Opinion ID: 183251
Heading Depth: 2
Heading Rank: 1

Heading: Pirelli's Fraud Claim

Text: Pirelli maintains that Walgreens' alleged scheme violated the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA). The ICFA makes it unlawful to use deception or fraud in the conduct of trade or commerce. [3] In addition to its general proscriptions, the act provides a right of action for a person who suffers actual damage as a result of a violation. 815 ILCS 505/10a(a). When a plaintiff in federal court alleges fraud under the ICFA, the heightened pleading standard of Federal Rule of Civil Procedure 9(b) applies. Davis v. G.N. Mortg. Corp., 396 F.3d 869, 883 (7th Cir.2005). The concepts involved are relatively straightforward, but this appeal implicates important wrinkles that merit discussion. Under Rule 9(b) of the Federal Rules of Civil Procedure, a party who alleges fraud or mistake must state with particularity the circumstances constituting fraud or mistake. As one district court has noted, the particularity requirement of Rule 9(b) is designed to discourage a sue first, ask questions later philosophy. Berman v. Richford Indus., Inc., 1978 WL 1104, at  (S.D.N.Y. July 28, 1978); see also Fidelity Nat'l Title Ins. Co. of N.Y. v. Intercounty Nat'l Title Ins. Co., 412 F.3d 745, 748-49 (7th Cir.2005) (the particularity requirement forces the plaintiff to conduct a careful pretrial investigation and minimizes the risk of extortion that may come from a baseless fraud claim); Kennedy v. Venrock Assocs., 348 F.3d 584, 594 (7th Cir.2003) (the particularity requirement protects defendants from privileged libel). In adding flesh to the bones of the word particularity, we have often incanted that a plaintiff ordinarily must describe the who, what, when, where, and how of the fraudthe first paragraph of any newspaper story. United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 854 (7th Cir.2009). Yet, because courts and litigants often erroneously take an overly rigid view of the formulation, we have also observed that the requisite informationwhat gets included in that first paragraphmay vary on the facts of a given case. Emery v. Am. Gen. Fin., Inc., 134 F.3d 1321, 1324 (7th Cir.1998) (flexibility when information lies outside of plaintiff's control); In re HealthCare Compare Corp. Secs. Litig., 75 F.3d 276, 285 (7th Cir.1996) (Ripple, J., dissenting) (noting that reasonable minds can and will differ on the adequacy of a given fraud averment); see also Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th Cir.1993) (What constitutes `particularity' will necessarily differ with the facts of each case. . . .). The twin demands of detail and flexibility, though in tension with one another, make sense in light of the competing purposes of the federal rules. Heightened pleading in the fraud context is required in part because of the potential stigmatic injury that comes with alleging fraud and the concomitant desire to ensure that such fraught allegations are not lightly leveled. At the same time, the adoption of the Federal Rules of Civil Procedure constituted a self-conscious departure from prior pleading regimes that emphasized form for form's sake. See also 2 James Wm. Moore, MOORE'S FEDERAL PRACTICE § 9.03[1][b], at 9-18 (3d ed.2010) (although plaintiffs are not absolutely required to plead the specific date, place, or time of the fraudulent acts, they still must use some alternative means of injecting precision and some measure of substantiation into their allegations of fraud); David Marcus, The Federal Rules of Civil Procedure and Legal Realism as a Jurisprudence of Law Reform, 44 GA. L. REV. 433, 471 (2010) (contending that Charles Clark, one of the primary drafters and exponents of the federal rules, used code- and common-law pleading instrumentally as the foil[s] for his procedural jurisprudence). Here is the wrinkle and the rub. A plaintiff who alleges fraud can provide all the detail in the world, but does not have unlimited leeway to do so on information and belief. When a plaintiff sets out allegations on information and belief, he is representing that he has a good-faith reason for believing what he is saying, but acknowledging that his allegations are based on secondhand information that [he] believes to be true. BLACK'S LAW DICTIONARY 783 (7th ed.1999); see also Pirraglia v. Novell, Inc., 339 F.3d 1182 (10th Cir.2003) (quoting BLACK'S LAW DICTIONARY 779 (6th ed.1990)). Although Pirelli did not use the phrase information and belief in its complaint, its allegations fall squarely within the definition of the term. See also Dey v. Cont'l Cent. Credit, 170 Cal. App.4th 721, 88 Cal.Rptr.3d 241, 244 n. 1 (2008) (allegations based on hearsay constitute information and belief). As counsel for Pirelli stated at oral argument, We're secondhand on a lot of this information . . . we're picking up from the qui tam complaint. . . adopting these allegations. That insight about Pirelli's allegations has consequences. Even though it sounds more like an ethical issue than an evaluation of the amount of detail in a complaint, we have ruled that a plaintiff generally cannot satisfy the particularity requirement of Rule 9(b) with a complaint that is filed on information and belief. Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992) (Even before Rule 11 was amended to require [reasonable pre-complaint inquiry], and a fortiori since, it was understood that the duty to plead the circumstances constituting fraud with particularity could not be fulfilled by pleading those circumstances on `information and belief[.]'). The general rule that fraud cannot be pled based on information and belief is not ironclad, however: the practice is permissible, so long as (1) the facts constituting the fraud are not accessible to the plaintiff and (2) the plaintiff provides the grounds for his suspicions. UniQuality, Inc. v. Infotronx, Inc., 974 F.2d 918, 924 (7th Cir. 1992); Bankers Trust, 959 F.2d at 684. Here, Pirelli's complaint skips the phrase information and belief and just provides the grounds for its suspicions: besides its preliminary look at its own reimbursement data, the complaint relies on the ground that other people have sued Walgreens and detailed their allegations. But when someone alleges fraud based on information and belief, not just any grounds will do. The grounds for the plaintiff's suspicions must make the allegations plausible, even as courts remain sensitive to information asymmetries that may prevent a plaintiff from offering more detail. See In re Rockefeller Center Props., Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir.2002); see also Lusby, 570 F.3d at 854 (concluding that the knowledge evinced in a qui tam relator's fraud complaint supported a plausible inference of fraud in that case). Although the federal rules are flexible in this realm, allegations based on the mere filing of other lawsuits generally will not provide much in the way of plausible corroboration of a plaintiff's fraud. But cf. Thornton v. Evans, 692 F.2d 1064, 1081 (7th Cir.1982) (holding, in a context different than Rule 9(b) but animated by similar concerns, that where the acts constituting fraud and conspiracy [were] peculiarly within the defendants' knowledge, it was permissible to base a verification statement on information from public filings in other lawsuits, published government reports, and information in the media). It is appropriate to accord limited corroborative weigh to allegations in another's lawsuit. To appreciate why, consider the 2003 qui tam case. We take judicial notice of the complaint in the qui tam case, even though only portions were cited in Pirelli's complaint. See 520 S. Mich. Ave. Assocs., Ltd. v. Shannon, 549 F.3d 1119, 1137 n. 14 (7th Cir.2008). Notably, the complaint of massive fraud in the qui tam case itself is based largely on information and belief. See, e.g., Compl. ¶¶ 20, 23, 36, United States ex rel. Lisitza v. Walgreens Co., No. 03-cv-744 (N.D.Ill. Jan. 31, 2003) (detailing particulars of how the fraudulent scheme worked). The whistleblower (relator in the statutory argot) who made the allegations did not actually observe the prescription-filling practices. Rather, he alleged that he was a temporary pharmacist who was placed by an employment agency at pharmacies other than Walgreens. He typically was placed at pharmacies somewhere in Illinois. When he would receive prescriptions that were transferred from Walgreens to one of the pharmacies to which he was temporarily assigned, the relator observed that Ranitidine prescriptions were filled by Walgreens with the more expensive capsules. According to the complaint, the relator asked about this and Walgreens pharmacists regularly indicated that Walgreens had set up its system so that [R]anitidine tablets were impossible to provide, and that all [R]anitidine prescriptions were filled as capsules despite what a physician had specifically prescribed. Id. ¶¶ 16-18. Details of what the relator learned, such as the timeframe during which Walgreens pharmacists would make the alleged confessions, whether the relator's observations were universal, or the geographic scope of the fraud, are not fleshed out. That is not to say that the complaint in that case would have been inadequate as to that plaintiff. The allegations in the qui tam case were made by a whistle-blower. The qui tam relator surely lacked access to reimbursement data from third-party payors that would have allowed him to provide additional circumstances corroborating the existence of fraud. But the same conclusion obviously would not apply to a third-party payor itself. It would be odd if a complaint like this, itself based on information and belief, could constitute plausible corroboration for a fraud claim brought by a third-party payor, without pointing to any meaningful indication that the plaintiff had been injured. Imagine the possibilities under a contrary approach: Case Number 1 in one jurisdiction could be filed on information and belief, which would prove insufficient. Yet, a second litigant could bring Case Number 2, alleging a fraud based on the complaint in Case Number 1 and survive a motion to dismiss, having done sufficient pre-complaint inquiry by doing little more than reading a daily law bulletin. The outcome would be odd indeed. The allegations in the ESI suit, too, are problematic, though for a slightly different reason. The matter pled in the ESI suit not only speaks to the existence of a fraud but attempts to address whether Pirelli was injured by a fraudulent scheme. ESI learned that an overwhelmingly large percentage of prescriptions for Ranitidine in primarily three geographic areas (none in Illinois) was filled with the more expensive, less prescribed dosage form of the drug. Those allegations tend to show that ESI was injured by a fraudulent scheme. The district court was correct not to place weight on the allegations in the ESI suit. Again, Pirelli