Sheet Metal Workers Local No. 20 Welfare and Benefit Fund et al v. CVS Health Corporation
Filing
80
MEMORANDUM AND ORDER granting 56 Motion for Leave to File First Amended Complaint in case 1:16-cv-00046-WES-PAS and granting (40) Motion for Leave to File First Amended Complaint in case 1:16-cv-00447-WES-PAS. So Ordered by Chief Judge William E. Smith on 3/31/2018. Associated Cases: 1:16-cv-00046-WES-PAS, 1:16-cv-00447-WES-PAS(Jackson, Ryan)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
___________________________________
)
SHEET METAL WORKERS LOCAL NO. 20
)
WELFARE AND BENEFIT FUND, and
)
INDIANA CARPENTERS WELFARE FUND,
)
on behalf of themselves and all
)
C.A. No. 16-46 WES
others similarly situated,
)
)
Plaintiffs,
)
)
v.
)
)
CVS PHARMACY, INC.,
)
)
Defendant.
)
___________________________________)
)
PLUMBERS WELFARE FUND, LOCAL 130, )
U.A., on behalf of itself and all )
others similarly situated,
)
)
C.A. No. 16-447 WES
Plaintiffs,
)
)
v.
)
)
CVS PHARMACY, INC.,
)
)
Defendant.
)
)
___________________________________)
MEMORANDUM AND ORDER
WILLIAM E. SMITH, Chief Judge.
Presently before the Court is Plaintiffs’ Motion for Leave to
File First Amended Complaint (ECF No. 56), in which they ask
permission to update their story about alleged fraud spearheaded
by
Defendant
CVS
Pharmacy,
Inc.,
(“CVS”).
In
particular,
Plaintiffs would like to revise their complaint to comport with
information
they
learned
in
discovery,
namely,
that
Pharmacy
Benefit Managers (“PBMs”), who facilitated generic-drug purchases
between Plaintiffs and CVS, were allegedly aware of and abetted
CVS’s fraud. But not only do Plaintiffs seek to amend their factual
allegations; they also hope to add two claims under the Racketeer
Influence and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§
1961-1968. For the reasons that follow, Plaintiffs’ Motion is
GRANTED.
I.
Background 1
Alleging negligent misrepresentation, unjust enrichment, and
violations of state-consumer-protection acts, Plaintiffs had it in
their original complaint that CVS overcharged them by collecting
more for generic drugs than it was allowed under the National
Council for Prescription Drug Program (“NCPDP”). See Sheet Metal
Workers Local No. 20 Welfare and Benefit Fund v. CVS Health Corp.,
221 F. Supp. 3d 227, 229–31 (D.R.I. 2016) (denying CVS’s motion to
dismiss). According to this complaint, a key component of CVS’s
fraud was its Health Savings Pass (“HSP”) program, which CVS
developed to compete with big-box retailers (e.g., Wal-Mart, Inc.)
1
The following facts are those well-pleaded in the
Plaintiffs’ Proposed First Amended Complaint (ECF No. 58-1), taken
in the light most favorable to and drawing all reasonable
inferences in favor of Plaintiffs. Gray v. Evercore Restructuring
L.L.C., 544 F.3d 320, 324 (1st Cir. 2008).
2
who had recently slashed prices on certain generic drugs. See id.
at 229-30.
Instituted November 2008 and discontinued February 2016, the
HSP program allowed individual cash-paying CVS customers to access
discounted prices by paying an annual membership fee. (Pls.’
Proposed First Am. Compl. (“PAC”) 3, ECF No. 58-1). Though nominal,
the fee
paid
substantial
dividends.
CVS
saved
large
sums
by
purposefully structuring the HSP program to prevent Plaintiffs,
and
others
similarly
situated,
from
accessing
the
program’s
discounts while remaining (or so it thought) in compliance with
NCPDP’s requirement that CVS charge Plaintiffs no more than the
general public, that is, no more than the “Usual and Customary”
(“U&C”) price for drugs. (Id. at 1-4, 43.) The thought was that
because the HSP price was not available to cash customers, but
only to HSP members, CVS was not required to offer that price to
Plaintiffs, but could instead report the higher price paid by nonHSP-member cash customers as the U&C price. 2 (Id. at 25.) This
allowed CVS to retain cash customers without passing on the price
cut to purchasers like Plaintiffs. (Id. at 20-24.)
Since
filing
its
original
complaint,
Plaintiffs
claim
discovery has revealed a more complex scheme whereby CVS did not
2
Plaintiffs pay the lowest of several prices CVS reports.
The U&C price is usually the highest of the reported prices, but
is nonetheless reported to ensure Plaintiffs pay no more than cash
customers. (Id. at 15.)
3
act alone, but rather enlisted the help of various other entities
to
develop
and
conceal
the
gambit
described
above
to
bilk
Plaintiffs and others out of billions of dollars. (Id. at 31-43.)
One of these entities was Caremark, LLC, (“Caremark”). Caremark
helped CVS design the HSP program, and in particular, developed
the nominal-membership-fee feature as a way to compete with the
big-box stores for cash customers without offering similar savings
to Plaintiffs. (Id. at 20-24). Caremark also administered the HSP
program from its inception in 2008 to 2013, when Medical Security
Card Company (“ScriptSave”) took it over. (Id. at 26-27.) Both
Caremark and ScriptSave recognized that the program allowed CVS to
“‘protect’ loyalty member price[s] from third parties.” (Id. at
29.) But, anticipating that these third parties would consider
such protection a bug, not a feature, of the program, they worked
with CVS to keep it a secret. (Id. at 31.)
