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

CHICAGO DISTRICT COUNCIL OF

CARPENTERS WELFARE FUND,

Plaintiff-Appellant,

v.

CAREMARK, INCORPORATED and

CAREMARK RX, INCORPORATED,

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—DECIDED JANUARY 19, 2007

____________

Before ROVNER, EVANS and SYKES, Circuit Judges.

ROVNER, 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 matter jurisdiction. Carpenters does

not appeal from the dismissal of the state law claims.

2 Caremark Rx, Inc. is not a party to any of the three contracts.

Rather, it is the parent corporation 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 on

the 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. Because 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 obtain

brand name or generic prescription drugs for a small copayment. Carpenters pays the rest 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 Management (“PBM”) companies.2

There are three such contracts 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” and
No. 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 Caremark that 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 with retail pharmacies and drug

manufacturers on behalf of Carpenters. Caremark claims

only to have agreed to provide the stated benefits at prices

determined 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, those 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 the agreement. To the extent

that the contracts contradict the Complaint, the contracts trump the facts or allegations 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 (7th

Cir. 1991) (in determining the sufficiency of the complaint, the court may rely on exhibits to the complaint

whenever the allegations of the complaint are materially inconsistent with those exhibits). Under each of

these contracts, Caremark was obliged to provide a
4 No. 05-3476

variety of services to the covered union members. For

example, Caremark was obliged to provide a mail service pharmacy, access to a network of retail pharmacies,

claims processing, a formulary program, customer service

phone lines, and maintenance of records. Caremark

contracts with 55,000 retail pharmacies and operates

four automated and nineteen mail-order pharmacies in

order to process prescriptions for its clients. Each contract

also provided that Caremark was not a fiduciary as that

term 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 fiduciary 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 turn to the contracts to set

out the terms in each of these areas.

1. Drug Prices

Each contract contains a similar paragraph setting out

the costs associated with retail 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% for
No. 05-3476 5

brand-name drugs or (ii) HCFA MAC, as expanded by

Caremark, for generic substitutes, as appropriate, plus

a dispensing fee of $2.25, less the Covered Member copayment as established by [Carpenters]. The above

prices are based on the participation 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 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 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], electronically processed and dispensed

to a Covered Member through Caremark’s retail

pharmacy network, [Carpenters] 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 Member

copayment 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 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 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], electronically processed and dispensed to

a 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 reflect 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 the

average 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 the particular drug in a cash
No. 05-3476 7

transaction on the date the drug is dispensed as reported by the participating pharmacy to Caremark.

“HCFA” is the Health Care Financing Administration, a

federal agency that administers 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 avers

in 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 receive rebates from pharmaceutical manufacturers’ rebate programs.” Under the 1999

Contract, Caremark was similarly obliged to pay Carpenters a $1.50 rebate for mail order prescriptions and a $1.00

rebate for retail prescriptions filled except that no rebates

were due for generic prescriptions. As in the 1996 Contract, Caremark was not obliged 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 makers relating to the services

provided under the 1999 Contract. The 2003 Contract changed the amount due as rebates for each mail

order and retail prescription filled, 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. In the “Formulary Program”

provisions, the 2003 Contract also stated that:

Caremark may hold contracts with the manufacturers

of products covered under this Agreement and in

connection with such contracts, Caremark may have

a financial relationship with such manufacturers and

may receive rebates from such manufacturers.

Nothing in the 2003 Contract relieved Caremark of the

duty to pay rebates to Carpenters, even if the manufacturers deemed Caremark ineligible to receive rebates.

Carpenters argues that these 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 Carpenters’ 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 discretion in the management of its
No. 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. Caremark shall contact prescribers,

as appropriate, to obtain approval for substitution of

formulary drugs.

The 1999 Contract again required Caremark to provide

a supply of formulary brochures but this time the brochures were to be distributed directly to prescribers.

