Third party payer plaintiffs (mostly insurance companies and union welfare funds in unholy alliance with plaintiff lawyers), have not been doing very well with their economic loss claims against (mostly) pharmaceutical companies – at least outside the rogue First Circuit − as anyone following our TPP topic posts can attest.

So they’ve tried something new, and to our way of thinking, even more extreme. Some manufacturers of branded pharmaceuticals, to try to stay competitive with the discounts TPPs offer for generic drugs, have created programs that reimburse the larger co-payments that TPPs charge their subscribers who use branded drugs. The intended effect of such programs, of course, is to relieve at least some of the financial pressure on TPP subscribers to use generic drugs whether they want to or not.

TPPs responded by, in effect, throwing their subscribers, and their drug preferences, under the bus – by suing (under RICO, and“commercial bribery”) branded drug companies for making it cheaper for TPP subscribers to use branded drugs. They sought to make the aphorism “no good deed goes unpunished” a reality.

Well, we’ve received the first decision on the validity of such litigation, and the result is favorable to both TPP subscribers and branded drug manufacturers – and not so favorable for the TPPs themselves, who (no surprise, really) attempted to put their own financial interests above those of their plan subscribers. The decision is AFSCME District Council 37 Health & Security Fund v. Bristol-Myers Squibb Co., No. 12 Civ. 2238 (JPO), slip op. (S.D.N.Y. June 3, 2013).

The court granted a motion to dismiss, with prejudice against the commercial bribery (antitrust) claims and some of the RICO claims, and with leave to amend one piece of the RICO claims. Id. at 1-2.

Despite the TPPs’ efforts to vilify co-payment reimbursement as “kickbacks” or “bribes” being offered, id. at 5, the court was having none of it. Such reimbursements – directed to end users otherwise required to pay for the drugs− were really nothing more than publicly available discounts. There was nothing hidden or fraudulent about them:

[T]he mere existence of the . . . co-pay subsidy program is not a fraud on anyone because it involves no element of deception. To the contrary, the program is “open and notorious,” information about its terms and conditions is readily available on a number of public websites, and Plaintiffs do not allege that anyone is deceived about the effect of these programs. Nor do Plaintiffs allege any sort of omission or misrepresentation with respect to the existence of the program.

DC37, slip op. at 9-10. The plaintiff TPPs simply didn’t like drug companies offering their subscribers co-pay reimbursement because “the co-pay subsidy program is counter to their business objectives” to force their subscribers to use cheaper drugs. Id. at 10.

Plaintiff TPPs had three theories why their subscribers should lose their co-pay discounts: (1) a “misrepresentation theory” based upon supposed misinformation “at the point of purchase”; (2) a“waiver theory” that “routine and hidden waiver of personal co-pay obligations”was supposedly fraudulent; and (3) a “benchmark” theory that the discounts made the defendant’s average wholesale price reports inaccurate. Slip op. at 10. The first two were thrown out as a matter of law. The third required repleading.

The misrepresentation theory failed for a pretty simple reason – there wasn’t any misrepresentation. Indeed, plaintiff TPPs failed to allege “that they have been provided with any records” at all. Id. at 11.

[T]here is no active deception in the pharmacists’point-of-sale statements to TPPs that insureds have satisfied their co-pay obligation − at least, no more so than would be the case if an insured got the money to cover the cost from his rich uncle or a stranger on the street, as opposed to his own pockets. Thus, even by their own account, Plaintiffs have not received any records containing misrepresentations of the sort that could ground a claim for fraud.


Nor was there any recognized legal duty. The TPPs simply could not force their prescribers to pay the entire inflated co-payment out of their own pockets. Neither the drug companies nor the pharmacists had any duty to rat out their customers to the TPPs.

The Complaint does not allege the existence of any contractual relationship, or any other kind of relationship, between Defendants and any party that would require either Defendants or pharmacies to disclose to TPPs when a plan member uses a co-pay subsidy card provided by Defendants. . . . Moreover, a pharmacy’s alleged failure to disclose to Plaintiffs the fact that a consumer used a co-pay subsidy coupon to pay for part of his or her co-pay cannot plausibly support a claim for fraud against Defendants because Plaintiffs admit that their reimbursement of the pharmacy is separately governed by contract and does not depend on any point-of-sale representation.

Id. at 12. No misrepresentation; no duty. All in all, a pretty poor effort by the TPP.

The plaintiff TPPs’ waiver theory depended on the proposition that “[r]outine and hidden waiver of personal copay obligations is fraud.” DC37, slip op. at 13. However, that proposition was entirely unsupported:

In support of this proposition, Plaintiffs invoke several judicial decisions and federal statutes. None of these sources supports the proposition of law advanced by Plaintiff and, even if they did, Plaintiffs’ claim would still fail because Plaintiffs have not alleged any waiver of co-pays.


