CONCLUSION
For the reasons set forth above, defendants’ motion to dismiss the second amended complaint

is granted, This case is dismissed without prejudice.

ENTER:

Queprn dB Onl

Suzanne BLEonlon
August 21, 2006 United States District Judge

14


Plaintiffs identify Caremark employees who allegedly restocked returned drugs, as well as
their work location. E.g., id. at J] 147, 171, 188, 203. But plaintiffs do not allege a single instance
when returned drugs were improperly restocked. Plaintiffs submit exhibits purporting to identify
invoices in which Caremark requested payment for over 20,000 orders filled with returned drugs.
Id. Exs. 21-24, 32-34; see also Pls. Mem. at 10. But these exhibits do not indicate Caremark failed
to give credit for returned drugs, or that returned drugs were damaged.

IL Discovery

In the second amended complaint, 514 paragraphs sprawl over 178 pages; over a thousand
Pages are attached as exhibits. The volume of plaintiffs’ pleadings shows extensive discovery has
been conducted in this three year old case. On April 24, 2006, Caremark produced nearly 6,000
pages of documents. Leonard Aff., Pls. Mem. Ex. 1 at 21. Plaintiffs derived the majority of their
complaint exhibits from Caremark’s discovery materials. Jd, at {{] 21-23.

On May 9, 2006, 15 days after receiving Caremark’s discovery materials, plaintiffs also
received over 100,000 pages of Caremark documents from the United States Attorney’s Office. Id.
at 24. These documents originated from Caremark’s disclosure to the government in 2004, when
this case was under seal. Kocoras Aff., Defs. Mem. Ex. 1 at J{]3, 10. Most of the United States
Attomney’s documents duplicated Caremark’s April 24, 2006 production to plaintiffs. From these
documents, plaintiffs derived Exhibits 16, 17, 18, 30, 31, and 35 to the second amended complaint.
See Defs. Mem. Ex. B. Plaintiffs’ exhibits consisted of three contracts and invoices, as well as two
savings reports related to plaintiffs’ intervention claims. See Second Am. Compl. Exs. 16-18, 30-31,

35.


(amending the complaint solely based on information from the public disclosure); Feingold, 2001
WL 1155250, at *1 (filing suit after collecting publicly available information). In contrast, plaintiffs
filed this case nearly three years before Caremark’s disclosure to the United States Attorney was
made available to them. Leonard Aff. at {{] 2, 16. Plaintiffs also aided the government during its
investigation while the case was under seal. Jd. at {{]3-12. More importantly, they had information
sources independent of public disclosure. Jd. at 4, 21-25. Unlike the relators in Bannon, Gross,
and Feingold, plaintiffs are the type of whistle-blowers 31 U.S.C. § 3730 aims to encourage. See
Mathews, 166 F.3d at 858 (“Congress intended that the courts not be troubled by persons who wish
to capitalize on others’ discovery of frauds”). Accordingly, Caremark’s reliance on these cases is
misplaced.

Caremark also argues the second amended complaint improperly relies on materials plaintiffs
hope to obtain in discovery. This argument has no bearing on jurisdiction and must therefore be
rejected, See Mathews, 166 F.3d at 858 (sufficiency of pleadings falls outside the three-prong test).
Because the record shows plaintiffs’ claims are not based upon public disclosure, the second
amended complaint clears the jurisdictional hurdle under 31 U.S.C. § 3730(e)(4)(A).

