1 Carpenters also brought two state law claims against Caremark, one for breach of contract and one for violating the Illinois (continued...) 

## In the 

# United States Court of Appeals

For the Seventh Circuit

____________

No. 05-3476

C HICAGO D ISTRICTC OUNCIL OF C ARPENTERS W ELFARE F UND

, Plaintiff-Appellant

,

v

.

C AREMARK , I NCORPORATED and
C AREMARKR X , I NCORPORATED

, Defendants-Appellees

.

____________ Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.
No. 04 C 5868— John W. Darrah, Judge

.

____________ ARGUED MARCH 31, 2006—D ECIDED J ANUARY 19, 2007

____________

Before R OVNER , E VANS and S YKES

, Circuit Judges

.
R OVNER

, Circuit Judge . The Chicago District Council of Carpenters Welfare Fund (“Carpenters”) sued Caremark, Inc. and its parent company Caremark Rx, Inc. (collectively “Caremark”) for breach of fiduciary duties under 29 U.S.C. § 1106(b) of the Employee Retirement Income Security Act of 1974 (“ERISA”). 1 The district court deter-2 No. 05-3476

1 (...continued) Consumer Fraud and Deceptive Practices Act. After dismissing the ERISA count, the district court dismissed the state law counts for lack of subject matte r jurisdiction. Carpenters does not appeal from the dismissal of the state law claims.

2 Caremark Rx, Inc. is not a part y to any of the three contracts. Rather, it is the parent corporat ion of Caremark, Inc. Like the district court, we do not find it necessary to decide whether Caremark Rx, Inc. should be dismissed from the case solely onthe basis that it was not a party to any of the relevant contracts. As a factual matter, though, we note that Caremark Rx, Inc. does not appear in any of the contracts or in any of the specific allegations of the complaint, except to be identified as the parent corporation. Becaus e all of our reasoning would apply equally to the parent corporation, we will refer to the two companies collectively as Caremark henceforth. mined that Caremark was not an ERISA fiduciary and therefore granted Caremark’s motion to dismiss. We
affirm.

I.

We take the facts as presented in the Complaint. Carpenters provides healthcare benefits to the members of a labor union. One of the benefits provided is prescription drug coverage which entitles the union members to obtainbrand name or generic prescription drugs for a small copayment. Carpenters pays the re st of the cost. In order to manage this benefit, Carpenters entered into a series of contracts with Caremark, Inc., one of the nation’s largest
Pharmaceutical Benefit Mana gement (“PBM”) companies. 2

There are three such contract s in the record, signed in 1996, 1999, and 2003. Each covers a multi-year period. The first two contracts are between Caremark and Carpenters directly; we will refer to these as the “1996 Contract” andNo. 05-3476 3

the “1999 Contract” respectively. The third agreement was executed in two parts: first is a contract between Caremark and Midwest Employee Benefit Fund Coalition, an organization of which Carpenters was a member. In the second part, Carpenters entered into a Participating Group Agreement with Caremarkthat set specific terms for services covered and prices. Together we will refer to those last two agreements as the “2003 Contract.”

A.

The parties disagree about the nature of Caremark’s obligations under the contracts. Carpenters portrays Caremark as its fiduciary, responsible for, among other things, negotiating prices withretail pharmacies and drug
manufacturers on behalf of Carpenters. Caremark claims only to have agreed to provide the stated benefits at pricesdetermined via arm’s-length negotiations between Caremark and Carpenters. Carpenters attached to the Complaint the three contracts at issue, and under the Federal Rules of Civil Procedure, th ose contracts are considered parts of the pleading. Fed. R. Civ. Pro. 10(c); Venture Assocs. Corp. v. Zenith Data Sys. Corp. , 987 F.2d 429, 431 (7th Cir. 1993). We may thus turn to the contracts to
determine the nature of th e agreement. To the extent
that the contracts contradi ct the Complaint, the contracts trump the facts or a llegations presented in the Complaint. Flannery v. Recording Indus. Assoc. of Am.

, 354 F.3d 632, 638 (7th Cir. 2004); Thompson v. Illinois Dept. of Prof. Regulation , 300 F.3d 750, 754 (7th Cir. 2002); Perkins v. Silverstein , 939 F.2d 463, 469 n.4 (7thCir. 1991) (in determining the sufficiency of the complaint, the court may rely onexhibits to the complaint whenever the allegations ofthe complaint are materially inconsistent with th ose exhibits). Under each of these contracts, Caremark was obliged to provide a4 No. 05-3476

variety of services to the covered union members. Forexample, Caremark was obliged to provide a mail service pharmacy, access to a ne twork of retail pharmacies, claims processing, a formulary program, customer service phone lines, and maintena nce of records. Caremark contracts with 55,000 retail pharmacies and operates four automated and nineteen mail-order pharmacies in order to process prescriptions fo r its clients. Each contract also provided that Caremark was not a fiduciary as thatterm is defined by ERISA, and that Carpenters possessed the sole authority to control and administer the plan.