Plaintiffs also allege that four of the country’s largest
PBMs
–
Caremark,
Express
Scripts,
Inc.,
OptumRx,
Inc.,
and
MedImpact Healthcare Systems, Inc. – were in on the scheme, too.
(Id. at 31-43.) PBMs contract with health plans like Plaintiffs to
reimburse pharmacies like CVS when a plan’s members fill their
prescriptions. (Id. at 4-5, 10.) PBMs ostensibly work on behalf of
their health-plan clients to, among other things, negotiate low
pharmacy drug prices. (Id.) The interests of PBMs and health plans
are not perfectly aligned, however. (See id. at 15-17.) Health
4
plans want cheap drugs; PBMs want the difference between what they
pay pharmacies for drugs and what they charge health plans for
those drugs to be as large as possible. (Id.) In other words, the
difference between what PBMs pay and what they charge is their
gain, but the health plans’ loss. (See id.)
The PBMs allegedly increased this spread by deliberately
hiding from health plans the fact that CVS was not reporting its
HSP price as its U&C price. (Id. at 31.) Each PBM developed an
internal policy interpreting definitions of U&C price in their
respective contracts with CVS as excluding HSP prices. (Id. at 3143.) Plaintiffs allege that this was no coincidence – that CVS
prompted the PBMs to keep the ruse a secret, and that each PBM
knew the others had agreed to do so. (Id.) This assurance was
paramount to the scheme, for if any one PBM had confessed, the
health plans would have put a stop to it, insisting they pay no
more than CVS’s cash customers in accordance with their contracts
with the PBMs. (Id. at 45.) Indeed, Plaintiffs say that, in a
competitive market, such insistence would have been unnecessary,
as one or more PBMs would have adopted HSP prices sua sponte in an
effort to attract plan business. (Id. at 51-57.)
According to Plaintiffs, fraud operated here on more than a
wink and a nod. Plaintiffs allege that it “was orchestrated out of
the corporate headquarters of CVS, Caremark, each remaining PBM,
and ScriptSave” and “required those headquarters to communicate
5
directly
and
frequently
by
U.S.
Mail
and
interstate
wire
facilities.” (Id. at 60-61.) Plaintiffs aver that these parties
“share[d] information regarding various cash discount programs,
the structure of those programs, and whether they [were] reporting
those prices as U&C prices.” (Id. at 66.) For example, in a backand-forth
between
CVS
executives
and
executives
at
Indiana
Carpenters Welfare Fund’s PBM, Medco Health Solutions, Inc., (now
owned
by
Express
Scripts),
Medco
assured
CVS
that
it
would
interpret its definition of U&C price – “the lowest net cash price
a cash . . . customer would have paid . . . inclusive of all
applicable discounts” – as excluding CVS’s HSP price, even though
Medco had previously determined that it would consider Wal-Mart,
Inc.,’s discounted price for generics as its U&C price. (Id. at
33-38.) Unsuccessful in its attempt to have Medco modify its
definition of U&C price to explicitly exclude discounts associated
with “card programs such as CVS’ Health Savings Pass,” CVS settled
for Medco’s sotto voce amendment. (Id.) CVS then notified an
ostensible competitor of Medco’s – Caremark – of Medco’s decision
when a vice president at CVS, Tina Egan, forwarded an email to
Caremark’s
senior
legal
counsel,
Roderick
Bergin,
containing
Medco’s discreet capitulation. (Id. at 37 (“Ms. Egan forwarded
Medco’s response to Roderick Bergin . . . as an ‘FYI.’”).)
Plaintiffs believe that the foregoing, if proved, supports
the two RICO claims in their PAC. In the first of these claims,
6
Plaintiffs
allege
that
CVS
and
Caremark
shepherded
a
RICO
enterprise that included the aforementioned PBMs and ScriptSave,
all of whom Plaintiffs want as defendants. (Id. at 51-64.) This
enterprise worked together to defraud Plaintiffs by disguising the
fact that CVS failed to report HSP prices as its U&C prices for
certain generic drugs. (Id.) The second claim is similar to the
first, except that it splits the enterprise alleged in the first
claim into three, each including CVS, Caremark, ScriptSave, and
one of the three other PBMs. (Id. at 64-78.) Plaintiffs also have
a standalone fraud claim in their PAC, which relies on the same
alleged fraud underlying their RICO claims. (Id. at 82-83.) The
remaining claims – negligent misrepresentation, unjust enrichment,
and violations of state-consumer-protection acts – are holdovers
from the original complaint. See Sheet Metal Workers, 221 F. Supp.
3d at 230.
II.
Discussion
A.
Legal Standard
The parties disagree as to whether Federal Rule of Civil
Procedure 15(a) or 16(b) supplies the standard by which the Court
must evaluate Plaintiffs’ Motion. But, in fact, both apply.
The First Circuit has made plain that where, as here, a
plaintiff seeks to amend its complaint after the deadline for doing
so set by the district court’s scheduling order has passed, Rule
16(b)’s “good cause” standard applies. O’Connell v. Hyatt Hotels
7
of P.R., 357 F.3d 152, 154 (1st Cir. 2004). 3 This standard –
“[u]nlike Rule 15(a)'s ‘freely given’ standard, which focuses
mostly on the bad faith of the moving party and the prejudice to
the opposing party” – “emphasizes the diligence of the party
seeking the amendment.” Id. at 155. Under Rule 16(b), “[p]rejudice
to the opposing party remains relevant but is not the dominant
criterion.” Id.
