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Physician Specialty Pharmacy, LLC v. Prime Therapeutics, LLC

United States District Court, D. Minnesota

January 23, 2019

Physician Specialty Pharmacy, LLC, Plaintiff,
v.
Prime Therapeutics, LLC, Defendant.

          Adrienne Dresevic & Robert J. Dindoffer, The Health Law Partners, P.C., and Elizabeth R. Odette & Kristen G. Marttila, Lockridge Grindal Nauen P.L.L.P., (for Plaintiffs); and

          Christine Lindblad, Meghan M.A. Hansen, Ellie J. Barragry, & Alex L. Rubenstein, Fox Rothschild LLP, (for Defendants).

          REPORT AND RECOMMENDATION

          TONY N. LEUNG UNITED STATES MAGISTRATE JUDGE.

         This matter is before the Court, United States Magistrate Judge Tony N. Leung, on Defendant's Motion to Dismiss Plaintiff's Amended Complaint (ECF No. 18) and Plaintiff's Motion in Limine Regarding June 30, 2016 Settlement Demand Letter. (ECF No. 35). These motions have been referred to the undersigned magistrate judge for a report and recommendation to the Honorable Michael J. Davis, United States District Judge for the District of Minnesota, pursuant to 28 U.S.C. § 636(b)(1) and Local Rule 72.1. (ECF No. 25). Based on all the files, records, and proceedings herein, and for the reasons set forth below, this Court recommends that Defendant's motion be GRANTED and Plaintiff's Motion be DENIED AS MOOT.

         I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

         Physician Specialty Pharmacy, LLC (“PSP”), is a specialty pharmacy located in and organized pursuant to the laws of Florida. Amend. Compl. ¶ 13. (ECF No. 6). Because PSP is located on the Florida-Alabama border, a substantial number of its customers come from Alabama. Prime Therapeutics (“Prime”) is a pharmacy benefit manager located in Minnesota that is owned by nine health plans that are members of the Blue Cross Blue Shield Association. Id. at ¶ 14, 16. Prime manages the prescription drug benefits for Blue Cross and Blue Shield of Alabama, a health insurance provider that controls 93 percent of large-group health benefits in Alabama. Id. at ¶¶ 17, 144-45.

         For several years, PSP filled prescriptions claims for Prime's beneficiaries. Id. at ¶ 26. When a Prime member used PSP to fill a prescription, PSP would use an electronic interface to submit a claim to Prime. Id. at ¶ 47. Prime would then tell PSP what amount Prime would reimburse PSP for the prescription and what amount the member would pay for the prescription. Id. Once Prime processed the prescription, it received payment from the member's health insurance plan. Id. at ¶ 48.

         Beginning at the end of 2015 and continuing into 2016, Prime began to conduct a series of audits into PSP's business. Id. at ¶ 27. The first batch of audits began on December 14, 2015 and covered claims submitted between November 30, 2014 and November 30, 2015. Id. at ¶ 77. The second batch of audits began in January 2016 and covered claims between December 12, 2015 and January 8, 2016. Id. The final batch of audits began in the first half of 2016 and covered all claims submitted between January 8, 2016 and May 27, 2016. Id. While Prime conducted these audits, it refused to pay PSP for any prescription that PSP dispensed to a Prime member. Id. at ¶ 78.

         Prime issued its findings for the first two batches of audit results in April 2016. Id. at ¶ 81. It rejected over $300, 000 worth of claims that PSP submitted to Prime for reasons including incorrect entry of an origin code and using drug wholesalers that Prime had excluded, despite the fact that Prime never notified PSP of those exclusions. Id. at ¶¶ 83-85. Prime informed PSP that it would need to submit to an “administrative audit appeal process” if it wanted to receive payment for the rejected claims. Id. at ¶ 87.

         Before PSP could appeal, however, and before Prime issued the results of its final batch of audits, Prime terminated PSP from its pharmacy network for “poor audit performance.” Id. at ¶ 88-89. PSP subsequently appealed both the first two audit batches and its termination from Prime's network. Id. at ¶¶ 93-94. A few months after PSP appealed, Prime issued its results for the third batch of audits. Id. at ¶ 95. It rejected more than $500, 000 worth of PSP's claims for technical and clerical errors. Id. at ¶ 98-99. Prime also rejected PSP's appeals of its first two batches of audit results, but gave PSP the opportunity for a final appeal, as required by state law. Id. at ¶ 101-02. Around the same time, Prime announced a partnership with Walgreens to provide specialty pharmacy and mail service businesses. Id. at ¶ 171.

