Federal District Court Strikes Blow Against RICO Challenges to Drug Co-pay Coupons

By Jamie K. Wolszon & Alan M. Kirshenbaum ¬−

On June 3, 2013, the U.S. District Court for the Southern District of New York ruled that a drug company co-pay subsidy program did not violate the Racketeer Influenced and Corrupt Organizations Act (RICO) under theories of alleged mail and wire fraud.  Specifically, the court held that the defendants’ co-pay subsidy program did not cause misrepresentation at the point-of-sale, nor was there routine waiver of co-pays by the defendants.  Am. Fed‘n of State, Cnty. & Mun. Emps. Dist. Council 37 Health & Security Plan et al. v. Bristol-Meyers Squibb Co. et al., No. 12-cv-2238, (S.D.N.Y. June 3, 2013) (opinion), at 10.  In addition, the court ruled that the savings program did not constitute commercial bribery under the Robinson-Patman Act.  Id. at 34.

However, the court’s ruling allows the plaintiffs in the case, two union health plans, to file an amended complaint limited to a third theory that the defendant drug companies engaged in a pattern of mail and wire fraud and violated RICO because the companies reported benchmark prices (including Average Wholesale Price and Wholesale Acquisition Cost) for the drug to reporting agencies, and those benchmark prices did not take into account the reduced prices from the savings programs. 

This lawsuit is one of several filed by various union health plans alleging that brand-name drug-makers violated RICO and committed commercial bribery when they provided co-pay subsidy coupons to privately-insured consumers for branded prescription drugs.  We previously reported on these lawsuits here.  The new opinion already is affecting pending cases with similar allegations, as both plaintiffs and defendants have explicitly mentioned it in pleadings to the court.

Court dismisses with prejudice two of the three alleged RICO theories

Plaintiffs alleged that the co-pay savings program, offered jointly by the defendants, Bristol-Myers Squibb and Otsuka America Pharmaceutical, Inc., constitutes substantive RICO violations and a conspiracy to violate RICO.  To allege a RICO violation, plaintiffs must allege acts in furtherance of a pattern of racketeering activity.  Since the savings program was carried out using the mail and Internet, plaintiffs alleged mail fraud (18 U.S.C. § 1341) and wire fraud (18 U.S.C. § 1343). 

The plaintiffs advanced three separate fraud-based theories to attempt to establish their RICO case: (1) Defendants caused misrepresentations to be made at the point of purchase (misrepresentation theory); (2) Defendants committed fraud through the routine and hidden waiver of personal co-pay obligations (waiver theory); and (3) Defendants committed fraud by causing inaccurate price benchmarks to be published (benchmark theory).  Id. at 10.

Court rules against “misrepresentation” theory

Plaintiffs alleged that Defendants cause “misrepresentations to be made…at the time of the point of sale transaction…when…the pharmacist electronically charges the health benefit provider the full benchmark price without accounting for the existence of co-pay subsidies (as instructed by defendants).”  The court dismissed with prejudice this “misrepresentation” theory.  The court stated that there is no deception in a pharmacist’s point-of-sale assertions that insureds have satisfied their co-pay obligations.  Nor is there any duty for the brand-name drug company to disclose to the insurance plan the use of the subsidy, according to the court.  Moreover, the court added, the insurance plan’s reimbursement of the pharmacy is governed by contract, and does not depend on any point of sale representation by the pharmacy.  Id. at 11-13.

Court rules against “waiver” theory

Plaintiffs also alleged that “routine and hidden waiver of personal copay obligations is fraud.”  Id. at 13.  The court also dismissed with prejudice this “waiver” theory.  The court stated that the drug companies do not waive the co-pay.  To the extent that there was any waiver, it would be the pharmacy that waives the co-pay, according to the court.  But in fact, according to the court, there is no actual waiver of the co-pay; “[p]harmacies collect the full amount of the co-pay obligation every time, either from the patient or BMS,” the court stated.  Id. at 18.

Court dismisses without prejudice the “benchmark” theory

Plaintiffs also claimed that Defendants “engaged in an intentional scheme to defraud plaintiffs and the class by reporting benchmark prices to reporting agencies while failing to account for the routine waiver of co-pays.”  The court dismissed without prejudice this “benchmark” theory, allowing the plaintiffs to bring back the benchmark theory in an amended complaint.   Id. at 19.

Court rules that co-pay savings program does not constitute commercial bribery

In addition to the RICO claims, plaintiffs also alleged that the subsidy program violates an anti-trust law prohibition against commercial bribery.  Plaintiffs alleged that the savings program bribes consumers with co-pay subsidies to induce them to purchase branded drugs that cost their insurance plans more.  The court ruled that the subsidy program does not constitute commercial bribery because plaintiffs could not make a required showing that insureds owe a judiciary duty toward, or are agents of, their insurance plans.  Id. at 29-30.

BMS ruling is affecting pending cases involving other drug firms’ co-pay subsidy programs

This ruling comes on the heels of another court’s ruling dismissing similar RICO and anti-trust claims against Merck & Co. (Merck) for its co-pay subsidy program.  On April 29, 2013, U.S. District Court for the District of New Jersey Judge Michael A. Shipp granted Merck’s motion to dismiss on standing grounds.  See Plumbers & Pipefitters Local 572 Health & Welfare Fund v. Merck & Co., No. 12-cv-1379 (D.N.J. Apr. 29, 2013) (opinion).  Unlike the BMS ruling, Judge Shipp’s ruling dismissed all of the claims without prejudice, providing the plaintiffs an opportunity to amend those claims.  Plaintiffs filed a partial motion for reconsideration of that decision granting the motion to dismiss on May 13, 2013.  See Plumbers & Pipefitters Local 572 Health & Welfare Fund v. Merck & Co., No. 12-cv-1379 (D.N.J. May 13, 2013) (partial motion for reconsideration).  Merck filed an opposition to that partial motion for consideration on June 3, 2013.  See Plumbers & Pipefitters Local 572 Health & Welfare Fund v. Merck & Co., No. 12-cv-1379 (D.N.J. June 3, 2013) (opposition to partial motion to dismiss).

The BMS and Merck opinions are already affecting pending cases that raise similar allegations.  In another case with similar allegations in a federal district court in New Jersey, the court ordered, in response to a request made by plaintiff and agreed to by defendant, that the plaintiff has until August 16, 2013 to file an amended complaint to address the objections raised in the Merck and BMS opinions.  See Plumbers and Pipefitters Local 572 Health and Welfare Fund v. Novartis Pharmaceuticals Corp., 12-cv-1403 (D. N.J. June 24. 2013) (stipulation and order).

In another case with similar allegations in a federal district court in Illinois, the plaintiff notified the court that in light of the Merck and BMS opinions, it intends to file an amended complaint by July 15, 2013.  New England Carpenters Health and Welfare Fund v. Abbott Laboratories, No. 12-cv-1662 (N.D. Ill. June 14, 2013) (notice to file amended complaint).  Defendant Abbott responded that the plaintiffs cannot remedy the deficiencies in the allegations by amending the complaint.  New England Carpenters Health and Welfare Fund v. Abbott Laboratories, No. 12-cv-1662 (N.D. Ill. June 18, 2013) (response to notice to file amended complaint).  

Meanwhile, Defendant GlaxoSmithKline LLC. has requested that a federal district court in Pennsylvania allow it to submit the BMS decision as supplemental authority in its case with similar allegations.  New England Carpenters Health and Welfare Fund v. GlaxoSmithKline LLC., No. 12-cv-1191 (E.D. Pa. June 11, 2013) (second motion for leave to file supplemental authority).