If a plaintiff makes it over the hurdle set by Rule 16(b),
the district court must then evaluate a contested motion to amend
under
Rule
15(a)’s
“freely
give[n]”
standard.
See
Leary
v.
Daeschner, 349 F.3d 888, 909 (6th Cir. 2006) (“Once the scheduling
order’s deadline passes, a plaintiff first must show good cause
under Rule 16(b) for failure earlier to seek leave to amend before
a court will consider whether amendment is proper under Rule
15(a).”); 6A Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 1522.2 (3d ed. 1998) (same). That is, the
district court must ask whether a plaintiff’s amendment would cause
undue delay, was brought in bad faith, or with a dilatory motive,
or if the amendment would be futile. Grant v. News Grp. Bos., Inc.,
55 F.3d 1, 5 (1st Cir. 1995).
3
Due seemingly to scrivener’s error, the deadline by which
to amend the pleadings was not included in this case’s scheduling
order. Nevertheless, both parties agree the deadline was March 3,
2017. (See Def.’s Sur-Reply in Opp’n to Pls.’ Mot. for Leave to
File First Am. Compl. 2, ECF No. 65.)
8
Particularly salient at the moment are questions of undue
delay 4 and futility. Undue delay, on its own, can be a basis for
denying amendment in the First Circuit. Acosta–Mestre v. Hilton
Int’l of P.R., Inc., 156 F.3d 49, 52 (1st Cir. 1998). But see
Wright & Miller, supra, at § 1488 (“In most cases, delay alone is
not a sufficient reason for denying leave.”). There is no delay
that is per se undue. Wright & Miller, supra, at § 1488 (“Quite
appropriately the courts have not imposed any arbitrary timing
restrictions on requests for leave to amend and permission has
been
granted
under
Rule
15(a)
at
various
stages
of
the
litigation.”). Rather, a district court mulling a motion to amend
in a particular case must consider any alleged delay with that
case’s specific history in mind. Id. (“The policy of allowing
amendments to be made at any time during the litigation is sound.
It would be unreasonable to restrict a party’s ability to amend to
a particular stage of the action inasmuch as the need to amend may
not appear until after discovery has been completed or testimony
4
Whether the movant has delayed unduly its amendment request
is relevant to – even sometimes determinative of – whether it has
been diligent under Rule 16(b). See, e.g., Compania Embotelladora
Del Pacifico v. Pepsi Cola Co., 607 F. Supp. 2d 600, 602 (S.D.N.Y.
2009) (“[C]ourts have found good cause to be lacking [under Rule
16(b)] where, as here, the moving party had knowledge of the facts
and circumstances in the case for a period of several years and
could have made their motion within the specified time period.”
(quotation marks omitted)); Wright & Miller, supra, at § 1522.2
(“[R]elief [under Rule 16(b)] may be granted if the court finds
that the movant has not unduly delayed the action and that the
opponent will not be prejudiced by the modification.”).
9
has been taken at trial.”). However, the First Circuit has not
hesitated to affirm the denial of an amendment when more than a
year elapses between filing the initial complaint and the motion
to amend it. See, e.g., Badillo–Santiago v. Naveira–Merly, 378
F.3d 1, 7–8 (1st Cir. 2004) (thirteen-to-fourteen months); Acosta–
Mestre, 156 F.3d at 52 (fifteen months); Grant, 55 F.3d at 6
(fourteen months).
Whether amendment would be futile “is gauged by reference to
the liberal criteria of Federal Rule of Civil Procedure 12(b)(6).”
Hatch v. Dep’t for Children, Youth, and Their Families, 274 F.3d
12, 19 (1st Cir. 2001) (noting, however, that if a plaintiff waits
until after the close of discovery and the docketing of a summary
judgment motion, then amendment is “properly classified as futile
unless the allegations of the proposed amended complaint are
supported by substantial evidence”). In other words, amendment is
futile when the proposed complaint does not “contain sufficient
factual matter to state a claim to relief that is plausible on its
face.”
Saldivar
v.
Racine,
818
F.3d
14,
18
(1st
Cir.
2016)
(alteration and quotation marks omitted). A plausible claim of
relief is one that “support[s] the reasonable inference that the
defendant
is
liable,”
not
just
“a
sheer
possibility
that
a
defendant has acted unlawfully.” Id. (quotation marks omitted). In
making this determination, the Court regards “the well-pleaded
10
facts in the light most favorable to the non-moving party, drawing
all reasonable inferences in its favor.” Gray, 544 F.3d at 324.
B.
Rule 16(b)
Defendant argues that Plaintiffs have been less than diligent
in prosecuting their case. (Def.’s Sur-Reply in Opp’n to Pls.’
Mot. for Leave to File First Am. Compl. 3, ECF No. 65.) Defendant
notes that a mere thirty pages of discovery – sworn declarations
from the PBMs indicating they knew CVS was not reporting HSP prices
– form the basis of Plaintiffs’ PAC. (Id. at 1, 3) Moreover,
Plaintiffs possessed the PBMs’ declarations as early as December
23, 2016, over five months before Plaintiffs submitted their Motion
to Amend on June 5, 2017. (Id.) Therefore, Defendant contends, “If
they had acted diligently, Plaintiffs easily could have reviewed
those documents and moved to amend the complaint by March 3, 2017,
the agreed deadline.” (Id. at 1).