         PSP submitted its final appeal of the first batch of audit results and its first appeal of the third batch of audit results on September 3, 2016. Id. at ¶¶ 104-05. It also submitted a final appeal of the second batch of audit results on September 16, 2016. Id. ¶ 106. Prime denied PSP's first appeal of the third batch of audit results and asked for amended final appeals of the other two batches on November 23, 2016. Id. at ¶¶ 107-08. PSP filed a final appeal of the third batch of audit results and supplemental information on the other two batches of audit results on December 23, 2016. Id. at ¶ 110. It also submitted additional information regarding the third batch of audit results on January 11, 2017. Id. at ¶ 112.

         On April 3, 2017, Prime announced the creation of AllianceRx, a joint venture with Walgreens to provide specialty and mail-order pharmacy services. Id. at ¶¶ 159-60. A few weeks later, Prime issued its final audit results regarding PSP's claims. Id. at ¶ 117. Prime rejected over $700, 000 worth of claims. Id. at ¶ 118. Shortly thereafter, Prime also rejected PSP's appeal of its termination from Prime's network. Id. at ¶ 124. PSP subsequently requested a dispute resolution conference, at which an attorney for Prime indicated that she did not know of any PSP claims where the patient did not receive the medication that was billed or prescribed. Id. at ¶ 131. PSP alleges that Prime used the audits as a pretext to terminate PSP from its network for the benefit of AllianceRx.

         PSP filed suit, alleging that Prime violated Minnesota and Florida state law and federal antitrust law. PSP alleged that Prime and Walgreens unlawfully restrained trade in the Alabama specialty/mail-order pharmacy markets and the retail pharmacy market by vertically integrating over 90 percent of Alabama's prescription drug benefits and by excluding PSP from dispensing prescriptions to Prime members. Id. at ¶ 364-66. PSP also alleged that Prime and Walgreens combined, conspired, and agreed to monopolize the Alabama specialty/mail-order pharmacy market and the Alabama retail pharmacy market and that Prime attempted to monopolize or monopolized the same markets. Id. at ¶¶ 367-74.

         Prime moved to dismiss the complaint. (ECF No. 18). Attached to a declaration in support of its motion was a settlement demand letter from PSP, dated June 30, 2016. (ECF No. 21-3). PSP subsequently moved to exclude that letter from evidence. (ECF No. 35). At the hearing, the Court ordered the parties to provide supplemental letter briefing on a number of issues. The parties submitted those letters on October 1 and 9, 2018, following which the Court took the matter under advisement.

         II. MOTION TO DISMISS

         Prime has moved to dismiss the Amended Complaint under Fed.R.Civ.P. 12(b)(6) and 12(b)(1). When determining a Rule 12(b)(1) motion, courts “must distinguish between a ‘facial attack' and a ‘factual attack' on jurisdiction.” Carlsen v. GameStop, Inc., 833 F.3d 903, 908 (8th Cir. 2016) (quoting Osborn v. United States, 918 F.2d 724, 729 n.6 (8th Cir. 1990)). “In a facial attack, ‘the court restricts itself to the face of the pleadings, and the non-moving party receives the same protections as it would defending against a motion brought under Rule 12(b)(6).'” Id. “In a factual attack, the court considers matters outside the pleadings, and the non-moving party does not have the benefit of 12(b)(6) safeguards.” Id.

         In deciding a Rule 12(b)(6) motion, a court accepts as true all well-pleaded factual allegations and then determines “whether they plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009). In doing so, the court must draw reasonable inferences in the plaintiff's favor. Zink v. Lombardi, 783 F.3d 1089, 1098 (8th Cir. 2015) (citation omitted). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Sletten & Brettin Orthodontics v. Cont'l Cas. Co., 782 F.3d 931, 934 (8th Cir. 2015) (citation and internal quotations omitted). Facial plausibility of a claim exists “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). Although a sufficient complaint need not be detailed, it must contain “[f]actual allegations . . . enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555 (citation omitted). Complaints are insufficient if they contain “naked assertions devoid of further factual enhancement.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 557) (internal quotation marks omitted).