Nonetheless, Carpenters alleges that, under the three contracts, Caremark has discretionary authority over the management and administration of Carpenters’ drug benefit plan and also exercises discretion and control over Carpenters’ assets. This discretionary authority gives rise to fiduciary duties under ERISA, Carpenters reasons. In particular, Carpenters alleges that Caremark has discretion (and therefore fidu ciary duties) in four specific areas: (1) in negotiations with drug retailers over drug prices; (2) in negotiations with drug manufacturers over rebates and other discounts; (3) in the management of the formulary program; and (4) in the management of the drug switching program. We turnto the contracts to set
out the terms in ea ch of these areas.

1. Drug Prices

Each contract contains a similar paragraph setting out
the costs associated with re tail pharmacy services. The 1996 Contract provided:

Retail Pharmacy . For each prescription, a total net
effective rate of the lesser of (x) the retail pharmacy’s usual and customary prices or (y) AWP less 13% forNo. 05-3476 5

brand-name drugs or (ii) HCFA MAC, as expanded by Caremark, for generic substi tutes, as appropriate, plusa dispensing fee of $2.25, less the Covered Member copayment as established by [Carpenters]. The above prices are based on the pa rticipation of a full and complete Caremark pharmacy network. Caremark will use its best commercially reasonable efforts to negotiate these rates with existing pharmacies in [Carpenters’] network. In th e event of changes in the marketplace beyond Caremark’s control resulting in a reduction in the number of participating pharmacies

or in contract reimbursem ent rates for this network, pricing will be adjusted to reflect these changes.

1996 Contract, ¶ 4(a)(ii). The 1999 Contract similarly provided:

Retail Pharmacy . For each Prescription billed to [Carpenters], electronica lly processed and dispensed to a Covered Member through Caremark’s retail pharmacy network, [Carpe nters] shall pay Caremark AWP less 13.5% for brand-name drugs or AWP less 55% for MAC generic substitutes, as appropriate, plus a dispensing fee of $2.50, less the Covered Membercopayment as established by [Carpenters]. [Carpenters] shall also pay any applicable sales or use tax. The above prices are based on the participation of a full and complete Caremark retail pharmacy network. Caremark shall use commercially reasonable efforts to negotiate these rates with existing pharmacies in [Carpenters’] retail network. In the event of changesin the marketplace beyond Caremark’s control resulting in a reduction in the number of participating pharmacies or in contract reimbursement rates for this retail network, pricing shall be adjusted to reflect these changes.

1999 Contract, Ex. A, ¶ 2. Finally, the 2003 Contract sets
out a similar set of terms:6 No. 05-3476

Retail Pharmacy . For each Prescription billed to [Carpenters], electronicallyprocessed and dispensed toa Covered Member through Caremark’s retail pharmacy network, [Carpenters] shall pay Caremark: (i) for Brand Drugs, the lower of Usual and Customary Price or AWP less 15%, or (ii) for Generic Drugs AWP less 55%; plus in each case a dispensing fee of $2.05 for Brand Drugs and $2.20 for Generic Drugs, and less the Covered Member Copayment as established by [Carpenters]. [Carpenters] shall also pay any applicable sales or use tax. The Covered Member Copayment for each electronically processed retail Prescription
shall be the lesser of the Covered Member Copayment as established by [Carpenters] or the pharmacy’s usual and customary charge. The above prices are based on the participation of a full and complete Caremark retail pharmacy network. Caremark shall use commercially reasonable efforts to negotiate these rates with existing pharmacies in [Carpenters’] retail network. In the event of changes in the marketplace beyond Caremark’s control resulting in a reduction in the number of participating pharmacies or in contract reimbursement rates for this retail network, pricing shall be adjusted to reflec t these changes. Such pricing adjustments will take effect only after Caremark provides at least thirty (30) days written notice of its intention to adjust pricing and upon Coalition’s written agreement of such price increases.

