Court Opinion

ID: 2709579
Source: CourtListenerOpinion
Date Created: 2014-08-05 15:17:36.407433+00
Date Added: 2024-06-11T10:01:27.629809
License: Public Domain

In the

 United States Court of Appeals
                For the Seventh Circuit

No. 12-2977

U NITED F OOD AND C OMMERCIAL
W ORKERS U NIONS AND E MPLOYERS
M IDWEST H EALTH B ENEFITS F UND,
individually and on behalf of all
others similarly situated,
                                                 Plaintiffs-Appellants,
                                   v.

W ALGREEN C O ., P AR
P HARMACEUTICAL C OS., INC., and
P AR P HARMACEUTICAL, INC.,
                                                Defendants-Appellees.

              Appeal from the United States District Court
         for the Northern District of Illinois, Eastern Division.
            No. 12 C 204—Samuel Der-Yeghiayan, Judge.

       A RGUED JANUARY 24, 2013—D ECIDED JULY 8, 2013

 Before M ANION and W OOD , Circuit Judges, and B ARKER,
District Judge. 


 The Honorable Sarah Evans Barker, United States District
Court for the Southern District of Indiana, sitting by designation.
2                                              No. 12-2977

   W OOD , Circuit Judge. The United Food and Commercial
Workers Unions and Employers Midwest Health Benefits
Fund (the Fund), an employee benefit plan that pro-
vides healthcare benefits to its participants, is convinced
that the Walgreen Company (Walgreens) fraudulently
overcharged it and other insurance providers by filling
prescriptions for several generic drugs with a dosage
form that differed from, and was more expensive than,
the dosage form prescribed to the customer. The Fund
filed suit against Walgreens, as well as Par Pharmaceutical
Companies and Par Pharmaceutical, Inc. (collectively
Par), which manufactured the generic drugs at issue,
alleging that the defendants engaged in a scheme to
defraud insurers. This scheme, the Fund concludes,
violated the Racketeer Influenced and Corrupt Organiza-
tions Act (RICO), 18 U.S.C. §§ 1961-1968. Finding that
the complaint failed to state a claim upon which relief
could be granted, the district court dismissed the case.
  We affirm. While the complaint contains ample allega-
tions of misconduct by both Walgreens and Par, it falls
short of plausibly alleging the type of concerted activity
undertaken on behalf of an identifiable enterprise neces-
sary to a successful RICO claim. RICO is not violated
every time two or more individuals commit one of the
predicate crimes listed in the statute. In the end, that is
all that this complaint alleges, and thus the action was
properly dismissed.

                             I
  As this case reaches us on appeal from a motion to
dismiss, we accept all facts alleged in the complaint as
No. 12-2977                                               3

true. Par is the fifth-largest generic drug manufacturer
in the United States. In the late 1990s it began to manufac-
ture a generic version of the drug ranitidine, which is
marketed under the brand name Zantac and which
went off-patent in 1997. Although ranitidine is most
commonly prescribed as either 150-mg or 300-mg tablets,
Par (as well as several other manufacturers) manufactured
ranitidine in capsule form. While tablets and capsules of
a given drug contain the same active ingredient, the
federal Food and Drug Administration (FDA) does not
consider the different dosage forms to be “bioequivalent.”
(It has held this position since at least December 2000.) As
a result, a prescription for ranitidine tablets may not be
filled with ranitidine capsules (or vice versa) without
authorization from the prescribing physician.
  In the early 2000s Par began to market and distribute
a generic version of fluoxetine, which is sold under the
brand name Prozac and which went off-patent in 2001.
Most fluoxetine is prescribed as 10-mg or 20-mg capsules;
Par, however, had marketing and distribution rights to
10-mg and 20-mg fluoxetine tablets. As with ranitidine,
prescriptions for fluoxetine capsules may not be filled
with fluoxetine tablets in the absence of a physician’s
authorization.
  Although Par’s ranitidine capsules and fluoxetine
tablets were considerably less popular than the alterna-
tive dosage forms, they had the potential to be much
more lucrative. To understand why, a brief discussion
of pharmacy reimbursement practices is in order. When
a patient seeking to fill a prescription has insurance,
4                                            No. 12-2977