         A. Federal Law Claims

         PSP first contends that Prime and Walgreens violated Section 1 of the Sherman Act, which provides that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” 15 U.S.C. § 1. “Despite its broad language, ” Section 1 applies only to “unreasonable” restraints of trade or commerce. Craftsmen Limousine, Inc. v. Ford Motor Co., 363 F.3d 761, 772 (8th Cir. 2004) (“Craftsmen I”). In order to evaluate whether PSP has pled facts showing the alleged contract, combination, or conspiracy is unreasonable, the Court must first identify what legal standard governs the challenged conduct. Id. at 773.

         The default standard for evaluating whether conduct violates Section 1 of the Sherman Act is the “rule of reason.” Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 885 (2007). To successfully plead a case under the rule-of-reason standard, a plaintiff must allege facts showing that the challenged conduct has “detrimental effects” upon competition. Flegel v. Christian Hosp., NE-NW, 4 F.3d 682, 688 (8th Cir. 1993). Traditionally, a plaintiff pleads such a case by first alleging sufficient facts to define a relevant market, which is composed of both a product and geographic market. Craftsmen Limousine, Inc. v. Ford Motor Co., 491 F.3d 380, 388 (8th Cir. 2007) (“Craftsmen II”). The plaintiff then performs “an inquiry into market power and market structure designed to assess the [conduct's] actual effect.” Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984). This inquiry requires consideration of a number of factors, “including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint's history, nature, and effect.” State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). This is a very “challenging” standard for a plaintiff to meet. Craftsmen II, 491 F.3d at 388.

         In some cases, however, a truncated, “quick look” rule-of-reason standard applies. See Calif. Dental Ass'n v. FTC, 526 U.S. 756, 770 (1999). The quick-look standard applies when a person “with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.” Id. at 770. Typically, the quick rule standard applies when there are facts pled that show “genuine adverse effects on competition, ” such as a “naked restriction on price or output.” FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 460 (1986). In these cases, because the “anticompetitive effects can easily be ascertained, ” Calif Dental Ass'n v. FTC, 526 U.S. at 770, there is no need to conduct an “elaborate market analysis.” Ind. Fed'n of Dentists, 476 U.S. at 461. Instead, upon a showing of anticompetitive effects, the burden turns immediately to the defendant to show some form of pro-competitive justification for the conduct. National Collegiate Athletic Ass'n v. Board of Regents of University of Oklahoma, 468 U.S. 85, 113 (1984) (“NCAA”).

         Finally, some restraints are considered unreasonable “per se.” Leegin, 551 U.S. at 886. The per se standard applies to restraints that “always or almost always tend to restrict competition and decrease output.” Id. Such restraints include horizontal agreements between competitors to fix prices, divide markets, or boycott certain firms. Id.; Johnson Bros. Liquor Co. v. Bacardi U.S.A., Inc., 830 F.Supp.2d 697, 707 (D. Minn. 2011). Because these categories of restraints are “so strongly linked with anti-competitive activity and their economic impact so immediately obvious . . . the plaintiff meets its burden of proving the unreasonableness of the restraint merely by proving the existence and substance of the restraint itself.” Craftsmen II, 491 F.3d at 387.

         PSP contends that the per se standard should apply here, citing caselaw holding that the per se standard applies to conspiracies between firms to exclude another from the marketplace, so long as the conspirators possess “market power or exclusive access to an element essential to effective competition.” Johnson Bros., 830 F.Supp.2d at 707; see also Silver v. New York Stock Exchange, 373 U.S. 341, 347-48 (1963). But the per se standard applies to those types of conspiracies only when the conspirators directly compete with one another. See Johnson Bros., 830 F.Supp.2d at 700 (considering agreement between two producers of alcoholic beverages). This is not such a case. PSP does not allege that Walgreens and Prime compete directly with one another. Instead, PSP alleges that Prime is a customer or purchaser of pharmacies like PSP and Walgreens. And when there is an agreement between a buyer and a seller to exclude another entity from the market, the per se rule is inapplicable. See NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 136-37 (1998) (explaining that the freedom to switch suppliers lies close to the heart of the competitive ...


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