Source: https://casetext.com/case/chicago-v-caremark
Timestamp: 2019-03-25 12:26:32
Document Index: 260758765

Matched Legal Cases: ['§ 1106', '§ 1002', '§ 1002', '§ 1106', '§ 1002', 'art 1']

Chicago v. Caremark, 474 F.3d 463 | Casetext
Chicago v. Caremark
474 F.3d 463 (7th Cir. 2007)
ReadReadAttorney AnalysesAnalyses0lockCiting BriefsBriefs20lockCiting CasesCiting Cases58
Chicagov.Caremark
United States Court of Appeals, Seventh CircuitJan 19, 2007
Kenneth P. Ross (argued), Coleman Associates, Chicago, IL, for Plaintiff-Appellant.
Robert H. Griffith (argued), Foley Lardner, Chicago, IL, for Defendants-Appellees.
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"). The district court determined that Caremark was not an ERISA fiduciary and therefore granted Caremark's motion to dismiss. We affirm.
Carpenters also brought two state law claims against Caremark, one for breach of contract and one for violating the Illinois 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.
We take the facts as presented in the Complaint. Carpenters provides health-care 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 co-payment. 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. 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 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."
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.
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 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.
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 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.
Provide a supply of Caremark's Prescription Formulary brochures which list Caremark's preferred brand-name 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 prescribes, 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 prescribes. Caremark also agreed to contact prescribes, "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:
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 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.
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.
We need not address this last point because we find that Caremark is not an ERISA fiduciary under any of the contracts.
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); Marshall-Mosby 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); Pegram v. Herdrich, 530 U.S. 211, 223-226, 120 S.Ct. 2143, 147 L.Ed.2d 164 (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, 120 S.Ct. 2143; Baker, 387 F.3d at 660. Caremark may be an ERISA fiduciary for some purposes and not for others. Baker, 387 F.3d at 660.
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.
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 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.
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 pass-through 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 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, ___ U.S. ____, 126 S.Ct. 2360, 165 L.Ed.2d 280 (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." 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 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.
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.
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 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.
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 negotiated 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.
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 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 1.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.
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 final arbiter of the content of the formulary and any drug-switching decisions. Caremark's decisions relating to the formulary 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.