the pharmacy recoups most of the cost of filling that
prescription from the insurer. The insurer could be the
government, a private insurance company, or, as in
this case, a welfare-benefit fund. Each insurer (or, more
generically, Third-Party Payor (TPP)) establishes the
rates at which it will reimburse the pharmacy. For
generic drugs that are available from multiple sources
(most of them), the reimbursement rate is calculated as
a Maximum Allowable Cost, which represents the maxi-
mum amount that the TPP will reimburse the pharmacy
for a given drug. Maximum Allowable Costs are set
based on price information gathered in the marketplace.
They reflect changing market conditions and bear a
reasonable relation to drugs’ actual costs. If, however,
there are too few manufacturers of a given generic to
determine a Maximum Allowable Cost, the reimburse-
ment rate is set using an alternative measure: the
Average Wholesale Price. Average Wholesale Prices are
benchmark prices published by drug manufacturers;
they often bear little to no relation to a drug’s cost.
  Unsurprisingly, TPP reimbursement rates are substan-
tially higher when based on the Average Wholesale
Price than when based on the Maximum Allowable
Cost. A pharmacy makes more money on prescriptions
reimbursed using Average Wholesale Prices, and this in
turn enables the drug manufacturer to command higher
prices for those drugs. Because so few manufacturers
made either ranitidine capsules or fluoxetine tablets,
reimbursement rates for those dosage forms of those
drugs were calculated using the favorable Average Whole-
sale Price method. By contrast, the more popular
No. 12-2977                                              5

ranitidine tablets and fluoxetine capsules were reim-
bursed according to the Maximum Allowable Cost method.
  Par, realizing that the disparity between reimburse-
ment formulas for the different dosage forms of ranitidine
and fluoxetine presented an opportunity for profit,
crafted a marketing pitch aimed at convincing pharmacies
to purchase the more expensive dosage forms of each
one. In presentations to pharmacies—including Walgreens,
but also others, such as Caremark and CVS—Par high-
lighted the millions of dollars in additional profits the
pharmacies stood to earn if they could find a way to fill
their ranitidine and fluoxetine prescriptions with dosage
forms reimbursed under the generous Average Wholesale
Price formula. These presentations implied (at the
least) that the pharmacies could legally fill prescriptions
written for one dosage form with an alternative dosage
form without seeking approval from the prescribing
physician, a suggestion that directly contravened the
FDA’s position that the tablets and capsules are not
bioequivalent.
   Par’s pitch evidently worked on Walgreens. Beginning
in 2001, Walgreens reconfigured its internal computer
systems so that all prescriptions for ranitidine were
filled with capsules and all prescriptions for fluoxetine
were filled with tablets, regardless of the dosage form
actually prescribed. The Fund alleges that Walgreens’s
pharmacists implemented this switch without con-
sulting the prescribing physicians. Worse, Walgreens’s
director of pharmacy marketing, Tom Lawlor, falsely
represented in an email to company pharmacists that
6                                             No. 12-2977