The closest case Defendant finds to these facts is Steir v.
Girl Scouts of the USA, 383 F.3d 7 (1st Cir. 2004). In Steir,
plaintiff moved to amend her complaint nine months after defendant
tacitly conceded facts relevant to the proposed amendment, three
months after the defendant openly conceded such facts, and a week
after
discovery
Notwithstanding
had
closed.
plaintiff’s
Steir,
383
“somnolence,”
F.3d
the
at
First
13-14.
Circuit
considered the question whether plaintiff met Rule 16(b)’s goodcause standard a difficult one, finding that “[w]hile it would
11
have been well within the discretion of the district court to allow
the motion, it was not an abuse of discretion to deny it.” Id. at
14.
This case is different. Plaintiffs here moved to amend their
complaint five months after CVS began producing documents which
now number in the hundreds of thousands of pages. (Pls.’ Mem. in
Supp. of Their Mot. for Leave to File First Am. Compl. 2-3, ECF
No. 56-1). Indeed, Defendant’s production was ongoing at the time
Plaintiffs moved to amend. (Id.) And unlike in Steir, discovery
had not yet closed. (Id.) While it may be true that Plaintiffs
received the thirty pages they rely on in their PAC on December
23, 2016, these thirty pages were among 3,024 they received that
day, followed by 401,175 pages they received a few weeks later.
(Pls.’ Reply Brief in Supp. of Their Mot. for Leave to File First
Am. Compl. 11, ECF No. 62.) Under these circumstances, the Court
finds that Plaintiffs, while perhaps less diligent than they could
have been, were diligent enough in their review of the documents
to meet Rule 16(b)’s good-cause standard. 5 See Salomon v. Adderly
5
Defendant also argues that allowing Plaintiffs’ amendment
would cause it undue prejudice. (Def.’s Mem. in Supp. of Obj. to
Pls.’ Mot. for Leave to File First Am. Compl. 17-18.) But this
argument is unavailing: when Plaintiffs filed their Motion to
Amend, discovery was still open; Defendant had yet to take any
depositions; and Defendant had already responded to broad document
requests relevant to the PAC’s allegations. (Pls.’ Mem. in Supp.
of Their Mot. for Leave to File First Am. Compl. 13.) Furthermore,
amendment here is unlikely to cause a “major alteration in
[Defendant’s] trial tactics and strategy.” Cf. Steir, 383 F.3d at
12
Indus., Inc., 960 F. Supp. 2d 502, 507–08, 511 (S.D.N.Y. 2013)
(allowing amendment where plaintiff learned material information
“through discovery after the expiration of the scheduling order
deadline”); Burns v. Hale & Dorr LLP, 242 F.R.D. 170, 174–75 (D.
Mass. 2007) (allowing amendment where it was argued that “the
claims which the plaintiff seeks to add, for conversion and breach
of contract, are based on facts which were only discovered during
the course of discovery”).
C.
Rule 15(a)
Defendant’s arguments under Rule 15(a) are that Plaintiffs’
Motion to Amend was unduly delayed and that amendment would be
futile. Neither is persuasive.
1. Undue Delay
Defendant marshals the same facts to argue undue delay as it
did to argue lack of diligence, namely, that Plaintiffs waited
five months after they had received documentation supporting their
new theories to move for amendment. (Def.’s Mem. in Supp. of Obj.
to Pls.’ Mot. for Leave to File First Am. Compl. (“Def.’s Obj.”)
16, 19, ECF No. 60-1.) Defendant also notes that Plaintiffs filed
12–13 (quotation marks omitted) (finding major alteration likely
where plaintiff sought to add a legal claim to a complaint that
had sounded only in equity, and where allowing addition of such a
claim “would have required the re-opening of discovery . . . [and]
a postponement of the hearing scheduled on the pending motions for
summary judgment”).
13
their Motion over sixteen months after they filed the original
complaint. (Id. at 16.)
These delays might suffice to establish undue delay in a
vacuum, but not in the context of this case. To be sure, where
significant time has elapsed between filing the complaint and
moving to amend, the movant must show a valid reason for the delay.
See In re Lombardo, 755 F.3d 1, 3 (1st Cir. 2014). And here, even
though the time between filing the complaint and moving to amend
is considerable, Plaintiffs have in fact provided a valid reason
for the delay: before receiving their declarations, Plaintiffs
were under the impression that the PBMs too were unaware of CVS’s
alleged pricing scheme. See Enzymotec Ltd. v. NBTY, Inc., 754 F.
Supp. 2d 527, 535–39 (E.D.N.Y. 2010) (allowing motion to amend
filed over twenty months after complaint and nine months after
scheduling order deadline where plaintiff learned new facts during
discovery); Lanigan v. LaSalle Nat’l Bank, 108 F.R.D. 660, 663
(N.D. Ill. 1985) (“It is not uncommon that facts disclosed in
discovery lead to new claims, and courts may properly allow the
plaintiff
to
amend
the
complaint
in
light
of
this
new
receiving
the
information.”).
