Medoff v. CVS Caremark Corporation et al

Filing 64

MEMORANDUM AND ORDER Re: 34 Motion to Dismiss, filed by David Rickard, Thomas M. Ryan, CVS Caremark Corporation, Howard McClure. The defendants motion to dismiss is denied, with further narrowing of the plaintiffs claims to await a later stage of the litigation. So Ordered by Joseph N Laplante on 12/30/2013. (Urizandi, Nisshy)

UNITED STATES DISTRICT COURT
DISTRICT OF RHODE ISLAND
City of Brockton Retirement
System et al.
v.

Civil No. 09-cv-554-JL
Opinion No. 2013 DNH 178

CVS Caremark Corporation et al.
MEMORANDUM ORDER
This is a putative class action by disappointed shareholders
of CVS Caremark Corporation, who allege that the company and
certain of its officers made a number of fraudulent statements
and omissions about the integration of CVS’s retail pharmacy
business, and Caremark’s “prescription benefit manager,” or
“PBM,” business, following the companies’ merger in November
2007.

The plaintiffs claim that, as a result of these

misstatements and omissions, they purchased CVS Caremark stock at
artificially inflated prices, only to see the share price decline
by 20 percent on November 5, 2009, when (during the company’s
third-quarter earnings call) “investors learned the truth about
the company’s failure to integrate the merged-entity, which
resulted in the loss of billions of dollars of PBM contracts, and
that the CVS Caremark retail-PBM model had failed to gain
acceptance in the marketplace.”

The plaintiffs seek to recover

for their alleged losses under § 10(b) of the Exchange Act, 15

U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange
Commission, 17 C.F.R. § 240.10b-5.
In May 2012, following extensive briefing and oral argument,
this court granted the defendants’ motion to dismiss the
complaint by way of a comprehensive written order.

City of

Brockton Ret. Sys. v. CVS Caremark Corp., 2012 DNH 106.

This

court ruled that, aside from an unrealized earnings projection,
which was not actionable due to the “safe harbor” for forwardlooking statements, 15 U.S.C. § 77z-2(c)(1)(2), the plaintiffs
had not plausibly alleged that the claimed misstatements or
omissions caused their loss.

Id. at 3.

This court reasoned that

the company’s “loss of billions of dollars of PBM contracts” had
been disclosed several months prior to the earnings call, which
also did not “disclose” the company’s alleged “failure to
integrate the merged-entity” or that the “CVS Caremark retail-PBM
model had failed to gain acceptance in the marketplace”--in fact,
the company had specifically denied the existence of such
problems during the call, and attributed the contract losses to
other factors.

Id. at 25-27.

This court did not reach the

defendants’ alternative arguments for dismissal:

that the

plaintiffs had failed to plead any actionable misstatements or
omissions and that the complaint failed to “state with
particularity facts giving rise to a strong inference that the

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defendant[s] acted with the required state of mind,” as required
by the statutory pleading standard, 15 U.S.C. § 78u-4(b)(2).
The plaintiffs appealed this court’s judgment of dismissal
to the Court of Appeals, challenging the ruling that they had not
plausibly alleged loss causation, but not the ruling that the
earnings projection was inactionable.

The Court of Appeals

agreed with the plaintiffs, in part.

Mass. Ret. Sys. v. CVS

Caremark Corp., 716 F.3d 229 (1st Cir. 2013).

First, the court

observed, “the complaint does not allege that [CVS Caremark’s]
clients rejected the idea of a combined PBM and retail pharmacy.
Therefore, the [plaintiffs] fail to state a claim regarding the
business model itself.”

Id. at 239.

But, the Court of Appeals

ruled, the plaintiffs had plausibly alleged that the November
2009 earnings call “revealed to the market that CVS Caremark had
problems with service and the integration of its systems,” even
though, again, the company had specifically denied the existence
of those problems during the call.

Id. at 240.

While “[p]erhaps

the market did not perceive every detail of CVS Caremark’s
struggles” as a result of the earnings call, the court explained,
the market “knew enough to drive down the price of CVS Caremark
shares by 20%.”1

Id. (footnote by the court omitted).

1

Of course, one “detail of CVS Caremark’s struggles” that
the market knew as a result of the call was that the company
missed its earnings forecast by a significant margin. As this
3

The defendants urged, as an alternative basis for
affirmance, that the plaintiffs had not alleged any actionable
misstatement or omission, but the Court of Appeals declined to
address that argument.

