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United States v. Stephen L. Lafrance Holdings Inc.

United States District Court, N.D. Oklahoma

March 7, 2019

UNITED STATES OF AMERICA ex rel. J. DOUGLAS STRAUSER; STATE OF NEW JERSEY ex rel. J. DOUGLAS STRAUSER; STATE OF OKLAHOMA ex rel. J. DOUGLAS STRAUSER; and STATE OF TENNESSEE ex rel. J. DOUGLAS STRAUSER, Plaintiffs,
v.
STEPHEN L. LAFRANCE HOLDINGS, INC.; STEPHEN L. LAFRANCE PHARMACY, INC.; SUPER D DRUGS ACQUISITION CO.; DALECO, INC.; ARCADIA VALLEY DRUG CO.; MAY'S DRUG STORES, INC.; ELLISVILLE DRUG ACQUISITION CO.; JARCO PHARMACIES, INC.; JIM BAIN'S PHARMACY, INC.; S & W PHARMACY, INC.; CONSOLIDATED STORES, INC.; PHARM-MART PHARMACY OF WARREN, INC.; STEPHEN L. LAFRANCE, JR.; JASON LAFRANCE; and WALGREEN COMPANY, INC., Defendants.

          OPINION AND ORDER

          GREGORY K. FRIZZELL, CHIEF JUDGE.

         This is a qui tam action alleging violations of the False Claims Act (“FCA”), 31 U.S.C. §§ 3728-33, involving a scheme in which a pharmacy chain defrauded government health programs by reporting inflated “usual and customary” prices for prescription drugs. Before the court are two motions: the Motion to Dismiss [Doc. 87');">87');">87');">87');">87');">87');">87');">87] filed by defendants Walgreen Co. (“Walgreens”), Stephen L. LaFrance Holdings, Inc. (“LaFrance Holdings”), and Stephen L. LaFrance Pharmacy, Inc. (“LaFrance Pharmacy”)[1] and the Motion to Dismiss [Doc. 88] filed by defendants Arcadia Valley Drug Co., Daleco, Inc., Ellisville Drug Acquisition Co., Jarco Pharmacies, Inc., Stephen L. LaFrance, Jr., and Jason LaFrance. Both motions seek dismissal pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). The court addresses the motions together because each expressly incorporates the arguments of the other. For the reasons set forth below, both motions are denied.

         I. Procedural Background

         Relator J. Douglas Strauser filed his qui tam complaint in the United States District Court for the Western District of Oklahoma on May 14, 2013. [Doc. 1]. The case was sealed while the government investigated the allegations. During that time, relator filed his First Amended Complaint (“FAC ”). [Doc. 21]. On April 30, 2018, the United States file a Notice of Election to Decline Intervention. [Doc. 45]. Thereafter, the court in the Western District unsealed the case. [Doc. 48].

         On July 16, 2018, defendants filed the instant two motions to dismiss. [Doc. 87');">87');">87');">87');">87');">87');">87');">87; Doc. 88]. Relator filed a consolidated response in opposition to the two motions [Doc. 97], and each set of movants filed a reply [Doc. 100; Doc. 101]. On December 21, 2018, the court in the Western District transferred the case to this district pursuant to 28 U.S.C. § 1404(a). [Doc. 107].

         II. Allegations in the First Amended Complaint

         In 114 paragraphs spanning sixty-six pages, the FAC asserts four counts against fifteen defendants-thirteen corporations and two individuals. The following is a non-exhaustive summary of the allegations in the FAC.

         A. Relator's Background

         Relator is a licensed pharmacist who owned and operated pharmacies in Missouri from 1976 to 2008. [FA C ¶ 9]. On June 30, 2008, he sold his pharmacy business to an entity under common ownership and control with LaFrance Pharmacy. Relator worked as a pharmacist at one of the pharmacies he sold until June 2013. [Id.].