Caremark also agreed to contact prescribers, “as appropriate, to obtain approval for 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 union members upon request. The

2003 Contract contained additional provisions in the

formulary program section. We have already quoted

part of this paragraph in relation to the rebates, and we

repeat it here to place it in context:

[Carpenters] acknowledges that [Carpenters] has the

sole discretion and authority to determine the formulary for the Plan. Caremark may hold contracts with

the manufacturers of products covered under this

Agreement and in connection with such contracts,

Caremark may have a financial 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 [Carpenters]. 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 may

receive 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 Caremark to “contact prescribers, as

appropriate, to obtain approval 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 provisions, Caremark bears the

sole responsibility of deciding whether to try to persuade

a prescriber to switch a prescription to a different, therapeutically similar drug. Because 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 dismiss the ERISA claim on the

ground that the company was not an ERISA fiduciary

under any of the three contracts. The district court noted
No. 05-3476 11

that, in order to be considered an ERISA fiduciary,

Caremark must either (1) exercise discretionary authority or discretionary control respecting the management

of 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 fiduciary 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 the 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 which 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 choosing 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 contracts

required Caremark to pass through cost savings to Carpenters. Instead, the court ruled, the retail pharmacy

provisions obligated Caremark to charge Carpenters a

set price for each drug, a price that could only be changed

after further negotiations and agreement. Because the

prices set in the contracts were the result of arm’s-length

negotiations between Carpenters and Caremark, the
12 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 dealings 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 prices 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 administer the Plan.” In addition

to those general declarations of Carpenters’ authority

in 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 with respect to the formulary

program or the drug switching 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 Carpenters 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 Caremark. Accordingly, the court

dismissed Carpenters’ claim for 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 fiduciary under any of the contracts.

II.

On appeal, Carpenters argues that Caremark is an

ERISA fiduciary because Caremark has discretionary

authority (1) to negotiate with retailers the price that

Carpenters pays for prescription drugs on behalf of its

members and to unilaterally adjust 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 Carpenters on the initial content

of its formulary and then to unilaterally alter the formulary; and (4) to manage the drug switching program.

Carpenters also contends that Caremark’s disavowal of

its fiduciary status in the contracts 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 drawing all inferences in favor

of Carpenters, we review de novo whether 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. See 29 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 party 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 discretionary

authority or discretionary control respecting management of such plan or exercises any authority or control

respecting management or disposition of its assets, (ii) he

renders 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 660.4

 Caremark may be an ERISA

fiduciary for some purposes 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 for
No. 05-3476 15

drugs that union members obtain from retail pharmacies.

A thorough review of the contract 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 a

contract is unambiguous, the court may declare its meaning as a matter of law). In each contract, that price was

tied to a number fixed by neither Carpenters nor

Caremark. For example, the price depended sometimes on

average wholesale prices (“AWP”) as determined by a

national index. In some instances, 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 transaction on the date the drug

was dispensed as reported by the 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 those 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 transactions. And finally, Caremark was

in 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, nothing in any of the contracts

required Caremark to pass through any additional cost

savings it managed to negotiate with retailers.

Nor could Caremark increase the prices “unilaterally”

due to changes in the marketplace, as Carpenters con-
16 No. 05-3476

tends. Although each contract provided 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 somewhat puzzling provision in

each contract stating that “Caremark will use its best

commercially reasonable efforts to negotiate these rates

with existing pharmacies in [Carpenters’] network.” The

district court did not address what “rates” this provision

covered or what this provision meant. Carpenters cites

this provision as a source of discretionary authority for

Caremark, resulting in fiduciary duties. As we noted

above, Caremark could not negotiate AWP, usual and

customary charges or HCFA MAC. Carpenters argues

that Caremark was to negotiate 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 largely 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’s

length. 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 market power. Without such a

provision, Caremark was free to negotiate with retailers to
No. 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 to

Carpenters 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 to pocket the difference. This,

of course, is the very conduct that Carpenters alleges

was a breach of fiduciary duty. 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 are

generally 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 meaning 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 meant by “these rates.” Caremark

was now agreeing to use commercially reasonable efforts

to negotiate with pharmacies in Carpenters’ existing
18 No. 05-3476

network, i.e., the network of retailers that Carpenters

used before contracting with Caremark, so that Carpenters could pay these same rates when covered members used retailers in Carpenters’ existing network. This

is the most straight-forward reading of the provision.