Furthermore,
the
five-month
delay
between
declarations and moving to amend would perhaps support a finding
of undue delay if they had not been received amidst a veritable
avalanche of discovery. Even the most well-staffed firm would need
14
some time to sort and parse 400,000 documents. See Island Creek
Coal Co. v. Lake Shore, Inc., 832 F.2d 274, 279 (4th Cir. 1987)
(allowing amendment despite three-month delay between discovery of
new
evidence
in
deposition
and
motion
based
thereon
because
“plaintiffs were entitled to a reasonable time to investigate
through other sources the information they had secured from the
deposition of defendant’s witnesses”).
2.
Futility
Defendant’s other argument under Rule 15(a) against allowing
amendment is that to do so would be futile. (Def.’s Obj. 19-34.)
As discussed above, the Court uses the familiar 12(b)(6) motionto-dismiss standard to pass on the proposed amendment’s futility.
This
Court
has
misrepresentation,
already
held
that
unjust-enrichment,
Plaintiffs’
and
statutory
negligentconsumer-
protection claims meet the 12(b)(6) standard. See Sheet Metal
Workers, 221 F. Supp. 3d at 237-39. Updating these claims in light
of the allegation that the PBMs were privy to CVS’s alleged
chicanery does not change the Court’s analysis as to these claims.6
6
Plaintiffs do add a common-law fraud claim to their
statutory claims under various states’ consumer protection acts.
But because the same fraudulent activity is alleged as the
predicate to both kinds of claim, the Court need not revisit its
conclusion that Plaintiffs have met the Rule 9(b) standard,
“adequately put[ting] CVS on notice of the details of the alleged
fraud.” Sheet Metal Workers, 221 F. Supp. 3d at 231.
15
They continue to clear Rule 12(b)(6)’s plausibility threshold, and
therefore their amendment would not be futile under Rule 15(a).
The thornier question here is whether the same can be said of
Plaintiffs’ RICO claims. A viable RICO claim under § 1962(c)
requires four elements: “1) conduct; 2) of an enterprise; 3)
through a pattern; 4) of racketeering activity.” Libertad v. Welch,
53 F.3d 428, 441 (1st Cir. 1995). Defendant argues that Plaintiffs’
RICO claims are futile because they properly allege neither a RICO
enterprise,
a
pattern
of
racketeering,
predicate
acts
of
racketeering, nor causation. (Def.’s Obj. 19-34.)
RICO defines “enterprise” as “any individual, partnership,
corporation, association, or other legal entity, and any union or
group of individuals associated in fact although not a legal
entity.” 18 U.S.C. § 1961(4). Particularly relevant to this case
are so-called “association-in-fact” enterprises. An associationin-fact enterprise is “a group of persons associated together for
a common purpose of engaging in a course of conduct.” United States
v. Turkette, 452 U.S. 576, 583 (1981). The Supreme Court – in
keeping with a line of its cases correcting lower-court decisions
that unduly restricted RICO’s scope, see Odom v. Microsoft Corp.,
486 F.3d 541, 545–47 (9th Cir. 2007) – recently admonished that
the universe of enterprises covered by the statute is “obviously
broad,” Boyle v. United States, 556 U.S. 938, 944 (2009). See also
Nat’l Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 257 (1994)
16
(“RICO broadly defines ‘enterprise’ . . . .”); Sedima, S.P.R.L. v.
Imrex
Co.,
broadly.”).
473
U.S.
And
as
479,
to
497
(1985)
(“RICO
association-in-fact
is
to
be
read
enterprises
in
particular, the Boyle court found that their “definition has a
wide reach,” and that “the very concept of an association in fact
is expansive.” Boyle, 556 U.S. at 944.
Accordingly, an association-in-fact enterprise can be without
various accoutrements typically attending “businesslike entities.”
Id. at 945. For example, an association-in-fact enterprise “need
not have a hierarchical structure or a ‘chain of command[,]’ [and]
decisions may be made on an ad hoc basis and by any number of
methods—by majority vote, consensus, a show of strength, etc.” Id.
at 948. Moreover, “the existence of an association-in-fact is
oftentimes more readily proven by what i[t] does, rather than by
abstract analysis of its structure,” which is to say that “proof
of a pattern of racketeering activity may be sufficient in a
particular case to permit a jury to infer the existence of an
association-in-fact
enterprise.”
Id.
at
951
(quotation
marks
omitted); accord United States v. Patrick, 248 F.3d 11, 19 (1st
Cir.
2001)
(“While
‘enterprise’
and
‘pattern
of
racketeering
activity’ are separate elements of a RICO offense, proof of these
two elements need not be separate or distinct but may in fact
coalesce.” (quotations marks omitted)).
17
In their PAC, Plaintiffs allege that CVS, the various PBMs,
and
ScriptSave
formed
either
one
global
or
three
separate
association-in-fact enterprises. (PAC 51-78.) Defendant argues
that both the alleged global and separate RICO enterprises amount
to unactionable “hub-and-spoke” structures. (Def.’s Obj. 21-22.)
An enterprise with a hub-and-spoke structure exists where one
entity (the hub) transacts similarly with several other entities
(the spokes) after a design typically hatched by the hub. See,
e.g., United States v. Apple, Inc., 791 F.3d 290, 314 (2d Cir.
2015). And indeed hub-and-spoke enterprises have routinely been
found insufficient to support RICO claims. See, e.g., In re Pharm.
Indus. Average Wholesale Price Litig., 263 F. Supp. 2d 172, 183
(D. Mass. 2003) (“Most courts have found that complaints alleging
hub-and-spoke enterprises fail to satisfy the RICO enterprise
requirement.”) (collecting cases); In re Trilegiant Corp., 11 F.
