Zimmerman v. Diplomat Pharmacy, Inc. et al

Filing 36

OPINION AND ORDER denying 23 Motion to Dismiss. Signed by District Judge John Corbett O'Meara. (WBar)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

DAVID N. ZIMMERMAN, Individually
and on Behalf of All Others Similarly
Situated,
Case No. 16-14005
Plaintiffs,
Honorable John Corbett O’Meara
v.
DIPLOMAT PHARMACY, INC., PHILIP
R. HAGERMAN, and SEAN M.
WHELAN,
Defendants.
/
OPINION AND ORDER
DENYING DEFENDANTS’ MOTION TO DISMISS
This matter came before the court on defendants Diplomat Pharmacy, Inc., Philip
R. Hagerman, and Sean M. Whelan’s May 26, 2017 Motion to Dismiss Plaintiffs’
Amended Class Action Complaint. Plaintiffs filed a response July 10, 2017; and
Defendants filed a reply brief August 9, 2017. Pursuant to Local Rule 7.1(f)((2), no
oral argument was heard.
BACKGROUND FACTS
This is a shareholder class action suit in which Plaintiffs allege violations of the
Securities Exchange Act of 1934 and is governed by the Private Securities Litigation

Reform Act of 1995 (“PSLRA”). On a motion to dismiss, the court is required to
“construe the complaint in the light most favorable to the plaintiff, accept all wellpleaded factual allegations as true, and examine whether the complaint contains
sufficient factual matter, accepted as true, to state a claim to relief that is plausible on
its face.” Ohio Pub. Emps. Ret. Sys. v. Federal Home Loan Mortg. Corp., 830 F.3d
376, 382-83 (6th Cir. 2016) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
Accordingly, the court takes its statement of facts from Plaintiffs’ response brief as
follows:
In late 2015, Defendants were notified by Caremark, the largest PBM
[pharmacy benefits manager] through which Diplomat dispensed its Part
D prescriptions, that starting January 1, 2016, DIR [direct and indirect
remuneration] fees assessed by Caremark would go from a flat $3 to $7
amount to a percentage range of 3% to 5% on the cost of each billed
prescription’s ingredients. What this meant for Diplomat, the largest
specialty pharmacy in the country, was that because the ingredients of
their Part D drugs cost upwards of $30,000 (or more) per prescription,
the DIR fees deducted from Caremark reimbursements would increase
1,000% to 10,000% (or more) in 2016. Therefore, Defendant knew that
unlike in prior years, when Caremark would have deducted only $3 to $7
from a $30, 000 Part D prescription dispensed by Diplomat, in 2016, the
change to the 3% to 5% range meant that the DIR fee would skyrocket
to between $900 and $1,500 on that same prescription.
Despite knowing about the financial havoc these Caremark DIR fees
would wreak on Diplomat’s profitability, Defendants concealed this
information from investors by failing to timely record adequate accruals
for DIR fees in Diplomat’s publicly filed 1Q16 and 2Q16 financial
results, in violation of GAAP [generally accepted accounting principles],
and misleadingly omitting material information about DIR fees from the
Company’s 2015 10-K and 1Q16 and 2Q16 10-Qs. Defendants knew
2

that if they had properly accrued these DIR fees in their publicly filed
financial statements, investors would have been alerted to the
astronomical increases in DIR fees and their material negative impact on
profitability, and Diplomat’s stock price would surely suffer (as it
eventually did) and potentially derail the ongoing merger negotiations it
was having with Caremark’s parent company, CVS. And because
Diplomat never even mentioned DIR fees or related accruals in any of its
financials filed before the end of the Class Period, there is no reason to
believe that CVS was alerted to Defendants’ failure to properly accrue
DIR fees assessed by Caremark.
Investors began to learn the truth when, after the close of trading on
October 25, 2016, Diplomat announced that defendant Whelan had
resigned without a successor in place and just days before the release of
3Q16 financial results. In response, on October 26, 2016, Diplomat’s
stock tumbled more than 12% on unusually heavy trading volume. The
full truth of Defendants’ previously concealed scheme was revealed
when after the close of trading on November 2, 2016, Diplomat
announced its 3Q16 results, reporting that ‘[t]hird quarter revenue and
profit measures . . . were negatively impacted by an incremental $8
million of DIR fees, of which $4 million was retroactive to Q1 and Q2
2016.’ In response, on November 3, 2016, Diplomat’s stock plummeted
more than 40%, falling from $22.38 to $12.95 on heavy volume, thereby
harming investors.
LAW AND ANALYSIS
To state a claim for securities fraud a plaintiff must allege “(1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection between
the misrepresentation or omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”
Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011). This claim is

3

subject to the pleading standards of the PSLRA, which require allegations to be stated
with particularity.
In their motion to dismiss Defendants contend that Plaintiffs have failed to plead,
among other things, a strong inference of scienter, the “knowing and deliberate intent
to manipulate, deceive, or defraud,” or “highly unreasonable conduct which is an
extreme departure from the standards of ordinary care.” Doshi v. General Cable
Corp., 823 F.3d 1032, 1039 (6th Cir. 2016). Defendants argue that instead, Plaintiffs
have pleaded “fraud by hindsight.” Defs.’ br. at 24-25.
However, the standard under which the court must review Defendants’ motion
to dismiss “does not impose a probability requirement at the pleading stage; it simply
calls for enough fact to raise a reasonable expectation that discovery will reveal
evidence of illegal [conduct].” Bell Atl. Corp v. Twombly, 550 U.S. 544, 556 (2007).
Construing the amended complaint in this case in the light most favorable to the
purported plaintiff class and accepting all well-pleaded factual allegations as true, the
court finds that it does contain sufficient factual matter, accepted as true, to state a
claim for relief. Accordingly, the court must deny Defendants’ motion to dismiss the
amended complaint.

4

ORDER
It is hereby ORDERED that Defendants’ May 26, 2017 Motion to Dismiss
Plaintiffs’ Class Action Amended Complaint is DENIED.

s/John Corbett O'Meara
United States District Judge

Date: January 19, 2018

I hereby certify that a copy of the foregoing document was served upon counsel
of record on this date, January 19, 2018, using the ECF system.

s/William Barkholz
Case Manager

5