2003 Contract, Ex. A, Section 1, ¶ 2.

There are a number of defined terms in these provisions that require explanation. “AWP” refers to theaverage wholesale price for a prescription drug as reported in First Data Bank or other nationally available reporting service of pharmaceutical prices. “Usual and Customary Price” refers to the retail price charged by a participating pharmacy for th e particular drug in a cashNo. 05-3476 7

transaction on the date th e drug is dispensed as reported by the participating pharmacy to Caremark.
“HCFA” is the Health Care Financing Administration, a federal agency that admini sters Medicare and Medicaid
services. It is now known as the Centers for Medicare
and Medicaid Services. “MAC” is the maximum allowable cost that the federal government will pay under Medicare and Medicaid for a generic drug. HCFA did not list a MAC price for every available generic drug. Carpenters aversin its Complaint that the phrase “HCFA MAC, as expanded by Caremark” obligated Caremark to calculate the price for these unlisted generic drugs using the formula that HCFA used to generate MAC pricing and offer Carpenters at least as favorable a price as an HCFA calculation would yield. According to Carpenters, these provisions gave Caremark the duty and the discretion to use commercially reasonable efforts to negotiate the prices Carpenters would pay retailers for filling union members’ prescriptions.

2. Rebates

The 1996 Contract provided that Caremark would pay Carpenters a $1.50 rebate for each mail order prescription and a $0.75 rebate for each retail prescription filled. Caremark would be relieved of this obligation if Caremark was “no longer eligible to re ceive rebates from pharmaceutical manufacturers’ rebate programs.” Under the 1999 Contract, Caremark was sim ilarly obliged to pay Carpenters a $1.50 rebate for mail o rder prescriptions and a $1.00 rebate for retail prescriptions filled except that no rebateswere due for generic prescriptions. As in the 1996 Contract, Caremark was not oblig ed to pay the rebate if the manufacturers were no longer allowing Caremark to participate in a rebate program. Additionally, the 1999 Contract provided that Caremark would hold all con-8 No. 05-3476

tracts relating to rebates with the pharmaceutical manufacturers and that Carpenters agreed not to enter into contracts directly with drug ma kers relating to the servicesprovided under the 1999 Contract. The 2003 Contract changed the amount due as rebates for each mail order and retail prescription f illed, removed the exception for generic drugs mentioned in the 1999 Contract, and retained the language explaining that Caremark would hold all contracts with drug makers relating to rebates and that Carpenters would not enter into contracts directly
with those manufacturers. Inthe “Formulary Program” provisions, the 2003 Contract also stated that:

Caremark may hold contra cts with the manufacturers of products covered under this Agreement and in

connection with such cont racts, Caremark may have a financial relationship wi th such manufacturers and may receive rebates from such manufacturers.

Nothing in the 2003 Contract relieved Caremark of the duty to pay rebates to Ca rpenters, even if the manufacturers deemed Caremark ineligible to receive rebates. Carpenters argues that thes e various rebate provisions delegated to Caremark discretionary authority over the negotiations of drug purchase agreements with drug manufacturers on Carpenters’ behalf. This discretion gave rise to fiduciary duties, according to Carpenters. Moreover, Carpenters contends that the provisions gave Caremark control over Carpe nters’ assets, namely over the portion of rebates paid by drug makers that “belongs to Carpenters.” This control over assets, Carpenters contends, also gave rise to fiduciary duties.

3. Formulary Programs

Carpenters also argues that Caremark is a fiduciary

because it exercises discretionin the management of itsNo. 05-3476 9

formulary program, including control over the content of the formulary and over the drug-switching program. The 1996 Contract specifies that, among other services,
Caremark shall:

Provide a supply of Caremark’s Prescription Formulary brochures which list Caremark’s preferred brandname product in each of a number of therapeutic categories and requests the Covered Member to provide the formulary to his or her prescriber to assist the prescriber in making cost-effective prescribing decisions. Caremarkshall contact prescribers, as appropriate, to obtain a pproval for substitution of formulary drugs.

The 1999 Contract again required Caremark to providea supply of formulary brochures but this time the brochures were to be distributed directly to prescribers. Caremark also agreed to co ntact prescribers, “as appropriate, to obtain approval fo r substitution of formulary drugs.” The 2003 Contract required Caremark to provide the same formulary services as the 1999 Contract and additionally required Caremark to provide the formulary

brochures to the insured unionmembers upon request. The 2003 Contract contained additional provisions in the formulary program section. We have already quoted part of this paragraph in re lation to the rebates, and we repeat it here to place it in context:

[Carpenters] acknowledges that [Carpenters] has thesole discretion and authority to determine the formulary for the Plan. Caremarkmay hold contracts with the manufacturers of products covered under this Agreement and in connection with such contracts, Caremark may have a financ ial relationship with such manufacturers and may receive rebates from such
manufacturers. In addition , Caremark may contact Covered Members regarding therapeutic compliance,10 No. 05-3476

therapeutic education or similar programs, at no additional expense to [Ca rpenters]. On an aggregate basis, Caremark’s Therapeutic Interchange Program (TIP) shall result in net savings to [Carpenters]. A Covered Member shall not pay a higher Copayment
due to Caremark’s TIP program. Caremark mayreceive compensation from pharmaceutical manufacturers for certain of these services.