Par’s ranitidine capsules were “AB-rated generic prod-
ucts” and thus could be substituted for ranitidine
capsules under FDA regulations. Worse still, Walgreens
continued its policy of automatically switching dosage
forms even after receiving a rebuke from the Illinois
Department of Public Health in July 2001, warning that
the statement that ranitidine capsules were AB-rated
generics was “false and deceptive.”
   Walgreens’s dosage-form-switching practices eventu-
ally attracted scrutiny from a number of states’ attorneys
general and the Justice Department. In September 2004,
acting on the advice of counsel, Walgreens ended the
switching program for all new prescriptions and resumed
filling ranitidine and fluoxetine prescriptions with the
dosage form specified by the physician. Walgreens con-
tinued to fill existing prescriptions with the more ex-
pensive dosage forms for some unspecified period of
time. Lawlor explained in an email that this change in
policy was implemented “quietly.” In order to offset the
revenue loss from the termination of the switching pro-
gram, Walgreens negotiated with Par to receive price
reductions on ranitidine and fluoxetine.
  In 2008, at the request of the United States, the court
unsealed a qui tam complaint against Walgreens. The
complaint alleged that the switching program resulted
in overcharges to the federal government and various
states in violation of both the False Claims Act (FCA), 31
U.S.C. §§ 3729-3731, and related state laws. See Com-
plaint, United States ex rel. Lisitza v. Walgreens Co.,
No. 03-cv-00744 (N.D. Ill. Jan. 31, 2003). Walgreens paid
No. 12-2977                                                 7

$35 million to the federal government, 46 states, and
Puerto Rico to settle the claims. Walgreens to Pay $35 Million
to U.S., Forty-Six States & Puerto Rico to Settle Medicaid
Prescription Drug Fraud Allegations, D EP’T OF JUSTICE
(June 4, 2008), http://www.justice.gov/opa/pr/2008/June/
08-civ-496.html. In 2011, a similar qui tam complaint
against Par was unsealed. See Second Amended Com-
plaint, United States ex rel. Lisitza v. Par Pharm. Co., No.
06-cv-06131 (N.D. Ill. July 19, 2011). That case is ongoing.
  Relying largely on the pleadings and documents from
the qui tam cases, the Fund filed this class action lawsuit
in January 2012, alleging that Walgreens and Par con-
ducted an association-in-fact RICO enterprise for the
purpose of overcharging insurers by switching dosage
forms of ranitidine and fluoxetine. Walgreens and Par
moved to dismiss for failure to state a claim. The
district court granted the motion after concluding,
among other things, that the Fund failed to allege suffi-
ciently that Walgreens and Par conducted the affairs of
an enterprise within the meaning of 18 U.S.C. § 1962(c).
The Fund appeals.

                              II
  The district court identified numerous deficiencies in
the Fund’s complaint, each of which would provide an
independent basis for dismissal. We need not be so com-
prehensive. Because we agree with the district court
that the complaint fails to allege that Walgreens and Par
“conduct[ed]” the affairs of an “enterprise,” 18 U.S.C.
8                                                No. 12-2977

§ 1962(c), we see no need to address the district court’s
alternative bases for dismissal.
  We review de novo whether the Fund’s enterprise al-
legations meet the pleading standards of Rule 8(a) of the
Federal Rules of Civil Procedure. St. John’s United Church
of Christ v. City of Chi., 502 F.3d 616, 625 (7th Cir. 2007).
To state a claim sufficient to survive a Rule 12(b)(6)
motion to dismiss, the Fund’s complaint “must contain
sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)). “Plausibility” is not a synonym
for “probability” in this context, but the plausibility
standard does “ask[] for more than a sheer possibility
that a defendant has acted unlawfully.” Id.; see also
Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010).

                              A
   Section 1962(c) makes it “unlawful for any person
employed by or associated with any enterprise en-
gaged in, or the activities of which affect, interstate or
foreign commerce, to conduct or participate, directly
or indirectly, in the conduct of such enterprise’s affairs
through a pattern of racketeering activity.” Critically for
our purposes, to state a claim under this section, a plain-
tiff must identify an “enterprise.” See, e.g., Slaney v. Int’l
Amateur Athletic Ass’n, 244 F.3d 580, 597 (7th Cir. 2001).
The statute defines the term “enterprise” to include “any
individual, partnership, corporation, association, or
No. 12-2977                                                 9