The TPPs relied on contract cases, id. at 13-15, despite that their contracts with their subscribers did not obligate anyone in particular to pay the co-payment. Unlike physicians, or dentists, who might be subject to an insurer’s economic coercion or inducements, the pharma companies are too big to be forced by overreaching insurers to sign contracts prohibiting such reimbursements. While TPPs “may create contracts that relieve them of the duty to pay physicians and dentists who routinely waive co-pays,” id. at 16, that’s all they can do. Nothing forces the TPPs’ subscribers to bear the freight, if someone else – not contractually bound to do the TPPs’bidding − is willing to help them out:

[The law] do[es] not create any sort of general rule that routine and hidden waiver of co-pays, even in the absence of a contractual obligation to enforce the co-pay requirement, states a claim for fraud.


That didn’t stop the TPPs. They claimed that discounts offered to their own subscribers were “kickbacks” or “false claims” under various federal statutes. One big problem (actually, two): those statutes “apply only to federal health care programs,” and the TPPs did not claim any violation. DC37, slip op. at 17. No case had ever held that “routine” co-pay discounts to individual subscribers stated any sort of claim for health care fraud. Id. at 18. While states or the federal government could, if they chose, ban third-parties such as drug companies from offering co-pay-related discounts, the simple fact is that they haven’t – and indeed have been moving (if at all) in the opposite direction. Id. at 18 n.14 (discussing state statutes).

Finally, as a matter of fact, there was no “waiver”of anything. Each and every co-payment charged by the TPPs was paid – just not by the subscribers against whom the TPPs sought to exert economic pressure:

[T]here is not actually any waiver. Pharmacies collect the full amount of the co-pay obligation every time, either from the patient or [the drug company defendants’ programs]. Failure to do so would force the pharmacy to bear that cost. And . . . Plaintiffs do not allege that any contracts between Plaintiffs and the pharmacies forbid pharmacies from accepting co-pay assistance payments. . . . Defendants cannot “waive” a co-pay subsidy because that subsidy is not owed to them, and they do not commit fraud by enabling pharmacies to “waive” co-pays—embracing that characterization arguendo—because there is no deception, misrepresentation, or omission involved when they do so.

DC37, slip op. at 18-19. The waiver theory was just as bad as the misrepresentation theory.

That could not be said for the “benchmark” theory, which is predicated on whether end-user – that is to say “retail” − co-payment discounts somehow violate a drug company’s “average wholesale price” reporting requirements. Id. at 19-20 (discussing allegations). Because both sides submitted all kinds of stuff that went beyond the pleadings, 20-21, the court found the merits of this claim not ripe for decision under Rule 12, which is supposed to be pleading based. Id. at 20-21.

The court did find, however, that the TPPs had failed to plead anything resembling fraud. The complaint did not explain what these average “benchmarks” were, or how they affected the TPPs. 22. Nor were there any particularized allegations how any particular published benchmark was fraudulent, or even who was supposed to publish or rely upon them. Id. Critically:

[The complaint] is also vague regarding one of the main issues in the case: whether the industry understanding looks to the “net” or “true” price paid by the retailer to the manufacturer in the course of all transactions . . , or whether the“actual price for the ingredient cost” is understood only as the sale price when the manufacturer actually sells the drug to the retailer (without regard to any future rebates or discounts).

Id. Close only counts in horseshoes, hand grenades, and H-bombs. This sort of vicinity claim doesn’t cut it under TwIqbal. Id. at 22-23. We’re also content to leave this claim at that, since we’ve generally considered AWC litigation beyond the scope of this product liability blog.

We’ll give the commercial bribery claims similarly short shrift, since we’re not focused on antitrust either. Basically commercial bribery under Robinson-Patman or state-law analogues, is the use of bribes to turn the“agent” of a commercial enterprise against the principal.

That ain’t this.

A subscriber to health insurer isn’t in any way the“agent” of the insurer – subscribers don’t owe “fiduciary” duties to insurers −indeed, the court found the entire concept to border on the ridiculous:

It would be hard to comprehend the scope of any such fiduciary duty − e.g., must patients pressure physicians to choose generics, or act faithfully to the insurer in deciding where and how to obtain the money necessary for co-pay obligations? − and neither precedent nor logic supports the existence of the obligations that Plaintiffs would impose on their insureds.

DC37, slip op. at 29. Insurers such as TPPs simply can’t make their insureds into their “agents.” “The bare fact that insureds’ decisions may entail financial consequences for the insurers does not transform insureds into intermediaries or agents.” Id. at 31.

To state it simply, “[t]he relationship between insurer and insured is of a different sort than the principal-agent relationship presupposed by commercial bribery doctrine.” Id. at 33. In trying to force their insureds to be their agents, the TPPs exaggerated their own importance in the scheme of things:

Thus, even though insureds can oblige insurers to pay for certain goods, they do not act as the insurers’ intermediaries or agents in those scenarios. Rather, they act as purchasers and consumers of medical goods and services who have contracted for a certain independent financing mechanism and who will be held to the terms of those contractual agreements if they choose to finance the cost of their market behavior through that insurance scheme.

DC37, slip op. at 34.

Once upon a time we handled occasional insurance litigation – enough to know that an insurer had a recognized legal obligation of good faith and fair dealing with respect to its insureds. To us, actions such as DC37, which would stand that obligation utterly on its head, illustrate the absurd lengths that some insurers (or, more properly, their counsel) will go in the pursuit of litigation. Thankfully, the court recognized this as well.