4. Drug Switching Program

As we noted above in the formulary program discussion, each contract obliged Caremarkto “contact prescribers, as appropriate, to obtain approva l for substitution of formulary drugs.” Carpenters refers to this as the “drug switching program.” In addition to the sections quoted above,Carpenters relies on another provision in the 1999 Contract under the mail service pharmacy section to demonstrate Caremark’s duties under the drug switching program. This provision obliges Caremark, “subject to prescriber approval and applicable law, [to] provide pharmaceutical cost containment services, including generic and therapeutic substitutions.” According to Carpenters, under these provi sions, Caremark bears the sole responsibility of deciding whether to try to persuadea prescriber to switch a prescription to a different, therapeutically similar drug. Becaus e of the discretion granted to Caremark in determining how to implement this provision, Carpenters contends that Caremark is its fiduciary under ERISA.

B.

Caremark moved to dismi ss the ERISA claim on the ground that the company was not an ERISA fiduciary under any of the three contracts. The district court notedNo. 05-3476 11

that, in order to be considered an ERISA fiduciary, Caremark must either (1) ex ercise discretionary authority or discretionary control respecting the managementof the plan; (2) exercise any authority or control respecting management or disposition of its assets; or (3) have any discretionary authority or discretionary responsibility in the administration of the plan. The court stated
that Caremark was a fiduciar y only to the extent that it exercised discretionary authority and thus it was possible that Caremark could be a fiduciary for some purposes and not for others. The court first held that, because each contract specified that “nothing in this Agreement shall be deemed to confer upon Caremark the status of fiduciary as defined” in ERISA, Caremark was not a fiduciary. The court then explored whether Caremark could nonetheless be a fiduciary for the four purposes alleged by Carpenters: (1) in negotiating with retail pharmacies the prices that th e plan pays for drugs; (2) in negotiating with drug manufacturers the prices that the plan pays for drugs and the rebates obtained for those drugs; (3) in determining wh ich drugs will comprise the formulary; and (4) in determining how to administer the drug switching program. The complaint alleged that Caremark breached its fiduciary duties by charging Carpenters a higher price than Caremark negotiated with retail pharmacies, and by choos ing drugs for the formulary that were more expensive so that Caremark could pocket extra rebates it obtained from drug makers.

The district court found that nothing in the contractsrequired Caremark to pass through cost savings to Carpenters. Instead, the cour t ruled, the retail pharmacy provisions obligated Caremark to charge Carpenters a set price for each drug, a pricethat could only be changed after further negotiations and agreement. Because the prices set in the contracts werethe result of arm’s-length negotiations between Carpenters and Caremark, the12 No. 05-3476

court held that Caremark could not be held liable for a breach of fiduciary duty related to retail pharmacy prices. As for Caremark’s de alings with drug manufacturers, the district court found that nothing in the contracts required Caremark to enter into agreements with drug manufacturers on behalf of Carpenters or to negotiate with drug makers for the pri ces Carpenters would pay for drugs. The court again pointed out that the contracts set the prices for drugs based on negotiations between Caremark and Carpenters, an arm’s-length deal that did not give rise to fiduciary duties.

Addressing issues related to the formulary and drug switching programs, the court noted that Carpenters adopted Caremark’s formulary in each contract. In each contract, a provision detailing Carpenters’s duties under the contract expressly stated that Carpenters had the “sole authority to control and admini ster the Plan.” In addition to those general declarations of Carpenters’ authorityin each contract, the 2003 Contract specified that Carpenters had the “sole discretion and authority to determine the formulary for the Plan.” Because of these provisions giving Carpenters the sole authority to control the plan and because of the negotiated drug prices in each contract, the court concluded that Caremark did not breach any fiduciary duties wi th respect to the formulary program or the drug switch ing program. Finally, turning to Carpenters’ arguments about the rebates, the court noted that each contract specified a set rebate that Caremark was to pay to Carp enters for each prescription filled. Nothing in any of the three contracts required Caremark to pass along to Carpenters any additional rebates issued by the drug manufacturers. Therefore, the court held, the rebate provisions did not create any fiduciary duties for Carema rk. Accordingly, the court dismissed Carpenters’ claim fo r breach of fiduciary duty. Carpenters appeals.No. 05-3476 13

3 We need not address this last point because we find that
Caremark is not an ERISA fiduci ary under any of the contracts. II.