Id.

The court explained that “the

parties’ briefing on this issue is abbreviated, so we think it
best to allow the district court to consider this argument in the
first instance.

The same is true for the scienter element of the

[plaintiffs’] claims, which was briefed before the district court
but not on appeal.”

Id.

Rather than reversing this court’s

dismissal order, then, the Court of Appeals vacated it and
remanded the case here “to allow the court to consider
alternative grounds for dismissal if it chooses.”

Id.

court had reasoned, that disclosure “could plausibly have caused
that day’s precipitous drop in the CVS Caremark share price,” but
it could not support the plaintiffs’ claims, since the earnings
forecast was an inactionable forward-looking statement. City of
Brockton, 2012 DNH 106, 17. The Court of Appeals, however,
relied on the missed forecast as lending plausibility to the
plaintiffs’ loss causation theory, declaring that “[t]he only
systemic failure likely to produce [the disappointing earnings]
numbers was a failure to integrate the PBM systems,” which was
the very fact that the plaintiffs accused the defendants of
withholding until the call. Mass. Ret. Sys., 716 F.3d at 241.
But, in a footnote, the Court of Appeals dispelled any suggestion
that the disclosure of the missed earnings projection could
itself sustain the plaintiffs’ loss causation theory, stating,
“[i]f this case proceeds, it will be up to the [plaintiffs] to
prove how much of this drop resulted from revelations about CVS
Caremark’s integration, which are actionable, and how much
resulted from disappointment in CVS Caremark’s corrected
earnings, which is not actionable.” Id. at 242 n.7.
4

This court subsequently granted (over the plaintiffs’
objection) the defendants’ motion to submit supplemental briefing
on their motion to dismiss, Order of July 5, 2013, and the
plaintiffs filed a response to the defendants’ supplemental
memorandum.

After reviewing those materials, this court declines

to dismiss the complaint again, for the reasons explained briefly
below.

This ruling, of course, is without prejudice to the

defendants’ renewal of their arguments for dismissal--including
their argument that the plaintiffs cannot show loss causation--by
way of a properly supported motion for summary judgment.
Actionable misstatements or omissions.

“For a complaint to

state a claim for securities fraud under section 10(b) and Rule
10b-5, it must plead,” among other things, “a material
misrepresentation or omission.”

ACA Fin. Guar. Corp. v. Advest,

Inc., 512 F.3d 46, 58 (1st Cir. 2008).

To do so, the complaint

must “‘specify each statement alleged to have been misleading
[and] the reason or reasons why the statement is misleading.’”
Id. (quoting 15 U.S.C. § 78u-4(b)(1) (bracketing by the court)).
The defendants argue that the plaintiffs have failed to meet
this standard because they “have not alleged that anyone from CVS
Caremark ever said that [it] had no problems with service” or “no
problems at all with integration of any of [its] systems
following the merger.”

In response, the plaintiffs identify

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several statements to that effect, which the company made to its
investors during the time that the plaintiffs held its stock,
including, but not limited to:
• a statement by CVS Caremark’s president and CEO,
defendant Thomas Ryan, in October 2008 that the
company’s PBM business “will continue to gain share
because . . . [w]e have excellent service”;
• a statement by CVS Caremark’s executive vice
president and CFO, David Rickard, in March 2009 that
“we have done the things strategically that needed to
be done to make this merger successful”;
• statements by Ryan in January 2009 denying that the
company had lowered prices for some of its PBM
customers “because of a lack of service,” or that the
company had “an issue with [its computer] systems”;
• a statement by Ryan in August 2009 that the company’s
PBM clients “love our integrated proactive pharmacy
care offerings”; and
• a statement in the company’s Form 10-K for its 2008
fiscal year that “[w]e believe the breadth of
capabilities resulting from the Caremark [m]erger are
[sic] resonating with our clients and contributed to
our success at renewing existing clients.”
But the defendants argue that these statements (and others like
them) cannot support the plaintiffs’ claims, for two reasons.
First, the defendants protest, the plaintiffs have not
specified “the reason or reasons why [each] statement is
misleading,” as required by § 78u-4(b)(1).

The plaintiffs have

alleged, however, that--contrary to the company’s statements that
its post-merger capabilities were “resonating with [its] clients”
and its denial that any perceived “lack of service” had driven it
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to lower its PBM prices--CVS Caremark had in fact “unilaterally
reduced prices on over 50 percent of its existing PBM contracts
in order to retain customers that were dissatisfied with [its]
inferior service [and] integration-related issues” during the
2009 selling season.