Il. Sufficiency of the Second Amended Complaint

In the May 30, 2006 memorandum opinion and order dismissing the firstamended complaint,
the court held plaintiffs must “set forth facts identifying the ‘who, what, when where, and how’” of
Caremark’s alleged fraud, in order to satisfy Fed. R. Civ. P. 9(b). Fowler, 2006 WL 1519567, at *3
(citing cases), The court further alerted plaintiffs to relevant case law setting forth Rule 9(b)’s
requirements in detail. Jd. For example, the court cited Peterson v. Community General Hospital,

No. 01 C 50356, 2003 WL 262515 (N.D. Ill. Feb. 7, 2003) (Reinhard, J.). In Peterson, relator sued

10


Il. Jurisdictional Bar

Defendants argue that 31 U.S.C. § 3730(e) deprives the court of subject matter jurisdiction
over this case. This provision bars courts from hearing any qui tam cases “based upon the public
disclosure of allegations or transactions in . . . [an] investigation . . . unless . . . [plaintiff] is an
original source of the information.” 31 U.S.C. § 3730(e)(4)(A). The provision was enacted “in the
context of the 1986 amendments, which... broaden the gui tam provisions, increasing the incentives
for the exposure of fraud.” United States ex rel Mathews v. Bank of Farmington, 166 F 3d 853, 858
(7th Cir. 1999), The provision aims to encourage whistleblowers to inform the government of fraud
on the one hand, and to prevent parasitic qui fam suits on the other. Jd. at 859. Imposition of the
jurisdictional bar under 31 U.S.C. § 3730(e) must be consistent with this legislative purpose. Jd.

To clear the jurisdictional bar, plaintiffs must establish one of the following three conditions:
(1) the allegations in their second amended complaint have not been publicly disclosed; (2) if the
allegations were in fact publicly disclosed, then plaintiffs are the original source of the information;
or (3) plaintiffs’ claims are not based upon public disclosure. Mathews, 166 F.3d at 859. Plaintiffs
concede that they fail the first two prongs of the Mathews test. They do not dispute Caremark’s 2004
disclosure to the United States Attorney constitutes “public disclosure” within the meaning of 31
U.S.C. § 3730(e)(4)(A). See id. at 861 (defining “public disclosure” as “[d]isclosure of information
to a competent public official about an alleged false claim”). Nor do they claim to be an “original
source” under 31 U.S.C. § 3730(e)(4)(A), absent evidence that before filing this case, they had
volunteered information to the government. 31 U.S.C. § 3730(e)(4)(B). Accordingly, to defeat
defendants’ jurisdictional challenge, plaintiffs must establish the third prong of the Mathews test:

their claims are not based upon public disclosure. Mathews, 166 F.3d at 859.


DISCUSSION

I Legal Standard

A motion to dismiss under Fed. R. Civ. P. 12(b)(6) challenges the sufficiency of the
complaint, and dismissal is warranted only if “no relief could be granted under any set of facts that
could be proved consistent with the allegations.” Cler v. Il. Educ. Ass'n, 423 F.3d 726, 729 (7th Cir.
2005) (quoting DeWalt v. Carter, 224 F.3d 607, 612 (7th Cir. 2000)). Ona motion to dismiss, all
well-pleaded allegations are accepted as true and all reasonable inferences are drawn in favor of the
non-moving party. Cler, 423 F.3d at 729. Generally, to survive a motion to dismiss, a complaint
need only provide a short and plain statement giving defendants fair notice of the nature and basis
of the claim. Fed. R. Civ. P. 8(a); DeWalt, 224 F.3d at 612. Buta fraud claim must allege facts with
particularity. Fed. R. Civ. P. 9(b). Under this rule, a fraud claim must identify: (1) the person(s)
who made the alleged misrepresentation; (2) the time, place, and content of the misrepresentation;
and (3) the method by which the misrepresentation was communicated to plaintiffs. Gen. Elec.
Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1078 (7th Cir. 1997). In other words, this
tule requires the “who, what, when, where, and how” of the circumstances of the alleged fraud.
DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).

A motion to dismiss under Rule 12(b)(1) challenges the court’s jurisdiction. Fed. R. Civ. P.
12(b)(1). Ona Rule 12(b)(1) motion, the court may consider evidence outside the pleadings. United
Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003). And plaintiffs bear the

burden to establish jurisdiction. Id.


Based on this record, it cannot be said that plaintiffs’ claims are based upon Caremark’s public
disclosure to the United States Attorney.