other legal entity, and any union or group of individuals
associated in fact although not a legal entity.” 18 U.S.C.
§ 1961(4). The Supreme Court has held on multiple oc-
casions that this definition is to be interpreted broadly.
See, e.g., Boyle v. United States, 556 U.S. 938, 944 (2009);
Nat’l Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 257
(1994). Most recently, it clarified in Boyle that an “associa-
tion-in-fact” enterprise need not have any structural
features beyond “a purpose, relationships among those
associated with the enterprise, and longevity sufficient
to permit these associates to pursue the enterprise’s
purpose.” 556 U.S. at 946.
   Despite the expansive nature of this definition, it is
not limitless. Section 1962(c) requires a plaintiff to
identify a “person”—i.e., the defendant—that is distinct
from the RICO enterprise. See Cedric Kushner Promotions,
Ltd. v. King, 533 U.S. 158, 161 (2001) (“[T]o establish
liability under § 1962(c) one must allege and prove the
existence of two distinct entities: (1) a ‘person’; and (2) an
‘enterprise’ that is not simply the same ‘person’ referred
to by a different name.”); Baker v. IPB, Inc., 357 F.3d 685,
692 (7th Cir. 2004) (“Without a difference between the
defendant and the ‘enterprise’ there can be no violation
of RICO.”). And that “person” must have “conducted or
participated in the conduct of the ‘enterprise’s affairs,’ not
just [its] own affairs.” Reves v. Ernst & Young, 507 U.S. 170,
185 (1993) (emphasis in original); see also Jay E. Hayden
Found. v. First Neighbor Bank, N.A., 610 F.3d 382, 389 (7th
Cir. 2010); Crichton v. Golden Rule Ins. Co., 576 F.3d 392,
399 (7th Cir. 2009). (Alleging a “pattern of racketeering
activity” imposes further requirements still, though we
10                                                No. 12-2977

may set those aside, as we need not reach this aspect of
the district court’s decision.)
   The Fund points to Walgreens and Par as the “persons”
it has identified for purposes of RICO, and it defines
the “enterprise” as an entity consisting of Walgreens, Par,
and management personnel from the two companies.
According to the complaint, the members of the enter-
prise associated for the common purpose of profiting
from illegally substituting Par’s more expensive dosage
forms of ranitidine and fluoxetine for the cheaper
dosage forms actually prescribed. The complaint
further alleges that communications between the parties,
as well as Walgreens’s implementation of the illegal
dosage-form-switching program using Par’s pills, estab-
lishes relationships among the enterprise’s members.
The scheme’s multiyear duration, it concludes, estab-
lishes longevity. The Fund asserts that the enterprise
was known as “Walgreens/Par/Hrp” (also referred to as
the “Hrp enterprise”). It supports this terminology
based on Par’s use of this label in a PowerPoint slide
accompanying a presentation it made to Walgreens
regarding ranitidine.
   Before Boyle, we would have had little trouble con-
cluding that these allegations were insufficient to plead
the existence of an association-in-fact distinct from
Walgreens and Par. See, e.g., Stachon v. United Consumers
Club, Inc., 229 F.3d 673, 675-76 (7th Cir. 2000); Richmond
v. Nationwide Cassel L.P., 52 F.3d 640, 645-46 (7th Cir. 1995).
Boyle, however, took a liberal view of what it takes to be
an association-in-fact for RICO purposes; it held that
No. 12-2977                                               11