         B. Defendants

         LaFrance Holdings was founded by Stephen L. LaFrance, Sr. [FAC ¶ 20]. Between 2008 and the fall of 2012, LaFrance Holdings, along with LaFrance Pharmacy and Stephen L. LaFrance, Jr. and Jason LaFrance, owned and controlled a group of affiliated corporate entities (“the LaFrance affiliates”) that, in turn, collectively owned a chain of pharmacies that were operated and controlled as a single enterprise. [ FAC ¶ 21]. The LaFrance affiliates shared the brands USA Drug, Select Brand, Super D Drug, May's Drug, Med-X, and Drug Warehouse, and many of their pharmacies were known as USA Drug pharmacies, often with reference to one of the additional brands as well. [FAC ¶ 23].

         By September 17, 2012, LaFrance Pharmacy had consolidated under its ownership most if not all of the LaFrance affiliates, which at the time collectively owned approximately 144 pharmacies in Arkansas, Mississippi, Missouri, New Jersey, Oklahoma, and Tennessee. [ FA C ¶ 24]. On September 17, 2012, Walgreens purchased the stock of LaFrance Holdings for $438 million. Walgreens also purchased the assets or stock of certain affiliated entities. [Id.]. Walgreens thereby become the owner of LaFrance Pharmacy and acquired the USA Drug pharmacy business. [Id.].

         C. Regulatory Background

         1. Usual and Customary (“U&C”) Charge Requirements

         During the relevant period (2008 through May 2013), the federal government required each state to comply with a number of specific requirements as a condition of the state's obtaining federal reimbursement for a portion of the state's Medicaid expenditures. [ FA C ¶ 43]. One of these federal requirements related to the appropriate reimbursement for pharmaceutical drugs. [Id.]. The federal government would not reimburse a state for its Medicaid expenditures for prescription drugs unless the state complied with certain payment limits. [Id.]. To get federal reimbursement, the state was required to pay no more than the lowest of three separate rates, one of which was the dispending pharmacy's “usual and customary charge to the general public” for the drug. [Id. (citing 42 C.F.R. § 447.512(b))].

         To comply with federal regulations, state Medicaid programs enacted rules that required pharmacies to bill Medicaid no more than their “usual and customary charge to the general public” for prescription drugs. [FAC ¶ 44]. The states required providers, including pharmacies, that billed Medicaid to certify that they were in compliance with Medicaid program rules and instructions. [Id.]. The term “Usual and Customary charge” was understood throughout the pharmacy industry to refer to the amount a pharmacy charges cash-paying customers. [FAC ¶ 45].

         During the relevant period, federal law also mandated that pharmacies submitting claims electronically to Medicaid use a standard claim format for electronic transactions published by the National Council for Prescription Drug Programs (“NCPDP”), a pharmaceutical industry group that promoted standardization in the pharmaceutical industry. [FAC ¶ 46 (citing 45 C.F.R. § 162.1102(a)-(c))]. The NCPDP's standard format included a field for “usual and customary charge, ” which the format's instructions defined to mean the “[a]mount charged cash paying customers for the prescription exclusive of sales tax or other amounts claimed.” [ FA C ¶ 47]. The seven states in which USA Drug operated stores-Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma, and Tennessee-required pharmacies billing the state Medicaid program to complete the “usual and customary” field in the standard NCPDP format. [FAC ¶ 48].

         2. Medicare Part D Prescription Drug Benefit

         To deliver Medicare Part D benefits to Medicare enrollees, the Centers for Medicare & Medicaid Services (“CMS”) contracted with private insurance companies known as Part D Plan Sponsors (“Part D Sponsors”), which in turn offered enrollees a choice of prescription drug benefit plans. [FAC ¶ 63]. To receive payment from CMS, Part D Sponsors were required to agree to give Part D enrollees access to “negotiated prices” for covered drugs-that is, the prices that the Part D Sponsors negotiated with providing pharmacies. [FAC ¶ 64].