This case is distinguishable from Mathews, Although Mathews was first alerted to the
underlying fraud from a non-public source, she relied on public disclosure to confirm the existence
of the fraud. Mathews, 166 F.3d at 863. In addition, she cited the public disclosure in her qui tam
complaint. Jd Accordingly, her claims were “actually and substantially derived from [public]
disclosure.” Jd. In contrast, plaintiffs here had personal knowledge of the alleged fraud and
conducted their own investigation. Leonard Aff. at {| 4-6. They also obtained the majority of their
complaint exhibits from discovery, independent of Caremark’s disclosure to the United States
Attorney. Jd. at 21-25. Mathews therefore lends no support to Caremark’s position.

In addition to Mathews, Caremark relies on three distinguishable cases: Unifed States ex rel.
Bannon v. Edgewater Medical Center, 406 F. Supp. 2d 907 (N.D. Ill. 2005) (Cole, M.J.); United
States ex rel. Gross v. Aids Research Alliance-Chicago, No. 01 C 8182, 2004 WL 905952 (N.D. Ill.
Apr. 27, 2004) (Hibbler, J.), aff'd, 415 F.3d 601 (7th Cir. 2005); and United States ex rel. Feingold
v. Associated Insurance Co., No. 98 C 4392, 2001 WL 1155250 (N.D. Ill. Sept. 28, 2001) (Guzman,
J.), aff'd sub nom. United States ex rel. Feingold v. AdminaStar Federal, Inc., 324 F.3d 492 (7th Cir.
2003). Relators in all three cases proffered no evidence demonstrating their claims derived from
non-pubic information. Bannon, 406 F. Supp 2d. at 922 (while relator asserts “she discovered the
fraud independently of [the public disclosure], there is no explanation of how that occurred”); Gross,
2004 WL 905952, at *7 (same); Feingold, 2001 WL 1155250, at *9 (same). In addition, the timing
of their qui tam complaints indicates relators were typical parasitic plaintiffs. See Bannon, 406 F.

Supp. 2d at 910 (filing suit four years after public disclosure); Gross, 2004 WL 905952, at **3-4


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

UNITED STATES OF AMERICA ex rel.
MICHAEL FOWLER, PEPPI FOWLER,
VICTOR CORTES, and DANNY NEVAREZ,
as relators under the False Claims Act,

Plaintiffs, Civil Action No.: 03 C 8714

v. Suzanne B. Conlon, Judge

CAREMARK RX, INC., a Delaware
corporation, and CAREMARK INC., a
Delaware corporation,

BSS SS SSS SH HE UH HY

Defendants.

MEMORANDUM OPINION AND ORDER

Michael Fowler, Peppi Fowler, Victor Cortes, and Danny Nevarez, on behalf of the United
States, sued their former employer, Caremark Inc., and its parent, Caremark Rx, Inc. (collectively
“Caremark”), for alleged fraudulent practices in distributing prescription drugs to members of
various federal health insurance plans. Plaintiffs initially brought a four-count amended complaint
under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seg., and the false claims acts of the
District of Columbia, Louisiana, Michigan, Tennessee, and Texas. Their amended complaint was
dismissed for failure to plead fraud with particularity and to comply with state statutory
requirements. United States ex rel. Fowler v. Caremark, Rx, Inc., No. 03 8714, 2006 WL 1519567,
at **3-5 (N.D. Ill. May 30, 2006) (Conlon, J.). They filed a second amended complaint asserting
only FCA claims. Defendants now move to dismiss the second amended complaint pursuant to Fed.

R. Civ. P. 9(b), 12(b)(1), and 12(b)(6). For the reasons set forth below, the motion is granted.


becomes fraud only if Caremark fails to credit the federal plans for the returned drugs, or to properly
inspect the returned drugs. Nowhere in these invoices or in the second amended complaint itself do
plaintiffs allege Caremark committed fraud in processing the enumerated prescription orders. See
United States ex rel. Garst v. Lockheed-Martin Corp., 328 F.3d 374, 378 (7th Cir. 2003) (“[t]o
satisfy Rule 9(b), [plaintiff must] allege that [defendant] said something knowing at the time that the
representation was false”), Absent allegations of specific fraudulent conduct, the second amended
complaint must be dismissed. Peterson, 2003 WL 262515, at *2.