On appeal, Carpenters argues that Caremark is an ERISA fiduciary because Caremark has discretionary authority (1) to negotiate wi th retailers the price that Carpenters pays for prescription drugs on behalf of its members and to unilaterally ad just those prices to adapt to market changes; (2) to negotiate with drug manufacturers the prices that Carpenters pays for drugs and
to determine the amount of financial incentives from manufacturers that Carpenters would share on its own purchases; (3) to advise Carpe nters on the initial content of its formulary and then tounilaterally alter the formulary; and (4) to manage the drug switching program. Carpenters also contends th at Caremark’s disavowal of its fiduciary status in the co ntracts is ineffective and void as against public policy pursuant to statute. 3

The district court dismissed the claim under Federal Rule of Civil Procedure 12(b) (6), for failure to state a claim because Caremark could not be an ERISA fiduciary under the facts alleged. On appeal, we accept as true all well-pleaded facts, and drawi ng all inferences in favor of Carpenters, we review de novowhether the complaint states a claim for which relief can be granted. Baker v. Kingsley , 387 F.3d 649, 660 (7th Cir. 2004); MarshallMosby v. Corporate Receivables, Inc. , 205 F.3d 323, 326 (7th Cir. 2000). To make out a claim for breach of fiduciary duty under ERISA, Carpenters must show that Caremark was a fiduciary as that term is defined in the statute and that Caremark was acting in its capacity as a fiduciary at the time it took the actions that are the subject of the complaint. See29 U.S.C. §§ 1002(21)(A), 1106(b);14 No. 05-3476

4 Carpenters alleged that Caremark violated section 1106(b)when it engaged in certain transactions related to the prescription drug benefit program. That section provides that a fiduciary shall not “(1) deal with the assets of the plan in his own interest or for his own account, (2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or (3) receive any consideration for his own personal account from any part y dealing with such plan in connection with a transaction involving the assets of the plan.” 29 U.S.C. § 1106(b). Because we find that Caremark was not a fiduciary when it engaged in any of the relevant transactions,
we need not address this section further. Pegram v. Herdrich , 530 U.S. 211, 223-226 (2000); Baker

, 387 F.3d at 660. A person is a fiduciary for an ERISA plan “to the extent (i) he exercises any discretionaryauthority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) herenders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. § 1002(21)(A); Pegram , 530 U.S. at 223; Baker , 387 F.3d at 660. 4Caremark may be an ERISA fiduciary for some purpo ses and not for others. Baker , 387
F.3d at 660.

A.

Carpenters argues first that Caremark has discretionary authority or discretionary control to negotiate up-front and adjust on an ongoing basis the price Carpenters pays forNo. 05-3476 15

drugs that union members obtain from retail pharmacies. A thorough review of the co ntract provisions quoted above in section A.1, however, reveals that, in each of the three contracts, Carpenters agreed to pay set prices for the drugs, prices negotiated with Caremark at arm’s length. See Central States, Se. & Sw. Areas Pension Fund v. Kroger Co. , 226 F.3d 903, 910 (7th Cir. 2000) (when acontract is unambiguous, the court may declare its meaning as a matter of law). In ea ch contract, that price was tied to a number fixed by neither Carpenters nor Caremark. For example, the price depended sometimes on average wholesale prices (“AW P”) as determined by a

national index. In some inst ances, the price was based on a retailer’s “usual and customary charge,” that is, the retail price charged by a participating pharmacy for the particular drug in a cash tran saction on the date the drug was dispensed as reported bythe participating pharmacy
to Caremark. In the case of generic drugs, the price was often fixed by a schedule used by Medicare and Medicaid

to determine how much th ose programs would pay for participants’ prescriptions (the “HCFA MAC”). There was no way for Caremark to “negotiate” the AWP reported on a national index. Nor could Caremark negotiate the usual and customary price that a pharmacy charged other
customers in cash transactio ns. And finally, Caremark wasin no position to negotiate the prices the federal government was willing to pay for drugs for Medicare and Medicaid recipients. In each contract, Carpenters agreed to pay prices based on those fixed numbers, sometimes with a percentage discount that Carpenters and Caremark negotiated at arm’s length, and in each instance with a fixed dispensing fee attached to each prescription. As the district court noted, nothin g in any of the contracts required Caremark to pass through any additional cost savings it managed to negotiate with retailers.

Nor could Caremark increas e the prices “unilaterally” due to changes in the marketplace, as Carpenters con-16 No. 05-3476

tends. Although each contractprovided that prices could be adjusted “[i]n the event of changes in the marketplace beyond Caremark’s control,” every contract also required that any changes be made in a writing signed by both parties. The provision thus gave Caremark the right to renegotiate prices during the contract term but not the right to change the prices unilaterally.

