SMART PHARMACY, INC. et al v. MEDCO HEALTH SOLUTIONS, INC.

Filing 106

MEMORANDUM OPINION. Signed by Magistrate Judge James B. Clark on 7/29/14. (jd, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

SMART PHARMACY, INC., et al.,

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Plaintiffs,
v.
MEDCO HEALTH SOLUTIONS, INC.,
Defendant.

Civil Action No. 11-6485 (FSH)

MEMORANDUM OPINION

CLARK, Magistrate Judge
Currently pending before the Court is Plaintiffs Smart Pharmacy, Inc. (“Smart”) and
Highland Pharmacy, LLC’s (“Highland”) (collectively, “Plaintiffs”) motion for leave to file a
second amended complaint [Docket Entry No. 77]. Defendant Medco Health Solutions, Inc.
(“Medco”) has opposed Plaintiffs’ motion [Docket Entry No. 84]. The Court has fully reviewed
and considered all arguments made in support of, and in opposition to, Plaintiffs’ motion. The
Court considers Plaintiffs’ motion without oral argument pursuant to L.Civ.R. 78.1(b). For the
reasons set forth more fully below, Plaintiffs’ motion is DENIED.
I.

BACKGROUND
Plaintiffs filed this matter as a putative class action on November 4, 2011, alleging that

Medco engaged in “abusive audit and reimbursement practices” and seeking relief under various
causes of action sounded in contract law. First Am. Compl. at ¶1; Docket Entry No. 20. Plaintiffs
brought this action on behalf of three putative classes, all of whom contracted with Medco for the
reimbursement of certain pharmacy services. Id.
“Overpriced Compound Class” which is defined as:
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Plaintiffs’ instant motion concerns the

All pharmacies who have submitted at least one claim to Medco for reimbursement…, and
which claim(s) was subsequently audited by Medco and for which monies were either
recouped by Medco, or are subject to recoupment by Medco, for an alleged “Overpriced
Compound” discrepancy since June 30, 2009.
Id. at ¶75b.
A First Amended Complaint was filed on August 24, 2012 as a result of the District Court’s
Opinion and Order granting Medco’s Motion to Dismiss. See Docket Entry Nos. 18, 19. After an
Initial Scheduling Conference on February 8, 2013, a pretrial scheduling order was entered, which
was amended by this Court on November 13, 2013, upon the transfer of this case to the
undersigned. The November 13th Scheduling Order required any motions to join new parties or to
amend the pleadings to be filed by January 24, 2014. See Docket Entry No. 60. The instant motion
was filed on March 17, 2014.
II.

LEGAL STANDARD
a. Good Cause under Fed.R.Civ.P. 16
Normally, leave to amend is governed by Fed.R.Civ.P. 15. Under the Rule, a party may

amend once as a matter of course within a specified time and conditions. See Fed.R.Civ.P. 15.
Once that period has passed, a party may amend only with written consent of the adverse party or
with leave of court. Fed.R.Civ.P. 15(a)(2). Where, however, the Court has entered a scheduling
order, Fed.R.Civ.P. (“Rule”) 16 also applies. See Harbor Laundry Sales, Inc. v. Mayflower
Textile Services Co., 2011 WL 6303258 at * 2 (D.N.J. Dec. 16, 2011). Under Rule 16, the court
sets a schedule which “limit[s] the time to join other parties, amend the pleadings, complete
discovery, and file motions.” Rule 16(b)(3). Rule 16(b)(4) governs modifications to that
schedule, setting forth that “[a] schedule may be modified only for good cause and with the
judge’s consent.” In this district, Rule 16 operates as a gatekeeper. A party must first establish
good cause for the delay under Rule 16. If good cause is found, only then do courts then
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evaluate the proposed amendment under Rule 15(a). See Harbor Laundry Sales, 2011 WL
6303258 at *3.
Good cause is more than a lack of prejudice to the opposing party. Id., citing
GlobespanVirata, Inc. v. Texas Instruments Inc., 2005 WL 1638136, at *3 (D.N.J. July 12,
2005). The focus of the inquiry is the diligence of the party, specifically that, despite its
diligence, the moving party could not have met the deadlines to move for leave to amend as set
forth in the original scheduling order. Id. Where a party has the knowledge or facts but fails to
move and provides no satisfactory explanation, the court has discretion to deny the late
amendment. See Prince v. Aiellos, 2012 WL 1883812 at *6 (D.N.J. May 22, 2012).
b. Liberal Standard under Fed.R.Civ.P. 15
Once a party establishes good cause, the court analyzes the request under Rule 15(a).
Pursuant to this rule, leave to amend the pleadings is generally granted freely. See Foman v.
Davis, 371 U.S. 178, 182 (1962); Alvin v. Suzuki, 227 F.3d 107, 121 (3d Cir. 2000).
Nevertheless, the Court may deny a motion to amend where there is “undue delay, bad faith or
dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments
previously allowed, undue prejudice to the opposing party by virtue of allowance of the
amendment, [or] futility of the amendment.” Id. However, where there is an absence of undue
delay, bad faith, prejudice or futility, a motion for leave to amend a pleading should be liberally
granted. Long v. Wilson, 393 F.3d 390, 400 (3d Cir. 2004).
Delay alone is not sufficient to deny a request for leave to amend, see Adams v. Gould
Inc., 739 F.2d 858, 868 (3d. Cir. 1984), but the moving party “must demonstrate that its delay in
seeking to amend is satisfactorily explained.” Harrison Beverage Co. v. Dribeck Importers, Inc.,
133 F.R.D. 463, 468 (D.N.J. 1990) (internal quotations omitted). Courts will deny a request for