Arguing the contrary, plaintiffs urge the court to follow United States ex rel. Hunt v.
Merck-Medco Managed Care, L.L.C.,336 F. Supp. 2d 430 (E.D. Pa. 2004) (Newcomer, J.), in which
a complaint survived a Rule 9(b) challenge. Plaintiffs argue the Hunt complaint is similar to their
second amended complaint. But their argument is unpersuasive because, unlike their second
amended complaint, the Hunt complaint identified specific misrepresentations. See, e.g., Pls. Mem.
Ex. 2. at ff] 54-58, 172-73. Moreover, the Hunt court concluded, without citing any case law, that
defendants had sufficient notice of the claims. Hunt, 336 F. Supp. 2d at 437. In contrast, notice is
woefully inadequate where, as here, plaintiffs allege only generalized schemes and fail to specify a
single false claim. See, e.g., Second Am. Compl. at J 481 (alleging “[e]ach and every” Caremark
invoice constituted a false claim). In any event, because Hunt is neither precedential nor persuasive,
plaintiffs’ reliance on Hunt is unconvincing.

The second amended complaint cannot pass muster under Rule 9(b) and must therefore be
dismissed. Accordingly, the court need not reach Caremark’s alternative arguments based on Rule

12(6)(6).

12


several hospitals for alleged false Medicare claims. Jd. at *1. He alleged defendants fraudulently
obtained referrals of Medicare patients, and billed the government for Medicare services. Jd. But
his complaint was dismissed because he failed to specify a single Medicare patient treated by
defendants:

But which patients? And which claims? And which claims or other documents show

defendants falsely certified their compliance with federal law? These questions are

absolutely essential to relator’s claim of fraud. Their answers, however, cannot be

found anywhere in the sort of all-inclusive allegations [in relator’s complaint]. They

must be pleaded with particularity.

id, Although plaintiffs were alerted to Peterson, their second amended complaint still misses the
mark.

Compared to the previously dismissed complaint, the second amended complaint elaborates
in detail plaintiffs’ personal knowledge of the alleged schemes, adds lists of Caremark employees
involved in the alleged schemes, and identifies invoices allegedly containing false claims. See, e.g.,
Second Amended Compl. at ff 147, 272, Exs. 24, 32. But like the complaint in Peterson, these
added allegations do not identify a single prescription through which Caremark perpetrated the
alleged fraud. Nor do they tie a specific fraudulent transaction to an invoice submitted to the
government. Accordingly, these allegations cannot satisfy Rule 9(b)’s requirement to give Caremark
notice of the alleged fraud. Peterson, 2003 WL 262515, at *2; see also United States ex rel. Joshi
y. St. Luke's Hosp., Inc., 441 F.3d 552, 556 (8th Cir. 2006) (generalized allegations do not satisfy
Rule 9(b)).

Plaintiffs point to some invoices purporting to identify prescriptions that were filled with

returned drugs. See, e.g., Second Am. Compl. Ex. 32. But the practice of filling orders with

returned drugs, in itself, is not fraud; viewed in the light most favorable to plaintiffs, the practice

11


Under Mathews, a claim is “based upon” public disclosure if it “both depends essentially
upon publicly disclosed information and is actually derived from such information.” Id. at 864
(emphasis supplied). Mathews does not impose the jurisdictional bar on qui tam plaintiffs whose
claims are based on information from a non-public source, even though their information is identical
to publicly disclosed information. Jd. at 863 (endorsing the minority view held by the Fourth
Circuit). Accordingly, plaintiffs may avoid the jurisdictional bar if their claims are based on
information from a source independent of Caremark’s public disclosure.