Supp. 3d 82, 98 (D. Conn. 2014) (“Hub-and-spoke enterprises have
long been held by courts in this circuit to be insufficient as a
matter of law to constitute the requisite enterprise for a RICO
violation.”).
But these unactionable hub-and-spoke enterprises were all
what courts have termed – sticking with the metaphor – “rimless,”
meaning
there
lacked
some
connection
among
the
enterprises’
respective spokes. See, e.g., Moss v. BMO Harris Bank, N.A., 258
F. Supp. 3d 289, 303 (E.D.N.Y. 2017) (dismissing RICO claims where
18
plaintiff asserted “[a]t best . . . a rimless ‘hub and spokes’
relationship between defendant [bank] and payday lenders . . .
that courts have consistently found insufficient to state a RICO
claim”). For example, the Third Circuit, in a case decided after
Boyle,
dismissed
RICO
claims
alleging
that
various
insurance
brokers (the hubs) worked with various insurers (the spokes) to
defraud consumers of commercial- and employee-benefit insurance.
In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 374 (3d Cir.
2010). As to these alleged enterprises, the court stated that
“[e]ven under the relatively undemanding standard of Boyle,” the
“plaintiffs
had
collaboration
failed
among
the
to
plead
insurers”
facts
and
plausibly
“therefore
suggesting
[could
not]
provide a ‘rim’ enclosing the ‘spokes’ of the[ ] alleged ‘hub-andspoke’ enterprises.” Id.
However, the Insurance Brokerage court denied a motion to
dismiss
the
RICO
claims
where
there
were
allegations
of
coordination among the spokes. Id. at 375–79. Like those alleged
in the dismissed claim, this enterprise had an insurance broker
for a hub and insurers for spokes, but in addition to evidence
that the hub had entered into bilateral agreements with each of
its spokes, there were also claims that this enterprise had engaged
in “bid-rigging,” whereby insurers would take turns submitting
sham
bids
to
fraudulently
steer
business
in
foreordained
directions. Id. “In other words, the insurers provided sham bids
19
to the broker, at the request of the broker, in exchange for
benefits provided by the broker.” Id. at 377. The court found that
“the allegations of bid rigging provide[d] the ‘rim’ to the . . .
enterprise’s
hub-and-spoke
configuration,
satisfying
Boyle’s
requirements.” Id. at 375.
The court so found even though there was no allegation of an
explicit agreement among the spokes to engage in reciprocal bidrigging.
See
id.
at
377.
However,
as
the
court
noted,
“the
complaint d[id] allege that one reason the insurers were willing
to furnish sham bids was so that they would be the beneficiaries
of sham bids in the future.” Id. The court in effect accepted the
allegation of an implicit agreement – a rim – among the insurers
based
on
their
otherwise
inexplicable
habit
of
“furnish[ing]
purposefully uncompetitive sham bids.” Id. at 336. This alleged
agreement – by which the enterprise was able to deceive insurance
purchasers “to a greater extent than would have been possible on
the
strength
of
the
bilateral
relationships
.
.
.
alone”
–
“plausibly suggest[ed] an interrelationship among the insurers,”
which
in
the
court’s
estimation
was
“enough
to
plead
an
enterprise.” Id. at 377-78; accord Interstate Circuit v. United
States, 306 U.S. 208, 226–27 (1939) (holding proof of an explicit
agreement
movie
unnecessary
distributors
to
where,
establish
“knowing
20
antitrust
that
conspiracy
concerted
among
action
was
contemplated and invited, the distributors gave their adherence to
the scheme and participated in it”).
Unlike the Third Circuit, the First Circuit and many of its
sister circuit courts of appeal have yet to comment on Boyle’s
impact,
if
any,
particularly
as
on
it
its
relates
association-in-fact
to
hub-and-spoke
jurisprudence,
enterprises.
But
several district courts have weighed in, albeit to inconsistent
effect. Compare Trilegiant 11 F. Supp. 3d at 98–99 (noting that
the Second Circuit has similarly failed to comment, but nonetheless
finding that “a classic ‘hub-and-spoke’ formation in which the
spokes are separate, distinct and unassociated and whose actions
are uncoordinated does not possess the requisite structure to
constitute a RICO enterprise, even as that notion was expanded by
Boyle”), and Target Corp. v. LCH Pavement Consultants, LLC, Civil
No. 12–1912 (JNE/JJK), 2013 WL 2470148, at *4 (D. Minn. June 7,
2013) (noting that “the Eighth Circuit has not addressed the
issue,” but siding with “the Third Circuit and several district
courts [that]
organization
have
does
reasoned
not
.
.
qualify
.
a
as
rimless
an
hub-and-spoke[]
association-in-fact
enterprise”), and McDonough v. First Am. Title Ins. Co., No. 10–
cv–106–SM, 2011 WL 285685, at *5–7 (D.N.H. Jan. 28, 2011) (holding
spoked
hub
with
“no
connecting
rim”
insufficient
for
RICO
enterprise, notwithstanding that “[t]he First Circuit has yet to
decide whether a [rimless] hub-and-spoke organization can qualify
21
as an ‘enterprise’ for RICO purposes”), with Fuji Photo Film
U.S.A., Inc. v. McNulty, 640 F. Supp. 2d 300, 306–08, 314 (S.D.N.Y.
2009) (denying motion to dismiss RICO claim involving rimless huband-spoke enterprise).
