disclose certain information gave them
a “false impression’ that there would not be a meaningful decrease after closing. (Am.
Compl. ¶ 88.)
Although DBI Investments, on which Defendant relies, found that the plaintiff’s
allegations of fraud were barred by the economic loss doctrine, the case is distinguishable.
DBI Invs., LLC, 617 Fed. Appx. 374. DBI Investments also noted that “not all tort claims,
. . . are barred by the existence of a contract.” Id. at 381. Citing Huron Tool, the court
pointed out that “[c]laims of fraud ‘extraneous to the contract’ are permissible, whereas
‘fraud interwoven with breach of contract’ cannot support an independent claim.” Id. at 382.
The court concluded that the plaintiff’s allegations of fraud based on the defendant’s
representation of dissolution procedures were “essentially claims of nonperformance of the
relevant contract provisions governing that procedure.” Id. at 383. The plaintiff had not
alleged “any statements related to dissolution extraneous to these provisions that ‘tricked’
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it into entering into the contract.” Id. The court came to a similar conclusion with respect to
the plaintiff’s claim that the defendant “misrepresented the effect of the performance
compensation structure,” which “concerned the operation of a contract provision with which
both parties were directly familiar.” Id. The court noted that the plaintiff, an entity controlled
by two sophisticated business men, “cannot claim that it was tricked into [the agreement]
based on [the defendant’s] emphasis on the positive aspects of the arrangement.” Id.
“Nothing prevented Plaintiff in this context from foreseeing the downside as well as the
upside of a performance-based compensation structure.” Id.
On the contrary, Plaintiffs’ allegations in the case at bar are that something very
specific prevented Plaintiffs from seeing the downside of the compensation structure of the
APA. Plaintiffs’ allegations are not merely “‘interwoven’ with the nonperformance or
foreseeable effect of contract terms. Id. Plaintiffs claims are that Defendant possessed
information and knowledge prior to Closing that at the time of Closing, the Pharmacies
would be subject to procedures that would decrease prescription numbers and that
Defendant would institute additional practices (decrease stock and staff, discontinue lottery
sales) to further decrease the number of prescriptions filled.
Plaintiffs have plead enough to maintain that their silent fraud claim is not simply an
action for nonperformance of the APA, and that the fraud they allege is distinguishable from
the terms of the contract.
3.

Fed. R. Civ. P. 9(b)