Plaintiffs argue their claims are based on their own investigation and Caremark’s discovery
materials, and not on Caremark’s 2004 disclosure to the United States Attorney. Leonard Aff. at [J
21-25. Their argument finds support in the record. First, plaintiffs received Caremark’s discovery
materials 15 days prior to obtaining Caremark’s 2004 government disclosure. Jd. at | 24.
Caremark’s discovery materials were not filed with the court and therefore fell outside “public
disclosure” under 31 U.S.C. § 3730(e)(4)(A). Mathews, 166 F.3d at 860. Second, plaintiffs derived
the majority of their complaint exhibits from Caremark’s discovery materials. See Defs. Mem. Ex.
B. For example, of the fifteen exhibits purporting to show Caremark’s fraudulent billing practices,
twelve came from Caremark’s discovery materials. See id. More importantly, plaintiffs created the
four key exhibits purporting to identify Caremark’s false claims submitted to the government. See
Second Am. Compl. Exs. 24, 32-34. While several additional exhibits were drawn from Caremark’s
disclosure to the United States Attorney, they were insignificant because they duplicated exhibits
obtained in discovery in this case in both form and substance. See Defs. Mem. Ex. B; see also

Second Am. Compl. Exs. 16-18, 30-31, 35 (three contracts, three invoices, and two savings reports).


submit samples of Caremark’s annual guarantee analysis. E.g., id. at §{ 299-302, Ex. 25. They
allege that in these analyses, Caremark falsely verified that it met turn-around time guarantees and,
accordingly, owed no monetary penalty. Jd. at 301. But plaintiffs do not identify a single order
with falsified turn-around time. Nor do they tie any orders to Caremark’s analyses.

B. Intervention

Plaintiffs allege Caremark schemed to charge excessive intervention fees. Jd, at 7350. The
alleged schemes primarily involve fraudulently procured authorizations for conversion. /d. at'{]335.
For example, Caremark allegedly encouraged its employees to seek authorization from receptionists
and nurses in doctors’ offices, rather than from the prescribing doctors themselves. Jd, at 335-40.

As a result, Caremark employees regularly altered federal plan members’ prescriptions based on
improper authorizations. Jd. at §§ 354-55.

Plaintiffs identify Caremark employees who knew about the alleged schemes, as well as their
work locations. E.g., id. at [{ 352-58. Plaintiffs also submit volumes of savings reports listing
prescription orders and their respective savings. Id. Exs, 30-31. But nowhere in these reports or in
the second amended complaint do plaintiffs identify an instance of improper authorization.

Cc. Returned Drugs

Plaintiffs allege that as a standard practice, Caremark restocked all returned drugs after only
acursory inspection, and resold them without regard to plan members’ safety, Jd, at {{] 130, 137-38.
Caremark allegedly failed to credit the federal plans for drugs returned by plan members. Jd. at J
139. This practice allegedly violated the government contracts, as well as various state laws. Id. at

7 139, 148-53.


addition to providing intervention services, Caremark is subject to performance guarantees. E.g.,
id. at ]33. For example, Caremark is required to ship prescription drugs to plan members within
a specified number of days after receiving their orders. E.g., id. at ] 75 (95% of the prescription
orders not requiring intervention must be shipped within two business days). Caremark must pay
penalty for failing to meet turn-around time guarantees. E.g., id. at 134.

Plaintiffs’ claims arise from Caremark’s government contracts. The second amended
complaint alleges schemes through which Caremark concealed turn-around time lapses, charged
excessive intervention fees, and improperly restocked and resold returned drugs.

A. Turn-Around Time

Plaintiffs allege Caremark schemed to conceal its failure to meet turn-around time
guarantees. See id. at {] 238-325, The alleged schemes are three-fold. First, as a routine practice,
Caremark employees allegedly falsified receipt dates for prescription orders. Jd. at 1255. Second,
Caremark allegedly implemented procedures to artificially restart the turn-around time clock. See
id. at {{] 261-62. For example, if an order remained unfilled beyond the required turn-around time
period, a Caremark employee would contact the plan member to obtain confirmation to process the
order. /d. Caremark would then treat the order as newly received for turn-around time purposes.
Id. Finally, Caremark allegedly transferred orders between facilities to conceal processing delays.
Id. at §{[ 252-55. For example, when one facility was inundated with orders, it would divert unfilled
orders to other facilities. Jd. at ]252. Employees at the facility receiving the diverted orders would
treat the diverted orders as if they were received directly from plan members. Jd. at (253.