Here, though, even without definitive guidance from the First
Circuit, the Court can safely say that the allegations in the PAC
assert rim enough around the spokes, without hazarding analysis as
to
perhaps
the
closest
question
arising
post-Boyle,
namely,
whether rimless hub-and-spoke enterprises are now actionable under
RICO. Before Boyle was decided, various courts had already found,
or
at
least
entertained
the
idea,
that
rimmed
hub-and-spoke
enterprises could support RICO claims. See, e.g., Cedar Swamp, 487
F.
Supp.
2d
at
451
(noting
that
hub-and-spoke
structure
may
constitute a RICO enterprise when “a plaintiff . . . allege[s]
that the defendants operated symbiotically and played necessary
roles in the achievement of a common purpose”); Aiu Ins. Co. v.
Olmecs Med. Supply, Inc., No. CV-04-2934 (ERK), 2005 WL 3710370,
at *7–8 (E.D.N.Y. Feb. 22, 2005). And in this case, Plaintiffs
have alleged just such an enterprise, pleading enough for the Court
to find that CVS, ScriptSave, and the PBMs “associated together
for a common purpose of engaging in a course of conduct.” Turkette,
452 U.S. at 583. 7
7
It is quite likely that at least one circuit court would
disagree with this conclusion. See United Food & Commercial Workers
22
Union & Emp’rs. Midwest Health Benefits Fund v. Walgreen Co., 719
F.3d 849 (7th Cir. 2013). In United Food, the Seventh Circuit held
that, Boyle notwithstanding, a plausible association-in-fact
enterprise is incomplete absent allegations that corporate
racketeers essentially formed a new entity that they managed
together and kept separate from their regular business activities.
See id. at 853–56. The Seventh Circuit’s position appears closer
to that enunciated in Boyle’s dissent than in its majority. See
Boyle, 556 U.S. at 952 (Stevens, J., dissenting) (“In my view,
Congress intended the term ‘enterprise’ . . . to refer only to
businesslike entities that have an existence apart from the
predicate acts committed by their employees or associates.”).
Whatever United Food’s congruence with Boyle, this Court
declines to follow the Seventh Circuit because presumably the First
Circuit would disagree with its analysis: requiring RICO
plaintiffs to plead structured, intimate relations among an
enterprise’s members appears supererogatory given the substantial
“breadth” the Boyle court read into RICO’s enterprise element, as
discussed above. See Boyle, 556 U.S. at 949. After Boyle, “if
defendants band together to commit [violations] they cannot
accomplish alone . . . they cumulatively are conducting the
association-in-fact enterprise’s affairs, and not [simply] their
own affairs.’” Ins. Brokerage, 618 F.3d at 378 (quoting Gregory P.
Joseph, Civil RICO: A Definitive Guide 332 (3d ed. 2010)). Even
before Boyle, the First Circuit did not require that a RICO
enterprise have an “ascertainable structure,” recognizing the
reality that not all such enterprises would “observe the niceties
of legitimate organizational structures.” Patrick, 248 F.3d at 19.
RICO, in other words, prohibits more than the most marked
illegality. See United States v. Mubayyid, 658 F.3d 35, 57 (1st
Cir. 2011) (finding sufficient evidence to support conviction for
conspiracy even though “[t]he government presented no direct
evidence of an agreement either among the defendants or between
any defendant and an unindicted co-conspirator,” because, inter
alia, “[b]y their very nature, criminal conspiracies are
clandestine”). The statute does not require each of an enterprise’s
various entities to work side-by-side with every other such entity.
Indeed, various circuit courts have found that an association-infact enterprise can exist despite ignorance on the part of some
participants as to the identity of the others. See, e.g., United
States v. Rastelli, 870 F.2d 822, 828 (2d Cir. 1989) (noting proof
that RICO conspirator knew all other conspirators, or had full
knowledge of conspiracy was unnecessary, because “[i]t is
sufficient that defendant know the general nature of the enterprise
23
To be sure, Plaintiffs do not allege an explicit agreement
among the PBMs to look the other way as CVS failed to report HSP
prices. But they do allege the PMBs communicated with each other
and with CVS in order to orchestrate the alleged fraud. (PAC 3338, 60-61, 66.) In at least one instance, CVS played courier
between two PBMs – Medco and Caremark – apprising the latter that
the former had agreed to participate in CVS’s scheme. (PAC 33-38.)
Also alleged, (PAC 31-43, 45, 51-57), is that these entities’
interest in defrauding Plaintiffs was advanced to a “greater extent
than would have been possible on the strength of the bilateral
relationships between [CVS] and each [PBM] alone,” Ins. Brokerage,
618 F.3d at 377. See also United States v. Niemi, 579 F.3d 123,
127 (1st Cir. 2009) (noting that interdependence among spokes in
criminal conspiracy “may be shown where one participant knows that
his own success depends on the continued existence and health of
the
[criminal]
organization
as
a
whole”);
cf.
New
England
Carpenters Health and Welfare Fund v. Abbott Labs., Case No. 12 CV
1662, 2014 WL 4783833, at *6 (N.D. Ill. Sept. 25, 2014) (finding
enterprise element not met where the complaint contained “no
allegations that pharmacies that comprise the RICO enterprise are
and know that the enterprise extends beyond his individual role”);
United States v. De Peri, 778 F.2d 963, 975 (3d Cir. 1985) (noting
that “knowledge [of the identities of all other participants] is
not essential to the finding of a RICO conspiracy”).