         To fund the Part D prescription drug benefit, CMS paid a Part D Sponsor a per-enrollee subsidy based on a bid submitted by the Part D Sponsor the previous year that reflected the Part D Sponsor's anticipated costs. [FAC ¶ 65]. At the end of each year, CMS “reconciled” the Part D Sponsor's actual allowable costs against the monthly subsidy payments to determine whether it needed to make further risk sharing, low-income subsidy, or reinsurance payments; or, conversely, whether the Part D Sponsor owed money to CMS. [FAC ¶ 66]. To calculate these additional payments, CMS needed information about every drug claim submitted to the Part D Sponsor by pharmacies, either directly or through a Pharmacy Benefit Manager (“PBM”) or other intermediary. [Id.].

         To submit claims for drugs dispensed to Medicare enrollees under Medicare Part D, a pharmacy had to individually contract with a Part D Sponsor that provided Part D benefits, or an intermediary organization. [FAC ¶ 68]. A pharmacy that entered one of these contracts was known as a “network pharmacy.” When negotiating these contracts, Part D Sponsors typically required the inclusion of U&C pricing clauses that prohibited network pharmacies from charging more for a covered drug than they would charge a cash-paying customer with no insurance coverage. [FAC ¶ 69]. Network pharmacies that submitted claims to Part D Plan Sponsors were required to certify to the accuracy, completeness, and truthfulness of the claim data and acknowledge that they would be used to seek federal funds. [FAC ¶ 70]. Network pharmacies were also required to use the NCPDP format to submit their charges to Part D Sponsors. [FAC ¶ 71].

         D. Walmart's Four-Dollar Generic Program

         In 2006, Wal-Mart Stores, Inc. (“Walmart”) launched a program that provided customers with four-dollar pricing for a thirty-day supply of any one of more than 300 commonly prescribed generic medications. [FAC ¶ 75]. In subsequent years, Walmart expanded the program so that it offered customers ten-dollar pricing for a ninety-day supply of many generic medications. [Id.]. Walmart made these same low prices available to Medicaid, charging Medicaid beneficiaries as well as cash-paying customers four dollars for a thirty-day supply and ten dollars for a ninety-day supply of the medications that were part of its program. [Id.].

         E. The Alleged Scheme

         To compete with Walmart, Steven L. LaFrance, Jr., Jason LaFrance, and the LaFrance affiliates that they controlled began requiring the USA Drug pharmacies to match the pricing of the Walmart program, but only for cash-paying customers. [FAC ¶ 75]. By the fall of 2008, USA Drug's management began requiring all of the USA Drug pharmacies to offer the four-dollar generic pricing to any cash-paying customer who requested it. [ FA C ¶ 77]. Once a customer had requested this pricing for a particular prescription, the pharmacy staff generally made a note in the patient's file to ensure the customer received the four-dollar generic pricing on all eligible generic drug prescriptions from that point forward. [Id.].

         USA Drug marketed its four-dollar generic pricing by notifying physicians' offices that its pharmacies offered this pricing and through word of mouth. [FAC ¶ 78]. By the 2009-2010 fiscal year, a majority of USA Drug's transactions with non-insured patients were made at four-dollar generic pricing for almost all medications on the Walmart list. [FAC ¶ 79]. For many of these drugs, more than ninety percent of USA Drug's transactions with non-insured customers were made at four-dollar generic pricing. [Id.].

         Between the fall of 2008 and the September 2012 purchase by Walgreens, USA Drug management supplied the pharmacies with a billing software program. [FAC ¶ 81]. USA Drug's corporate headquarters inputted parameters into this program that established a single price for every drug that management characterized as the “Usual & Customary price.” [Id.]. USA Drug's corporate headquarters instructed the pharmacies that they should override this pricing with four-dollar generic pricing for all cash-paying customers requesting it. [Id.]. To facilitate the ability of its pharmacists to override retail pricing with four-dollar generic pricing for cash-paying customers, USA Drug's computer systems were regularly updated with Walmart's current list of generic medications with four-dollar generic pricing. [FAC ¶ 82]. Whenever pharmacy staff accessed the computer screens that came up during the billing process, the billing software would inform the pharmacist or technician if the generic drug was on the Walmart four-dollar generic pricing list. Some pharmacies kept a paper copy of the Walmart list handy so they could readily determine whether any given generic drug was on the list. [Id.].