is relying on the mere fact of someone else's allegations, which evince little pre-complaint inquiry on Pirelli's part and which speak to potential fraud in three other jurisdictions outside of Illinois in any event. A plaintiff pleading fraud on information and belief has to show that the missing pieces are outside of its control. Ackerman v. Nw. Mut. Life Ins. Co., 172 F.3d 467, 471 (7th Cir.1999). But Pirelli has not suggested (much less explained why) it does not have the requisite knowledge about its reimbursement data to bolster its complaint with information like that which apparently undergirds the ESI suit. Although Rule 9(b) is satisfied by a showing that further particulars of the alleged fraud could have been obtained without discovery, Emery, 134 F.3d at 1323, it strikes us that information like that pled in the ESI Suit would not be the product of discovery but of a more fulsome look at its own data. Because it is appropriate to give limited if any weight to the ESI suit, we turn to Pirelli's preliminary reimbursement data. Those data comprise an exhibit to Pirelli's complaint showing only that it reimbursed Walgreens for the more expensive form of Ranitidine for eleven of its members since 2001. (Only one of the members was in Illinois.) In addition, it reimbursed Walgreens for the more expensive form of Fluoxetine for two members since 2001. (Neither member was in Illinois.) Pirelli has not placed the data in context, however, and there is no reason to think that reimbursements for a total of eleven members nationwide is suspiciousamong all of the pharmacies with which Pirelli had dealings, did only Walgreens seek reimbursement for the more expensive form of Ranitidine over this period? Are prescriptions for that form so exceedingly rare that the mere fact of reimbursement should raise eyebrows? Pirelli has not pled or argued that the answer to these questions is yes, and common sense, cf. Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009) (courts should draw on judicial experience and common sense in determining whether a given claim is plausible), says that the answer to each is likely to be no. Nor has Pirelli provided overall reimbursement figures for these drugs. The fact that drug companies make multiple forms of drugs and that there may be therapeutic reasons for preferring one over another suggest that there are markets for different forms of the drugs. In short, the data, untethered as they are, cannot corroborate a fraud because their free-floating nature stymies any meaningful understanding of what the numbers mean. Absent a reason to think otherwise, the most plausible explanation for dispensing a well known, popular drug in any form is that it was prescribed. We see no reason why Pirelli, which apparently has mined its national data in search of these transactions, could not easily have done more. Something along the lines of the allegations underpinning the ESI suit would have improved Pirelli's pleading fortunes. But a better presentation of its data might have done the trick, too. Putting the numbers in context could tell us whether Pirelli also reimbursed Walgreens for the cheaper form of the drugs in the five-year period that Pirelli examined. To the extent it did not, the fraud claim would be supported; to the extent it did, it would be undermined. Or we could see if reimbursements for the more expensive forms of the drugs outstripped reimbursements for the cheaper versions in an unlikely way. Pirelli did not have to dance to ESI's comprehensive statistical tune, but did need to provide firsthand facts or data to make its suspicions plausible. Pirelli's de minimis showing tells us little and does not fulfill Rule 9(b)'s purpose of forc[ing] the plaintiff to do more than the usual investigation before filing his complaint. Ackerman, 172 F.3d at 469. In an effort to stave off dismissal, Pirelli does point to the subset of three members from its preliminary data, but those data, too, suffer from fatal shortcomings. Recall that Pirelli examined a subset of the twelve members on whose behalf it reimbursed Walgreens. Pirelli broke out the reimbursement patterns for three of its members who had Ranitidine prescriptions filled by both Walgreens and other pharmacies. The records show that Walgreens reimbursed Pirelli for the more expensive form of Ranitidine while other pharmacies were reimbursing Pirelli for the cheaper form. The reimbursements came during overlapping time periods, so it looks as if Walgreens was either intentionally switching prescriptions or as if there were clerical errors at work. The small- n analysis, however, is problematic, particularly given that we still lack any context for the data. The bare fact of inconsistent reimbursements for three patients in a five-year time period is not sufficient to raise allegations of fraud above the speculative level. Without knowing anything else about the overall numbers involved, the dearth of transactions does not tend to corroborate the existence of a fraud. Indeed, according to its complaint, Pirelli does business in at least California, Connecticut, Florida, Illinois, Louisiana, and Tennessee. For an entity with national reach, laboring under a system in which prescriptions are transferred from one pharmacy to another, see Compl. ¶ 16, United States ex rel. Lisitza v. Walgreens, No. 03-cv-744 (N.D.Ill. Jan. 31, 2003), one would expect some number of prescription-filling errors. See also TO