24
in communication with one another or are even aware that other
pharmacies are part of the enterprise”).
Plaintiffs have also claimed that the PBMs acted contrary to
their individual interests by participating in the alleged scheme.
(PAC 51-57.) See Apple, Inc., 791 F.3d at 314 (finding necessity
of implicit agreement among spokes often derives from the fact
that “the spokes would not have gone along with [their various
agreements with the hub] except on the understanding that the other
[spokes]
were
agreeing
to
the
same
thing.”
(quotation
marks
omitted)). The PBMs compete with each other for the business of
entities like Plaintiffs. (PAC 51-57.) It would stand to reason,
then, that each PBM would be incented to require CVS to report HSP
prices as its U&C prices – in order to secure lower drug prices
for its current customers and to attract those of its competitors.
That the PBMs in this case seemingly did not act as they would be
expected to in a competitive market, but rather in a manner that
increased profit to both the PBMs and CVS at the expense of the
plans, lends further credence to Plaintiffs allegation that they
acted together. Cf. Evergreen Partnering Grp., Inc. v. Pactiv
Corp., 720 F.3d 33, 50 (1st Cir. 2013) (finding relevant to motionto-dismiss analysis of plaintiff’s antitrust claim the fact that
“[t]he complaint . . . state[d] that the defendant[s] . . . acted
against their
[plaintiff],”
own
best
because
interests
doing
so
25
when
“would
refusing
have
to
produced
deal
with
abundant
savings to customers and resulted in a higher volume of customer
sales
due
to
the
attractiveness
of
potential
savings
and
environmental benefits”).
This is not to say that each PBM’s interpretation of its
contracts to exclude HSP prices, on its own, risked RICO liability.
Even that they all did so more or less simultaneously may be mere
coincidence, the result of non-collusive contract interpretation
in their respective legal departments. On the other hand, “it is
well established that vertical agreements, lawful in the abstract,
can in context ‘be useful evidence for a plaintiff attempting to
prove the existence of a horizontal cartel,’ particularly where
multiple
against
competitors
their
own
sign
vertical
interests
were
agreements
they
acting
that
would
be
independently.”
Apple, Inc., 791 F.3d at 319–20 (quoting Leegin Creative Leather
Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 893 (2007)) (citing
Interstate Circuit, 306 U.S. at 222; and Toys “R” Us, Inc. v.
F.T.C., 221 F.3d 928, 935–36 (7th Cir. 2000)).
The question of
coincidence or not will undoubtedly be raised again at summary
judgment and, if necessary, at trial. See Liu v. Amerco, 677 F.3d
489, 497 (1st Cir. 2012) (“The place to test factual assertions
for deficiencies and against conflicting evidence is at summary
judgment or trial . . . .”). But for now, at the motion-to-dismiss
stage,
the
Court
finds
it
at
least
plausible,
assuming
the
allegations in the PAC are true, that each PBM, at the behest of
26
CVS, acted against its individual interest by choosing to adopt an
internal policy interpreting U&C price to exclude CVS’s HSP price,
with the expectation (and in at least one instance, a confirmation)
that competitors would do the same. In short, Plaintiffs have
adequately pleaded a rim around a spoked hub. 8
Defendant’s remaining arguments for why amendment would be
futile
argument
are
similarly
that
the
PAC
unconvincing.
fails
to
Contrary
allege
to
multiple
Defendant’s
schemes
and
therefore a pattern of racketeering, (Def.’s Obj. 25), the First
Circuit has expressly stated that “showing a ‘pattern’ does not
necessarily require proof of multiple criminal ‘schemes,’” Efron
v. Embassy Suites (P.R.), Inc., 223 F.3d 12, 16 (1st Cir. 2000)
(quoting H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 240-41
(1989)). “[O]ne scheme that extends over a substantial period of
time, or that shows signs of extending indefinitely into the
future, can establish a pattern.” Efron, 223 F.3d at 16. Such was,
allegedly,
the
case
here.
Furthermore,
the
alleged
scheme
consisted of various well-pleaded instances of the RICO predicates
mail and wire fraud. See Sheet Metal Workers, 221 F. Supp. 3d at
8
Because the Court finds the global enterprise is adequately
pleaded, the same is true a fortiori of the lesser-included
enterprises, especially given that Defendant’s arguments as to the
latter track those as to the former. See Schwartz v. Lawyers Title
Ins. Co., 970 F. Supp. 2d 395, 405 (E.D. Pa. 2013) (finding
multiple bilateral association-in-fact RICO enterprises wellpleaded after finding same as to larger enterprise).
27
231 (“The Court finds that Plaintiffs’ Complaint satisfies Rule
9(b). It is clear from the Complaint that the alleged false
statement to the Indiana Funds was the reported U & C price, which
Plaintiffs claim was inflated.”). Finally, the Court finds that
Plaintiffs have adequately pleaded causation. Despite Defendant’s
argument that Plaintiffs knew they were not paying HSP prices and
therefore would have paid those prices but for the fraud, (Def.’s
Obj. 26-30), the Court must, at this stage, credit all Plaintiffs’
well-pleaded allegations, including that they were unaware of the
alleged fraud, (PAC 44).
III. Conclusion
For the above reasons, Plaintiffs’ Motion (ECF No. 56) is
GRANTED.
William E. Smith
Chief Judge
Date: March 31, 2018
28
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