The defendants maintain that this

allegation is nevertheless insufficient because the plaintiffs
“do not identify a single contract that was re-priced during the
2009 selling season, let alone one that was re-priced due to
service,” and thus fail to “state with particularity all facts on
which [their] belief [in it] is formed,” 15 U.S.C. § 78u-4(b)(1).
As the Court of Appeals has cautioned, however, § 78u-4(b)
“does not require plaintiffs to plead evidence,” only to put “a
significant amount of meat . . . on the bones of the complaint.”
Hill v. Gozani, 638 F.3d 40, 56 (1st Cir. 2011).

So, at least at

this stage, the plaintiffs’ failure to specify which PBM
contracts were re-priced on account of the alleged post-merger
service problems is not fatal to their claim that, contrary to
Ryan’s statement in January 2009, CVS Caremark had indeed lowered
its prices on half of those contracts for precisely that reason.
Furthermore, in vacating this court’s prior dismissal order, the
Court of Appeals noted that--despite Ryan’s assurance “that a
worrisome repricing of contracts was unrelated to concerns about
CVS Caremark’s service”--“[s]everal facets of the November [2009]

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call revealed that [these] previous statements were
misrepresentations.”2

Mass. Ret. Sys., 716 F.3d at 239.

Based

on this observation, if nothing else, this court rules that the
plaintiffs have sufficiently alleged the falsity of Ryan’s
January 2009 statement disassociating the re-pricing from any
post-merger service problems, as well as the defendants’ more
general statements that its clients “love[d]” its post-merger PBM
services, which were “resonating” with them.
Second, the defendants maintain that their allegedly false
statements were merely “inactionable puffery”:

“loosely

optimistic statements that are so vague, so lacking in
specificity, or so clearly constituting the opinions of the
speaker, that no reasonable investor could find them important to
the total mix of information available.”
Corp., 82 F.3d 1194, 1217 (1st Cir. 1996).

Shaw v. Digital Equip.
But that is an inapt

characterization of at least some of the defendants’ alleged
misstatements--including Ryan’s claim that any “lack of service”
had played no role in the company’s re-pricing of half of its PBM
business.

Indeed, while the defendants argue that the plaintiffs

2

The Court of Appeals identified these “facets” of the
November 2009 earnings call as Ryan’s acknowledgment that CVS
Caremark had lost a contract with one of its PBM clients “in part
due to ‘service issues,’” as well as his announcement of the
“sudden retirement” of the then-president of Caremark Pharmacy
Services, defendant Howard McLure, who allegedly “built” the CVS
Caremark “integrated model.” Mass. Ret. Sys., 716 F.3d at 239.
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have failed to allege that this statement was false, as just
discussed, they do not argue that this particular statement was
“inactionable puffery.”

Instead, they reserve that charge for

some of their other challenged statements (e.g., “[w]e have
excellent service,” or “we have done the things strategically
that needed to be done to make this merger successful”).
While the defendants are probably right to call those
statements “puffery,” the court need not decide that at the
moment since, again, there is at least one allegedly false
statement which does not fit that description.

For the moment,

then, this court denies the defendants’ motion to dismiss insofar
as it is based on the inactionable character of their allegedly
false statements, leaving, for a later stage of the case, the
task of separating the wheat of those statements from their
chaff.

See Serabian v. Amoskeag Bank Shares, 24 F.3d 357, 366

(1st Cir. 1994) (ruling that, while not all of the plaintiffs’
allegations of securities fraud were actionable, the fact that
some were actionable precluded dismissal of the complaint but
otherwise left discretion in the district court as to how to
winnow the allegations further).
Scienter.

Under another of the statutory pleading standards

applicable to claims under § 10(b) or Rule 10b-5, a complaint
must “state with particularity facts giving rise to a strong

9

inference that the defendant acted with the required state of
mind” to sustain the claim.