That brings us to the so mewhat puzzling provision in each contract stating that “Caremark will use its best commercially reasonable effort s to negotiate these rates with existing pharmacies in[Carpenters’] network.” The district court did not address what “rates” this provision covered or what this provisi on meant. Carpenters cites this provision as a source of discretionary authority for Caremark, resulting in fidu ciary duties. As we noted above, Caremark could not negotiate AWP, usual and customary charges or HCFA MAC. Carpenters argues that Caremark was to negoti ate with the retailers the rates that Caremark would pay on behalf of the plan, costs that were then reimbursed by Carpenters. According to Carpenters, Caremark was to use its best efforts to negotiate the rates that Carpenters was to reimburse Caremark. This argument makes little sense given that Carpenters negotiated to pay Caremark fixed prices for the drugs based on indexes la rgely outside the control of either party to the contract. The only amounts within the control of Caremark and Carpenters were the percentage discounts and the dispensing fees, numbers that were negotiated between Carpenters and Caremark at arm’slength. The contract contained no mechanism for a passthrough of any additional savings Caremark managed to negotiate with retailers. The contracts did not provide, for example, that Carpenters would pay AWP minus the highest percent discount that Caremark could negotiate with retailers using its mark et power. Without such a provision, Caremark was free tonegotiate with retailers toNo. 05-3476 17

5 The exact wording of this phrase in the 1996 Contract is “existing pharmacies in the Client’s network,” where “Client” was defined as Carpenters. The 1999 Contract also referred toCarpenters as the “Client” in this provision. In 2003, the terminology changed to “existing pharmacies in the Participating Group’s retail network, where “Participating Group” was defined as Carpenters. Thus, in each instance, Caremark was agreeing to negotiate the rates with Carpenters’existing pharmacy
network.pay less than the amount Carpenters would later reimburse it, allowing Caremark topocket the difference. This, of course, is the very conduct that Carpenters alleges was a breach of fiduciary du ty. Given that this scheme was the very deal for which Carpenters bargained at arms’ length, Caremark owed no fiduciary duty in this regard. Schulist v. Blue Cross of Iowa , 717 F.2d 1127, 1131-32 (7th Cir. 1983) (parties bargaining at arm’s length prior to entering into contract owe no fiduciary duties for pre-contract activities). See also Pharmaceutical Care Mgmt. Assoc. v. Rowe , 429 F.3d 294, 301 (1st Cir. 2005), cert. denied , 126 S. Ct. 2360 ( 2006) (holding that pharmaceutical benefit management companies aregenerally not ERISA fiduciaries because they lack discretionary authority or control in the management of the plan but rather engage in ministerial duties).

This is not to say that the “commercially reasonable efforts” provisions had no me aning in the contracts. We note first that the provision required Caremark to negotiate “these rates” with “existing pharmacies in [ Carpenters’ ] network.” 5 In other words, the parties had just agreed on the rates Carpenters would pay for drugs purchased from retailers in Caremark’s pharmacy network; that is what is me ant by “these rates.” Caremark was now agreeing to use co mmercially reasonable efforts to negotiate with pharmacies in Carpenters’existing18 No. 05-3476

network, i.e., the network of retailers that Carpenters used before contracting wi th Caremark, so that Carpenters could pay these samerates when covered members used retailers in Carpent ers’ existing network. This is the most straight-forwa rd reading of the provision.

Carpenters argues that the “commercially reasonable efforts” provision applied br oadly to require Caremark to negotiate rates with Caremark’s ownretail network. If this is the case, and we thin k it is not given the express language of the contracts, we must still make sense of what was meant by “these rates.” The word “rates” in these provisions must refer tothe one number within the control of the parties, the percentage discount number. Reading the contracts this way, Caremark agreed to use commercially reasonable efforts to negotiate discounts with its network of retailers, both atthe time it entered into the contracts with Carpenters and later when the marketplacechanged. Carpenters apparently believed that the percentage discounts reflected in the contracts were the best rates that Caremark could negotiate with its own retailers using its market power. In other words, Carpenters believed that Caremark was passing along all of the savings that Caremark could negotiate wi th retailers. But nothing in the contracts required Carema rk to pass along all of the savings. At most, this language required Caremark to come to its negotiations wi th Carpenters with the lowest prices it could obtain from retailers using its market power. Caremark was always free to then negotiate a higher price with Carpenters than Caremark paid for the drugs. Except for a modest dispensing fee, that is how Caremark made its money. It was to Carpenters’ benefit to
deal with Caremark rather th an dealing directly with the retailers. Caremark had many clients and could use this volume to negotiate better price s with the retailers than a single client could negotiate. Caremark could then pass some of those savings on to clients like Carpenters andNo. 05-3476 19

still make money by keeping the difference for itself. By agreeing to pay a fixed amount to Caremark, Carpenters forwent its opportunity to ga rner any additional savings
that Caremark could extract from retailers.