Plaintiffs claim they have personal knowledge of Caremark’s schemes. For example, they

allege Nevarez “change[d] the received dates on thousands of , . . orders.” Jd. at [273. They also


BACKGROUND
I The Second Amended Complaint

The following facts are derived from the second amended complaint. Caremark provides
pharmacy benefit services to health insurance plans. Second Am. Compl. at §{] 4, 7. Caremark
maintains facilities at four locations: Miramar, Florida; Mount Prospect, Illinois; Phoenix, Arizona;
and San Antonio, Texas. Jd. at { 8. At each facility, hundreds of Caremark employees process
prescription orders for over 20 million plan members nationwide. Jd. at 7-8. At all relevant
times, Caremark employed the Fowlers at its Florida facility, and Cortes and Nevarez at its Texas
facility. Jd. at ff] 1-3. Through their employment, plaintiffs gained personal knowledge of
Caremark’s procedures, policies, and practices. Id.

Caremark services several federal health insurance plans including: (1) the National
Association of Letter Carriers Plan; (2) the National Rural Carriers Benefit Plan of the National
Rural Letter Carriers Association; (3) the National Mail Handlers Union Plan; and (4) the Sierra
Military Plan. Jd. at 945, 9, 18. Caremark’s government contracts have allegedly generated several
billion dollars in revenue. Jd. at [21. Under these contracts, Caremark processes orders from plan
members and mails prescription drugs to them. /d. at [8. Caremark also provides “conversion” or
“intervention” services in order to incur savings for the federal plans. E.g., id. at JJ 34, 327.
Savings refers to the cost differential between a plan member’s original order and the actual order
Caremark delivers. Jd. at {{[ 327-28. For example, if Caremark obtains approval from plan
members’ doctors to convert a prescription drug to an over the counter drug, to reduce dosage, or
to discontinue refills, the federal plans would then pay less for the orders. Jd. at 934. In return, the

federal plans would pay Caremark a fee for generating savings. See, e.g., id. at ff 42, 330. In


IV. Leave to Amend

When the first amended complaint was dismissed for failure to comply with Rule 9(b),
plaintiffs were given an opportunity to cure pleading defects. In response, they submitted a
178-page complaint and over a thousand pages of exhibits. Laden with baffling acronyms, their
sprawling pleadings raised questions whether they complied with Rule 8(a)’s requirement of a
“short and plain” statement.' Garst, 328 F.3d at 378 (dismissing a disorganized 74-page qui tam
complaint for failure to comply with Rule 8(a)). And despite receiving clear instructions, they
failed again to plead fraud with particularity.

Plaintiffs’ repeated failure to comply with Rule 9(b) instills little confidence that a blank
check to amend the complaint again would serve any purpose other than drawing another motion to
dismiss on the same grounds. See Guise v. BWM Mortgage, LLC, 377 F.3d 795, 801 (7th Cir. 2004)
(“a district court may deny leave to amend on the grounds of undue delay, bad faith, dilatory motive,
prejudice, or futility”); see also Robbins v. Desnick, No. 90 C 2371, 1991 WL 5829, at *4 (N.D. Il.
Jan. 15, 1991) (Conlon, J.) (dismissing a gui tam complaint with prejudice for failure to state a
claim). But because the claims here are not facially frivolous, this case is not dismissed with
prejudice. To prevail on a motion for leave to file a third amended complaint, plaintiffs must submit

a proposed third amended complaint that complies with Rules 8(a) and 9(b).

' The first 100 paragraphs of the second amended complaint contain acronyms such as
“SOP,” “OPM,” “NALC,” “NRLCA,” “CCM,” and “CCR.”

13