ERR IS HUMAN: BUILDING A SAFER HEALTH SYSTEM 28-31 (Linda T. Kohn, Janet M. Corrigan, & Molla S. Donaldson, eds., 2000) (stating that medication related errors are among the most common types of errors and suggesting that their frequency may be higher than it appears because studies focus on adverse effects from medication errors rather than errors that cause no harm). Pirelli has offered us no reason to think that these three instances are representative of something broader, and its pleading betrays its own timidity on that score. The complaint characterizes the handful of transactions it identifies as suspiciously consistent with the unlawful scheme alleged in the qui tam case and the ESI suit. To satisfy the particularity requirement of Rule 9(b) when it made allegations based on information and belief, however, Pirelli needed corroboration, not just consistency. We do note, however, that both the district court and Walgreens overstated the extent of Pirelli's burden. In order to survive the motion to dismiss phase, Pirelli needed some firsthand information to provide grounds to corroborate its suspicions. A preliminary look at data, in theory, would have been an appropriate means of accomplishing that task. Had the data showed an unlikely pattern of reimbursements, it would have helped make Pirelli's claim plausible. Moreover, Walgreens is incorrect inasmuch as it suggests that Pirelli necessarily needed Illinois data to establish the existence of a fraudulent scheme. See Corley v. Rosewood Care Ctr., 142 F.3d 1041, 1051 (7th Cir.1998) (relaxed standard applies when the information constituting the fraud is in the hands of the defendant). Similarly, the district court was incorrect when it suggested that Pirelli needs to point to specific misrepresentations made by particular Walgreens staffers. Suppose Pirelli had enough reimbursements nationwide to indicate that something was awry but only limited reimbursements in any given jurisdiction. If Pirelli knew that reimbursements of the drugs skewed 75/25 in favor of the cheaper forms with non-Walgreens pharmacies, but the proportions were flipped with respect to Walgreens, it might have provided sufficient grounds to corroborate Pirelli's suspicion that Walgreens was engaged in fraud and that Pirelli was injured by the scheme. See Corley, 142 F.3d at 1050 (the particularity requirement of Rule 9(b) must be relaxed where the plaintiff lacks access to all facts necessary to detail his claim). But those are not the allegations hereand flexibility in the face of information asymmetries should not be conflated with whistling past the rules of civil procedure. As a proposed end run around the complaint's particularity problems, Pirelli argues that Rule 9(b) does not apply and that it should get the benefit of Rule 8 of the Federal Rules of Civil Procedure. Rule 8, which governs the allegations in most suits, substitutes particularity for the lesser showing of fair notice of the nature of the claim. Fed.R.Civ.P. 8(a)(2); Tamayo v. Blagojevich, 526 F.3d 1074, 1083 (7th Cir.2008). The argument is that the more forgiving pleading standards should apply because Pirelli is entitled to recover under the ICFA's bar on unfair practices that fall short of deception. 815 ILCS 505/2 (banning unfair or deceptive acts); Robinson v. Toyota Motor Credit Corp., 201 Ill.2d 403, 266 Ill.Dec. 879, 775 N.E.2d 951, 960-61 (2002) (discussing factors that make a practice unfair under the ICFA). When a claim alleges an unfair practice, the relaxed pleading standards of Rule 8 do indeed govern. Windy City Metal Fabricators & Supply, Inc. v. CIT Tech. Fin. Servs., Inc., 536 F.3d 663, 670 (7th Cir.2008). However, the practices alleged in Pirelli's complaint constitute fraudulent activity, and the dictates of Rule 9(b) apply to allegations of fraud, not claims of fraud. Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 507 (7th Cir.2007) (A claim that `sounds in fraud'in other words, one that is premised upon a course of fraudulent conductcan implicate Rule 9(b)'s heightened pleading requirements.). Here, the complaint alleges that Walgreens unlawfully and intentionally concealed from Pirelli's PBM, or misrepresented to it, the form of the drug that was prescribed and that Pirelli suffered damages as a result. That is fraud predicated on either a misrepresentation or an omission. See, e.g., United States v. Stephens, 421 F.3d 503, 507 (7th Cir.2005) (fraud embraces half-truths that the defendant knows to be misleading and which the defendant expects another to act upon to his detriment and the defendant's benefit); McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir.2000) (fraud includes misrepresentations, misleading omissions and embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain advantage over another by false suggestions or by the suppression of truth). The district court correctly concluded both that Rule 9(b) applied and that its dictates were not satisfied. In sum, Pirelli's allegations were insufficient. Although a plaintiff generally receives the benefit of reasonable inferences at the motion to dismiss phase, e.g., Bonte v. U.S. Bank, N.A., 624 F.3d 461, 463 (7th Cir.2010), a plaintiff who bases allegations of fraud on information and belief bears the burden of pleading plausible grounds for suspecting that the defendant was engaged in a fraudulent scheme. Pirelli did not shoulder that burden, and its complaint was appropriately dismissed as a result.