Carpenters argues that the “commercially reasonable

efforts” provision applied broadly to require Caremark to

negotiate rates with Caremark’s own retail network. If

this is the case, and we think 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 to the 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 at the time it entered into the

contracts with Carpenters and later when the marketplace

changed. 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 with retailers. But nothing in

the contracts required Caremark to pass along all of the

savings. At most, this language required Caremark to

come to its negotiations with 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 than dealing directly with the

retailers. Caremark had many clients and could use this

volume to negotiate better prices with the retailers than a

single client could negotiate. Caremark could then pass

some of those savings on to clients like Carpenters and
No. 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 garner any additional savings

that Caremark could extract from retailers.

Each contract also included slight 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 pharmacies or in contract reimbursement rates for this retail network, pricing shall be

adjusted to reflect these changes.” This provision allowed

Caremark to seek a new pricing agreement with Carpenters if market changes increased Caremark’s cost of

dealing with the retailers. This 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 low 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 negotiate with retailers. But

nothing in any of the contracts 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 contracts, Caremark was not

obliged to pass along all of the savings it negotiated with

drug retailers. Failure to pass 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 in
20 No. 05-3476

the discussion. Although Caremark might have been a

fiduciary for some purposes, it was not a fiduciary for the

purposes named in this count of 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 fiduciary with respect to the

particular activity at issue). The district court correctly

concluded that Caremark was not a fiduciary for the

purpose of negotiating prices with drug retailers.

B.

Carpenters next argues that Caremark possessed

discretion to negotiate with drug manufacturers (as

opposed to retailers) 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. Because of this 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 certain

amount for prescriptions filled. The 1996 and 1999 Contracts relieved Caremark of the obligation to pay rebates

to Carpenters if Caremark was 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 requirement that Caremark pay

Carpenters a fixed amount of rebates on certain prescriptions filled. Carpenters complains 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 belongs 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 manufacturers. 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 prescriptions 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. Caremark was in no position to

unilaterally change the amount of 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 obligation if “for any reason”

Caremark was no longer eligible to participate in the drug

makers’ rebate programs. Carpenters’ complaint that

Caremark could negotiate other incentive payments and

work to eliminate its own eligibility for rebates (thereby

relieving Caremark of its duty to pay rebates to Carpenters) is a possibility that is contemplated under the

contracts. 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.6
22 No. 05-3476

6 (...continued)

was not collecting rebates from drug makers on behalf of

Carpenters. The contracts clearly specify that Caremark had an

independent contractual duty to pay rebates to Carpenters. See

supra Part I.A.2. Caremark was not 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 will address them together. The

formulary was the list of preferred drugs for the plan.

Carpenters adopted Caremark’s standard formulary with

each contract, in each instance generally retaining the

“sole authority to control and administer the Plan.” In the

2003 Contract, Carpenters specifically acknowledged

that it had the sole discretion 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 prescribers “as appropriate” and

obtain approval for substitution 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 for

the plan. Moreover, the court noted, every contract provided that Carpenters retained the sole authority to

control and administer the plan. As we noted above,

Caremark can be held to be a fiduciary only to the

extent 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 the
No. 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 his employer’s human resources

manager, and the plan retained 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 functions

and 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 administration 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 formulary and the drug-switching program. The express language of the contracts

contradicts this characterization 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 subject 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 administering the drug-switching program, Carpenters retained 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.

AFFIRMED.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—1-19-07