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leave to amend where delay becomes undue, when its accommodation creates an “unwarranted
burden on the court…[and] unfair burden on the opposing party.” Adams v. Gould, 739 F.2d 858
at 868.
Similarly, prejudice must be “undue” and rise to such a level that the non-moving party
would be “unfairly disadvantaged or deprived of the opportunity to present facts or evidence…”
Harrison, 113 F.R.D. at 468 (internal quotations omitted). In evaluating the extent of any
alleged prejudice, the court looks to the hardship on the non-moving party if the amendment
were granted. Cureton v. NCAA, 252 F.3d 267, 273 (3d Cir. 2001). “Specifically, [courts] have
considered whether allowing an amendment would result in additional discovery, cost, and
preparation to defend against new facts or theories.” Cureton, 252 F.3d at 273.
III.

DISCUSSION
Plaintiffs seek leave to amend their complaint so that they might “clarify the definition of

an Audit” with respect to potential members of the Overpriced Compound Class. Plaintiffs submit
that Medco has been conducting audits of pharmacies “under the rubric of an ‘investigation,’ as
opposed to an ‘audit.’” Plaintiffs’ Brief in Support at 4; Docket Entry No. 77-1. Plaintiffs postulate
that “Medco has done this in an effort to minimize the size of the putative classes in this lawsuit,
and hence, its overall legal exposure resulting from this lawsuit.” Id. Specifically, Plaintiffs
contend that Medco’s “investigations” are no different from the “audits” of which Plaintiffs have
complained, and that the result of either is the same, i.e. “monetary recoupment from the pharmacy
for alleged overpricing of a compound prescription.” Id. at 5. It is Medco’s process for determining
alleged overpricing that Plaintiffs complain of, and therefore, Plaintiffs adopt the “substance over
form” argument, maintaining that the mere labeling of the process as an “investigation” rather than
an “audit” is irrelevant and is simply a tactic Medco is using to limit or reduce the putative class

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and its potential litigation exposure. Id. As such, Plaintiffs request that they be permitted to file a
Second Amended Complaint with the proposed definition of an “audit” as follows:
The word “Audit” as used herein refers to any audit, review and/or investigation process
to which a pharmacy is subjected by Medco after a prescription drug claim has been
electronically adjudicated at the point-of-sale including, but not limited to, on-site audits,
desk audits, telephone audits, investigations, operational claims reviews, quality assurance
reviews, purchase verification audits and investigations, and any other evaluation of claims
and/or claims data performed by Medco.
Proposed Second Amended Complaint at ¶1; Docket Entry No. 77-3.
Plaintiffs submit that their motion should be granted, as “the amendment is being sought
while the parties remain in the midst of discovery,…prior to Plaintiffs’ motion for class
certification[,]…would [result in] no prejudice to Medco…[and] does not seek to assert any
additional claims/legal theories. Pltf. Br. Supp. at 11. Medco has opposed Plaintiffs’ motion,
arguing that the proposed amendment is untimely, prejudicial to Medco, and futile. The Court
shall address each objection in turn.
a. Good Cause under Fed.R.Civ.P. 16
Plaintiffs concede that this amendment is being sought subsequent to the deadline set forth
in the November 13, 2013 scheduling order, but submit that they “have not exhibited bad faith or
a dilatory motive” in requesting same. Id. at 10. Plaintiffs state that the “amendment has been
prompted by new information learned by Plaintiffs, through their counsel in connection with other,
unrelated matters” in the months leading up to the motion. Id. at 11. In contrast, Medco submits
that Plaintiffs have not shown the requisite good cause for filing their motion past the deadline,
especially given Plaintiffs’ vague indication that the new information was learned “over the last
couple of months[.]” Medco’s Brief in Opposition at 11; Docket Entry No. 84 (internal quotations
omitted). Moreover, Medco contends that Plaintiffs’ counsel authored an article in January 2013
on the precise issue of “audits” disguised as “investigations.” Id. at 8. Lastly, Medco argues that
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Plaintiffs have given no adequate reason why they did not move for an extension of time to file a
motion to amend. Id. at 11. Plaintiffs argue that they had no widespread knowledge of Medco’s
practices in January 2013, believing that it was only “certain discrete instances where Medco was
essentially auditing claims under the guise of an ‘investigation’.” Plaintiffs’ Brief in Reply at 8;
Docket Entry No. 85. Plaintiffs aver that they “moved diligently to incorporate the information
into its pleading…after assessing a rapid trend over the past couple months.” Id.
The Court finds that Plaintiffs have not shown the requisite good cause to modify the
scheduling order. Plaintiffs argue that the standard for establishing good cause under Rule 16 “must
be balanced against the standard under Rule 15(a), which provides leave to amend ‘shall be freely
given.’” Id. at 7. However, in this District, Plaintiffs are first required to show good cause and then a
Rule 15 analysis follows. See Velto v. Reliance Std. Life Ins. Co., 2011 WL 810550 at *4 (D.N.J. Mar.
1, 2011) (“Only once the party has shown sufficient ‘good cause’ to amend the Rule 16 Order to extend
the deadline will the Court evaluate the proposed amendment under Rule 15(a).”). Discovery has been
progressing for well over a year and the deadline for motions to amend has been extended no less than
three times. Plaintiffs were aware of the January 24, 2014 deadline for motions to amend the pleadings
since November 13, 2013. Further, Plaintiffs filed their motion on March 17, 2014 and state that they
learned of the “investigations” at issue “over the course of the last couple months[.]” Pltfs. Br. Supp.