15 U.S.C. § 78u-4(b)(2).

In

deciding whether a complaint meets this standard,
a court must consider plausible, nonculpable
explanations for the defendant’s conduct, as well as
inferences favoring the plaintiff. The inference that
the defendant acted with scienter need not be
irrefutable, i.e., of the smoking-gun genre, or even
the most plausible of competing inferences . . . . Yet
the inference of scienter must be more than merely
reasonable or permissible--it must be cogent and
compelling, thus strong in light of other explanations.
A complaint will survive . . . only if a reasonable
person would deem the inference of scienter cogent and
at least as compelling as any opposing inference one
would draw from the facts alleged.
Tellab, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324
(2007) (quotation marks, citation, and footnote omitted).
“In this circuit, a plaintiff may satisfy the scienter
requirement with a showing of either conscious intent to defraud
or a high degree of recklessness.”

ACA Fin. Guar. Corp., 512

F.3d at 58 (quotation marks omitted).

In moving to dismiss the

complaint, the defendants argue that it fails to support the
requisite “cogent and compelling” inference that they acted with
this culpable state of mind.
Like the defendants’ “puffery” argument, their scienter
argument has more to recommend it as to certain of the alleged
misstatements than others--in particular, Ryan’s statement that
post-merger service problems played no role in the company’s

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re-pricing of 50 percent of its PBM contracts.

As set forth in

the complaint, Ryan made that statement in response to a question
from a market analyst during a January 2009 earnings call.
Picking up on Ryan’s comment that CVS Caremark had “repriced a
significant amount of business . . . for all the reasons that you
can imagine,” the analyst asked, “what are the things that would
cause you to reprice?

Is there a concern about service for the

systems and how can you get people past that . . . ?”

Ryan said,

No . . . let me be clear on that because I think you
are making the assumption that we repriced because we
had inferior service. We repriced because we decided
that these key accounts were accounts that we could
impact . . . these are accounts that we kind of wanted
to lock down. No trade-offs because of our service
. . . . So there was no hidden agenda here about giving
a lower price because [of] lack of service if that’s
what you’re asking.
Asked point-blank, then, whether “a concern about service”
among the company’s PBM customers had caused it to lower its
prices, Ryan unequivocally denied that, and proffered an
alternative explanation that cast no aspersions on any aspect of
the CVS-Caremark integration.

If, as the plaintiffs allege, that

statement was indeed untrue--and, again, taking a cue from the
Court of Appeals, this court rules that the plaintiffs have
sufficiently alleged as much--then the statement, by its very
nature, supports a “cogent and compelling” inference that Ryan
was acting either with the intent to deceive or with a high

11

degree of recklessness as to whether he was doing so.

As the

Court of Appeals observed, “[f]rom the time the merger was
announced, analysts had questioned CVS’s ability to integrate
with Caremark,” Mass. Ret. Sys., 716 F.3d at 240, so Ryan (who
was running CVS before the merger, in addition to running CVS
Caremark afterwards) had every motive to deny any post-merger
service problems.

Furthermore, the defendants have not proffered

any other reason that Ryan might have done so, and none is
apparent to the court.

Indeed, the defendants’ argument that the

plaintiffs have not adequately pled scienter does not address
Ryan’s denial of service-driven price cuts at all.
Instead, the defendants argue--in some cases, quite
persuasively--that the complaint fails to support a strong
inference of scienter as to other allegedly false statements (as
to the claim of “excellent service,” for example, the defendants
point to the fact, trumpeted by Ryan during the January 2009
call, that “we just got the JD Power [and] Associates Health Plan
PBM of the Year [award] for our service”).

While, to plead a

securities fraud claim, a plaintiff must “with respect to each
act or omission, state with particularity facts giving rise to a
strong inference that the defendant acted with the requisite
state of mind,” 15 U.S.C. § 78u-4(b)(2) (emphasis added), this
court sees little utility in performing a statement-by-statement

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analysis of the complaint’s scienter allegations at this point.
As just discussed, the plaintiffs have adequately pled at least
one actionable misstatement, and they have adequately pled
scienter as to that misstatement.

They have also, as the Court

of Appeals determined, adequately pled loss causation.
Accordingly, the defendants’ motion to dismiss3 is denied, with
further narrowing of the plaintiffs’ claims to await a later
stage of the litigation.
SO ORDERED.

____________________________
Joseph N. Laplante
United States District Judge
Dated:
cc:

December 30, 2013

Barry J. Kusinitz, Esq.
David A. Rosenfeld, Esq.
Deborah R. Gross, Esq.
Robert M. Rothman, Esq.
William R. Grimm, Esq.
Edmund Polubinski, III, Esq.
Lawrence Portnoy, Esq.
Mitchell R. Edwards, Esq.
Joseph A. Fonti, Esq.

3

Document no. 34.
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