such an association had to have certain structural
features (a purpose, relationships among those associated
with it, and adequate longevity), that the structure had
to be ascertainable, but that no additional structural
requirements could be inferred from the statute. Even if
we were to assume, however, that the complaint suffi-
ciently pleads the existence of an association-in-fact enter-
prise under Boyle, it does not adequately allege that
Walgreens and Par were conducting the affairs of this “Hrp
enterprise,” as opposed to their own affairs. See Reves,
507 U.S. at 185. The Fund details various communica-
tions between Par and Walgreens in which Par proposed
the drug-switching program and Walgreens agreed to
implement it. It also describes actions taken by each
company—namely, that Par manufactured the expensive
dosage forms and that Walgreens rigged its internal
computer systems automatically to switch all ranitidine
and fluoxetine prescriptions to the expensive dosage
forms. But nothing in the complaint reveals how one
might infer that these communications or actions were
undertaken on behalf of the enterprise as opposed to on
behalf of Walgreens and Par in their individual
capacities, to advance their individual self-interests. The
complaint does not allege, for instance, that officials from
either company involved themselves in the affairs of
the other. Par personnel were not responsible for repro-
gramming Walgreens’s computer system, and Walgreens
personnel were not involved in Par’s manufacturing
process. Nor does the complaint anywhere suggest that
profits from the illegal drug-switching scheme were
siphoned off to the Hrp enterprise or to individual enter-
12                                              No. 12-2977

prise members. And although it would be possible to
envision a complaint that accused individual corporate
personnel of improperly hijacking the business operations
of their companies for illicit ends, see Jay E. Hayden, 610
F.3d at 389, the Fund does not assert this either. Instead,
the activities the complaint describes are entirely con-
sistent with Walgreens and Par each going about its own
business, with Par manufacturing generic drugs and
marketing its products to pharmacies, and Walgreens
purchasing drugs and filling prescriptions.
  To be sure, Walgreens and Par were not strangers.
Representatives from the companies regularly communi-
cated with one another, and Walgreens purchased its
generic ranitidine and fluoxetine from Par. This type of
interaction, however, shows only that the defendants
had a commercial relationship, not that they had joined
together to create a distinct entity for purposes of improp-
erly filling ranitidine and fluoxetine prescriptions. See
Crichton, 576 F.3d at 399-400 (plaintiff could not show
that defendant conducted the affairs of an associa-
tion-in-fact enterprise by describing a “garden variety”
marketing arrangement between defendant and its sup-
posed partner in the enterprise). Although the Fund’s
allegations do not entirely rule out the inference that
Walgreens and Par were acting in concert on behalf of a
shadow enterprise while maintaining the outward ap-
pearance of a normal commercial relationship, there is
ultimately not enough in this complaint to elevate
that inference from a “sheer possibility” to something
that is “plausible on its face.” Iqbal, 556 U.S. at 678.
No. 12-2977                                              13

   Nor does the fact that Walgreens’s and Par’s ac-
tivities were by all appearances illegal indicate that the
companies were acting on behalf of a distinct enterprise.
Cf. Baker, 357 F.3d at 691 (plaintiffs failed adequately to
allege that defendant was conducting the affairs of an
enterprise when “[t]he nub of the complaint is that [the
defendant] operates itself unlawfully”) (emphasis in
original). A corporation, after all, is perfectly capable of
breaking the law on its own behalf. The complaint de-
scribes conduct that might plausibly state a claim for
fraud (among other things) against either defendant, but
RICO does not penalize parallel, uncoordinated fraud.
Accord Boyle, 556 U.S. at 947 n.4 (RICO violation would
not be established by a showing that various defendants
engaged in RICO predicate crimes “independently
and without coordination”). The Fund cannot bootstrap
its allegations of illegal conduct into allegations that
Walgreens and Par conducted the affairs of an enterprise
by asking us to infer that because the activities were
illegal, they therefore must also have been coordinated
activity undertaken on behalf of the Hrp enterprise.
  The Fund asks us to assume that Walgreens and Par
were acting on behalf of the supposed Hrp enterprise
“because neither Defendant could have accomplished
the [drug-switching] scheme[] on its own.” The Fund
reasons that because Walgreens does not manufacture
drugs and Par does not fill prescriptions, neither company
could have implemented the drug-switching scheme
without the other. (This assumes, perhaps optimistically,
a dearth of other market actors who might have been
tempted to earn extra money this way.) It relies on
14                                               No. 12-2977