Each contract also includedslight variations of the following: “In the event of changes in the marketplace beyond Caremark’s control resulting in a reduction in the number of participating pharma cies or in contract reimbursement rates for this reta il network, pricing shall be adjusted to reflect these changes.” This provision allowedCaremark to seek a new pricing agreement with Carpenters if market changes in creased Caremark’s cost of dealing with the retailers. Th is is another way in which the “commercially reasonable efforts” language possibly came into play. If there were changes in the marketplace that caused retailers to increase charges to Caremark, Caremark agreed to use commercially reasonable efforts to keep those increases as lo w as possible. The contracts
then allowed Caremark to seek additional funds from Carpenters to account for these increased costs from the retailers, again bringing to the table the lowest price point that Caremark could ne gotiate with retailers. But nothing in any of the contra cts obliged Caremark to pass on to Carpenters all of the savings that resulted from its ongoing negotiations with retailers. Instead, the contracts provided that Carpenters and Caremark would adjust the pricing between themselves, another arm’slength transaction.

Under any reading of the co ntracts, Caremark was not obliged to pass along all of th e savings it negotiated with drug retailers. Failure to pa ss along all of the savings is the core of Carpenters’ complaint. Carpenters did not allege that Caremark breached a duty to negotiate rates with Carpenters’ existing network or that Caremark failed to come to the bargaining table with the best rates it could negotiate with retailers as the starting point in20 No. 05-3476

the discussion. Although Ca remark might have been a fiduciary for some purposes, itwas not a fiduciary for the purposes named in this countof Carpenters’ complaint. Plumb v. Fluid Pump Service, Inc. , 124 F.3d 849, 854 (7th Cir. 1997) (in assessing whether a person can be held liable for a breach of fiduciary duty, a court must ask whether that person is a fi duciary with respect to the particular activity at issue). The district court correctly
concluded that Caremark wa s not a fiduciary for the purpose of negotiating pri ces with drug retailers.

B.

Carpenters next argues that Caremark possessed discretion to negotiate wi th drug manufacturers (as opposed to retailers) the price s that Carpenters pays for drugs and to determine the amount of financial incentives from manufacturers that Carpenters would share on its own purchases. Because of th is discretion and because Caremark controlled Carpenters’ portion of the rebates paid by drug manufacturers, Carpenters contends that Caremark is an ERISA fiduciary under 29 U.S.C. § 1002(21)(A). As detailed above, each contract required Caremark to pay to Carpenters rebates in a certainamount for prescriptions filled. The 1996 and 1999 Contracts relieved Caremark of the obligation to pay rebates to Carpenters if Caremark wa s ineligible to receive rebates from the drug manufacturers’ rebate programs. The 1999 and 2003 Contracts acknowledged that Caremark would hold all contracts with the drug manufacturers relating to rebates. The 2003 Contract went one step
further and asserted that Caremark “may have a financial relationship” with the manufacturers. Common to all three contracts was the requ irement that Caremark payCarpenters a fixed amount of rebates on certain prescriptions filled. Carpenters compla ins that Caremark negoti-No. 05-3476 21

6 We also reject Carpenters’ argument that Caremark controlled “plan assets” in the form of “the portion of rebates paid by drug manufacturers that be longs to Carpenters.” Caremark (continued...)ated other types of financial incentives with the manufacturers, allowing Caremark to “unilaterally manipulate the amount of rebates paid to Carpenters . . . or even avoid paying them altogether.”

No provision in any of the contracts requires or authorizes Caremark to enter into agreements on behalf of Carpenters with the drug manufactu rers. To the contrary, each contract required Caremark to hold any rebate contracts with the drug makers and to pay a fixed rebate to Carpenters for certain pres criptions filled. There is no

discretion related to this payment. Nor is there any provision in the contracts requiring Caremark to pass through to Carpenters 100% of the rebates Caremark might receive from drug manufacturers. As with the provisions relating to retail pharmacies, Carpenters agreed to receive a fixed amount for rebates, allowing Caremark to retain any rebates above and beyond those
fixed amounts for itself. Care mark was in no position to unilaterally change the amountof the rebates because the amount was fixed in the contract. Moreover, the 1996 and 1999 Contracts provided that Caremark would be relieved of this payment oblig ation if “for any reason” Caremark was no longer eligib le to participate in the drug makers’ rebate programs. Carpenters’ complaint that Caremark could negotiate other incentive payments and

work to eliminate its own e ligibility for rebates (therebyrelieving Caremark of its duty to pay rebates to Carpenters) is a possibility that is contemplated under thecontracts. This was the deal for which Carpenters bargained with Caremark at arms’ length and thus Caremark owed no fiduciary duties to Carpenters related to rebates. 622 No. 05-3476

6 (...continued) was not collecting rebates from drug makers on behalf of Carpenters. The contracts clearl y specify that Caremark had an independent contractual duty to pay rebates to Carpenters. See

supra Part I.A.2. Caremark was no t collecting rebates from drug makers for Carpenters and then passing through a portion; thus Caremark was not controlling assets of the plan but rather was controlling its own assets in making these contractual rebate payments to Carpenters. C.