         When he was a pharmacist employed by USA Drug, relator repeatedly expressed to management his concern that USA Drug's failure to offer the four-dollar generic pricing to Medicaid would expose the company to potential liability if the company's pharmacies were to be audited. [ FA C ¶ 83-84].

         After Walgreens acquired ownership and control of LaFrance Pharmacy in September 2012, Walgreens, with actual knowledge of the USA Drug four-dollar generic pricing program, allowed the USA Drug pharmacies for a period of time to continue to utilize four-dollar generic pricing for cash-paying customers without making this pricing available to Medicare Part D and Medicaid. [FAC ¶ 86]. Walgreens' management directed the USA Drug stores that they would have to discontinue the four-dollar generic pricing for cash customers when the pharmacies' computer systems were converted to new systems used by Walgreens' stores. [Id.].

         In Count I, the FAC asserts a claim for violations of the federal False Claims Act, 31 U.S.C. § 3729(a). [FAC ¶¶ 103-08]. In Counts II, III, and I V, the FAC asserts claims for violations of the false claim statutes of New Jersey, Oklahoma, and Tennessee, respectively. [FAC ¶¶ 109-14].

         III. Standard for Motions to Dismiss

         A. Federal Rule of Civil Procedure 12(b)(6)

         In considering a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a court must determine whether the plaintiff has stated a claim upon which relief can be granted. A complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The plausibility requirement “does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence” of the conduct necessary to make out the claim. Id. at 556. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The court “must determine whether the complaint sufficiently alleges facts supporting all the elements necessary to establish an entitlement to relief under the legal theory proposed.” Lane v. Simon, 495 F.3d 1182, 1186 (10th Cir. 2007) (quoting Forest Guardians v. Forsgren, 478 F.3d 1149, 1160 (10th Cir. 2007)).

         B. Federal Rule of Civil Procedure 9(b)

         Pursuant to Fed.R.Civ.P. 9(b), “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” However, “[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Id. “Rule 9(b)'s purpose is ‘to afford [a] defendant fair notice' of a plaintiff's claims and the factual grounds supporting those claims.” George v. Urban Settlement Servs., 833 F.3d 1242, 1255 (10th Cir. 2016) (quoting Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997)). Thus, at a minimum, the complaint must allege “the time, place, and contents of the false representation, the identity of the party making the false statements and the consequences thereof.” United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 727 (10th Cir. 2006) (quoting Koch v. Koch Indus., 203 F.3d 1202, 1236 (10th Cir. 2000)).

         IV. Statutory Background

         Although Congress has repeatedly amended the False Claims Act, “its focus remains on those who present or directly induce the submission of false or fraudulent claims.” Universal Health Servs., Inc. v. United States ex rel. Escobar, 89');">89');">89');">89');">89');">89');">89');">89');">136 S.Ct. 1989');">89');">89');">89');">89');">89');">89');">89, 1996 (2016). “Th e F C A covers all fraudulent attempts to cause the government to pay out sums of money.” United States ex rel. Polukoff v. St. Mark's Hosp., 89');">89');">89');">89');">89');">89');">89');">895 F.3d 730');">89');">89');">89');">89');">89');">89');">89');">895 F.3d 730, 734 (10th Cir. 2018) (internal quotation marks omitted).

         The FCA's qui tam provisions allow a private person, called the relator, to sue on behalf of the government. 31 U.S.C. § 3730(b). The government may intervene and take over the relator's case, id. § 3730(b)(2) and (c)(3), but it often declines to do so. In such instances, the relator conducts the litigation and shares any recovery with the government. Id. § 3730(d).

         In relevant part, 31 U.S.C. § 3729(a)(1) imposes civil liability on any person who:

(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;
(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; [or]
. . .
(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to ...

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