the Third Circuit’s decision in In re Insurance Brokerage
Antitrust Litigation, 618 F.3d 300 (3d Cir. 2010), for the
proposition that “if defendants band together to commit
[violations] they cannot accomplish alone . . . then
they cumulatively are conducting the association-in-fact
enterprise’s affairs, and not [simply] their own affairs.” Id.
at 378 (alterations and emphases in original) (internal
quotation marks omitted). The RICO allegations in Insur-
ance Brokerage identified an association-in-fact enter-
prise consisting of an insurance broker and various insur-
ers formed with the aim of reaping supracompetitive
profits on insurance contracts through a system of bid
rigging. Id. at 376. The district court expressed doubt
that the defendants were participating in the affairs of
an enterprise, as opposed to their own affairs, because
“each entity was engaging in such transactions solely
for the purpose of furthering its own goals.” In re Ins.
Brokerage Antitrust Litig., 2007 WL 2892700, at *31 (D.N.J.
Sept. 28, 2007). The Third Circuit saw things differently,
concluding that regardless of whether “the interests of
the enterprise are congruent with those of its members,”
one could infer that the defendants were acting on
behalf of the enterprise from the fact that their
bid-rigging practices “allowed them to deceive insurance
purchasers in a way not likely without [] collusion.”
618 F.3d at 378.
  The Fund’s reliance on Insurance Brokerage is inapt. For
one thing, it is far from obvious that Walgreens could not
have accomplished the drug-switching scheme on its
own by simply purchasing expensive dosage forms
from Par and other manufacturers (of which there were
No. 12-2977                                               15

apparently several) and filling prescriptions with
these expensive dosage forms on its own initiative. More-
over, in Insurance Brokerage, the defendants could not
have achieved their goals—namely, fixing a competitive
bidding process in order to win insurance contracts
at inflated prices—without cooperation that fell outside
the bounds of the parties’ normal commercial relation-
ships. Companies competing for business in a legitimate
market that assigns business through bidding do not
disclose their bids to one another in advance. By contrast,
while it is true that Walgreens does not make drugs
and Par does not fill prescriptions, and that the two
companies must therefore “cooperate” in order for drugs
to reach consumers, such cooperation describes virtually
every prescription pharmaceutical distribution chain.
The allegations in the complaint do not indicate how
the cooperation in this case exceeded that inherent in
every commercial transaction between a drug manufac-
turer and pharmacy, and without such an indication,
we cannot find a basis for inferring that Walgreens and
Par were conducting the enterprise’s affairs.

                             B
  The Fund’s failure adequately to allege that Walgreens
and Par conducted the affairs of an enterprise is also
fatal to its RICO conspiracy claim. Proof of a conspiracy
within the scope of RICO requires a showing that: “ ‘(1) the
defendant agreed to maintain an interest in or control of
an enterprise or to participate in the affairs of an enter-
prise through a pattern of racketeering activity, and (2) the
16                                              No. 12-2977

defendant further agreed that someone would commit
at least two predicate acts to accomplish those goals.’ ”
DeGuelle v. Camilli, 664 F.3d 192, 204 (7th Cir. 2011) (quot-
ing Slaney, 244 F.3d at 600); see 18 U.S.C. § 1962(d). Just
as the complaint fails to allege that Walgreens and Par
acted on behalf of the Hrp enterprise, it equally fails to
allege that Walgreens and Par agreed to act on behalf of
the enterprise. We have explained that “the touchstone
of liability under § 1962(d) is an agreement to participate
in an endeavor which, if completed, would constitute a
violation of the substantive statute.” Goren v. New Vision
Int’l, Inc., 156 F.3d 721, 732 (7th Cir. 1998). Having failed
to plead facts that would establish a violation of
Section 1962(c), the Fund cannot state a claim for conspir-
acy under Section 1962(d) based on those same facts.
See Stachon, 229 F.3d at 677.
  The judgment of the district court is A FFIRMED.

                            7-8-13