Finally, Defendant argues that Plaintiffs have not plead their fraud claim sufficiently
to meet the standards of Fed. R. Civ. P. 9(b), which requires that “[i]n alleging fraud or
mistake, a party must state with particularity the circumstances constituting fraud or
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mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged
generally.” Fed. R. Civ. P. 9(b). “Rule 9(b) is not to be read in isolation, but is to be
interpreted in conjunction with Federal Rule of Civil Procedure 8 .” United States ex rel.
Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 503 (6th Cir. 2007). The Sixth Circuit has
held that Rule 9(b) requires that Plaintiffs “allege the time, place, and content of the alleged
misrepresentations on which he or she relied; the fraudulent scheme; the fraudulent intent
of the defendants; and the injury resulting from the fraud” or, “the ‘who, what, when, where,
and how’ of the alleged fraud.” Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 877
(6th Cir. 2006) (citations omitted). “The threshold test is whether the complaint places the
defendant on ‘sufficient notice of the misrepresentation,’ allowing the defendants to
‘answer, addressing in an informed way plaintiff[']s claim of fraud.’” Coffey v. Foamex L.P.,
2 F.3d 157, 162 (6th Cir. 1993) (internal citations omitted).
Despite Defendant’s argument to the contrary, Plaintiffs have pled considerably
more than “legal conclusions and generalizations.” (Def.’s Mem. 9.) Plaintiffs specifically
identified Defendant, Walgreen Co., as having knowledge of and withholding the following
information: the existence of the Settlement Agreement and the effect of its requirements
on the number of prescriptions filled, and the intent to discontinue lottery sales and to
maintain insufficient staff and inventory at the pharmacies. (Am. Compl. ¶¶ 59-62, 67, 8386.) Plaintiffs have also identified the time frame in which the alleged information was
known to Defendant and withheld as being prior to entering into the APA. (Am. Compl. ¶¶
59, 60, 62, 67 (“Prior to the time the Original APA was executed, according to an employee
of Defendant . . .”), 83, 84.) Plaintiffs specifically allege that Defendant intended Plaintiffs
rely on the false impression given by the suppression of certain information, and that
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Plaintiffs did so. (Am. Compl. ¶¶ 89-90). Although “intent, knowledge, and other conditions
of a person’s mind may be alleged generally,” Plaintiffs identified the intent and motive in
part by pointing out that “the amount of lost profits from a reduction of the Average
Customer Prescriptions from 810 to 609 during the First Twelve Month Period was less
than the $4 million Defendant would be permitted to retain from the Deferred Portion of the
Purchase Price as a result of such a reduction in the Average Customer Prescriptions.”
(Fed. R. Civ. P. 9(b); Am. Compl. ¶¶ 48, 82.)
With respect to the allegedly withheld information, Plaintiffs argue that “t]here is an
equitable duty of disclosure in a business transaction when ‘circumstances surrounding a
particular transaction are such as to require the giving of information . . . .” Hand v. DaytonHudson, 775 F.2d 757, 759 (6th Cir. 1985) (citing Ainscough v. O’Shaughnessey, 78
N.W.2d 209, 214 (Mich. 1956)); see also Sullivan v. Ulrich, 40 N.W.2d 126, 131 (Mich.
1949) (“Fraud may be consummated by suppression of a material fact by either party to a
contract of sale which he is in good faith bound to disclose, as well as by open false
assertions since by such suppression there is fraudulently produced a false impression
upon the mind of other party.”). With respect to such a duty, Plaintiffs have alleged, for
example, that Defendant did not inform them of the Settlement Agreement, nor that it would
“be in effect for approximately twenty-two months after the closing” (and became applicable
to the Pharmacies upon Closing) and that, prior to the Closing and as a result of the
Compliance Obligations related to the Settlement Agreement, Defendant had been “turning
away customers from its drugstores and had begun refusing to fill prescriptions of
controlled substances which were the subject of the Walgreens Compliance Obligations.”
(Am. Compl. ¶¶ 60-65, 82, 83; see also Am. Compl. ¶¶ 84-86.) In considering Plaintiffs’
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other claims, this Court has acknowledged that neither party has identified a provision
requiring Defendant to operate that Pharmacies in the same manner that they were run
prior to closing. Yet Plaintiffs allege that “Defendant implicitly agreed to: ‘conduct the
Business after Closing in substantially the same manner as the Business is being currently
operated without loss of patient information and without interruption of service to patients
or Payment Programs, billing or collection, or other material aspect of the Business,” relying
on a provision that required Plaintiffs to “reasonably cooperate” with Defendant to enable
such a continuation. (Am. Compl. ¶ 14; APA 8.15.). Although the Court found in its prior
opinion and order that Plaintiffs had not plead a breach of contract based on this provision,
Plaintiffs argument that it had “no reason to believe that the business of the Two
Drugstores would not continue as it had for years and . . . there would be an average of
810 prescriptions a day at the Two Drugstores after Closing” is not unreasonable in light
of such a provision. (Pls.’ Resp. 16.) As Plaintiffs point out, the deferred portion of the
purchase price is “an extremely significant part of the consideration” and had Plaintiffs
known the material facts suppressed by Defendant, they would have known “there was little
likelihood that an average of 810 prescriptions per day” would continue to be filled after
closing, and such facts “were critical to an evaluation of whether it was likely that the
Deferred Portion of the Purchase Price was going to be paid.” (Pls.’ Resp. 16.)
Defendant argues that this was a routine business transaction, and that the
existence of the settlement agreement was “readily accessible to the other party by the
exercise of due diligence.” (Def.’s Reply 6.) Michigan courts recognize that with respect to
the doctrines of silent fraud, actionable fraud and innocent misrepresentation, “none of
these doctrines requires that the party asserting fraud prove that the fraud could not have
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been discovered through the exercise of reasonable diligence.” Titan Ins. Co., 817 N.W.2d
at 569.
Finally, Plaintiffs’ failure to request rescission of the APA is not a bar to their fraud
claim. “The legal and equitable remedies for fraud are manifold. Fraud in the procurement
of the contract may be grounds for monetary damages in an action at law, . . . or, . . .
grounds to retroactively avoid contractual obligations through traditional legal and equitable
remedies such as cancellation, rescission, or reformation.” Id. at 569. “[S]uch remedies
may be limited or narrowed by statute.” Id. Michigan courts have “held that a plaintiff may
seek rescission and damages for fraud, despite that one requires affirmance of the contract
while the other demands disavowal, as long as the jury picks one theory and does not
award double recovery.” Abbo, 2014 WL 1978185, at *13 (citing Jim-Bob, Inc. v. Mehling,
443 N.W.2d 451 (Mich. App. 1989)).
These are adequately specific allegations of the silent fraud claim to survive
dismissal. While it remains to be seen whether this case will survive a motion for summary
disposition, Defendant’s motion to dismiss this claim will be denied.
IV. CONCLUSION
For the reasons set forth above the Court GRANTS in part Defendant’s motion to
dismiss (dkt. 28) and dismisses with prejudice Count IV.
The Court DENIES Defendant’s motion as to Count V.
SO ORDERED.
s/Nancy G. Edmunds
Nancy G. Edmunds
United States District Judge

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Dated: January 4, 2018
I hereby certify that a copy of the foregoing document was served upon counsel of record
on January 4, 2018, by electronic and/or ordinary mail.
s/ Lisa C. Bartlett
Case Manager

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