The formulary and drug-switching features of the plan are closely related and we w ill address them together. The formulary was the list of pre ferred drugs for the plan. Carpenters adopted Caremark’s standard formulary with each contract, in each inst ance generally retaining the “sole authority to control and administer the Plan.” In the 2003 Contract, Carpenters specifically acknowledged

that it had the sole discreti on and authority to determine the formulary for the plan. Carpenters alleged in its complaint that the formulary is not a static list; Caremark adds and removes drugs from the list as new drugs become available. Under the drug- switching program, Caremark was required to contact pres cribers “as appropriate” and obtain approval for substitu tion of formulary drugs.

The district court noted that, in the 2003 Contract, Carpenters expressly acknowledged that it had the sole discretion and authority to determine the formulary forthe plan. Moreover, the court noted, every contract provided that Carpenters retain ed the sole authority to control and administer the plan. As we noted above, Caremark can be held to be a fiduciary only to theextent that it possesses or exercises discretionary authority or discretionary responsibility in the administration of the plan. Given that Carpenters retained sole authority
to control and administer the plan, Carpenters was theNo. 05-3476 23

final arbiter of the content of the formulary and any drugswitching decisions. Caremark’s decisions relating to the formualry and drug-switching programs were akin to the decisions made by a claims administrator. In Klosterman v. Western Gen. Mgmt., Inc. , 32 F.3d 1119 (7th Cir. 1994), a plan participant sued a company hired to administer claims for an ERISA plan. The participant was enrolled in a plan administered by hi s employer’s human resources manager, and the plan reta ined the authority to make
the ultimate decisions in all doubtful or contested claims.
Western General was hired to administer claims according to the parameters of the plan. 32 F.3d at 1124. We found that Western General was not acting as a fiduciary in making claims decisions because it did not have the authority to make a final decision. 32 F.3d at 1124. We
noted that Western General did not become an ERISA fiduciary simply by performing administrative functionsand claims processing within a framework of rules established by the plan especially when the ultimate decision belonged to the plan. 32 F.3d at 1124-25. Similarly, Carpenters selected the features of the plan and charged Caremark with the ongoing ad ministration of the formulary and drug-switching programs. But Carpenters retained final authority over the content of the formulary
and the administration of the drug-switching programs.
Caremark lacked the ultimate discretionary authority to administer these programs and thus was not a fiduciary for these purposes.

Carpenters seeks to minimize the import of the provisions retaining sole authority for itself by contending
that Caremark exerted considerable influence over the initial formulary selection and “complete control” over the ongoing content of the form ulary and the drug-switching program. The express language of the contracts

contradicts this characterizati on of Caremark’s authority over these programs. Carpenters adopted Caremark’s pre-24 No. 05-3476

existing formulary as a feature of its plan. Under Pegram

, the formulary program and drug-switching program were plan features not subjec t to fiduciary standards. Pegram

, 530 U.S. at 226-27. Caremark was not a fiduciary at the time it was engaged in arm’s-length negotiations with Carpenters, prior to entering into any of the agreements.There is no fiduciary liability for acts that precede fiduciary status. Pegram , 530 U.S. at 227. See also Associates In Adolescent Psychiatry, S.C. v. Home Life Ins. Co. , 941 F.2d 561, 569-70 (7th Cir. 1991) (providers of professional services who are advising plans are generally not ERISA fiduciaries unless their services give them decision-making authority over the plan or plan assets). As for any ongoing changes to the formulary or specific decisions by Caremark in ad ministering the drug-switching program, Carpenters retain ed for itself the final authority to administer these programs on an ongoing

basis. Under Klosterman , Caremark was thus not a fiduciary for this purpose. Klosterman , 32 F.3d at 1124-25.

III.

For the reasons stated above, Caremark was not acting as a fiduciary in any of the relevant actions detailed in the complaint. Accordingly, Carpenters may not sustain a claim against Caremark for breach of fiduciary duty
under ERISA.

A FFIRMED

. A true Copy:

Teste:

________________________________ Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA-02-C-0072—1-19-07