at 4. As such, it stands to reason that the new information which Plaintiffs allude to began to
materialize prior to the expiration of the January 24th deadline. As such, the Court finds that Plaintiffs
failed to exercise due diligence in moving to amend by the deadline, or requesting an extension for
same and shall therefore deny Plaintiffs’ motion. See Velto, 2011 WL 810550 at *4 (“If the moving
party is unable to demonstrate 'good cause', the Court will deny the motion and will not proceed to a
Rule 15 analysis.”) However, due to the overwhelming interest that the Court has in deciding matters

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on the merits, rather than technicalities, the Court shall illustrate why Plaintiff’s motion fails under
Rule 15 as well. See Foman v. Davis, 371 U.S. 178 (1962).

b. Prejudice
Plaintiffs claim that the amendment would avoid undue prejudice by clarifying the class
definitions to focus “on the substance and outcome of Medco’s claims review process, rather than
the label or format used by Medco.” Pltf. Br. Supp. at 14. Furthermore, Plaintiffs claim that the
amendment “does not seek to assert any additional claims/legal theories.” Id. at 11. Medco
contends that the amendment “would unduly expand the nature of this action, complicate
discovery, and undoubtedly lead to protracted litigation and inordinate delay regarding its scope.”
Deft. Br. Opp. at 12. Medco rebuffs Plaintiffs’ claim that no new causes of action are being
asserted, arguing that “an expanded class of pharmacies…would implicate a wide variety of new
fact patterns and legal issues.” Id. at 13.
The Court finds that Medco would suffer undue prejudice if Plaintiff’s amendment were
permitted. The parties have been proceeding for nearly two years under the First Amended
Complaint and the Court finds that Plaintiffs’ proposed definition of an “audit” would serve to
confuse, rather than to clarify. Indeed, it is worth noting that the First Amended Complaint did
not define the word “audit,” much less to include such terms as “operational claims reviews,
quality assurance reviews, purchase verification audits and investigations, and any other evaluation
of claims and/or claims data performed by Medco.” Proposed Second Am. Compl. at ¶1. The
Court finds that countless discovery issues would result by virtue of the amendment, including
disputes as to who is included in the putative class and what conduct constitutes an “investigation
process,” which would necessarily lead to expanded class-based discovery and extended discovery
deadlines. As such, the Court finds that the proposed amendment would unduly prejudice Medco,
and must be denied.
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c. Futility
Lastly, Medco challenges Plaintiffs’ proposed amended complaint as futile. Because the
Court has already found that Plaintiffs’ motion must be denied on both Rule 16 and Rule 15
grounds, the Court declines to address this argument.
IV.

CONCLUSION
For the foregoing reasons, Plaintiffs’ motion for leave to file an amended complaint is

hereby DENIED. An appropriate Order follows.

Dated: July 29, 2014
s/James B. Clark, III
HONORABLE JAMES B. CLARK, III
UNITED STATES MAGISTRATE JUDGE

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