Case 3:17-cv-00699-BRM-LHG Document 109 Filed 03/09/18 Page 1 of 4 PageID: 1039 Michael R. Griffinger, Esq. GIBBONS P.C. One Gateway Center Newark, NJ 07102-5310 Tel.: (973) 596-4500 James P. Rouhandeh, Esq. (pro hac vice) David B. Toscano, Esq. (pro hac vice) DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, NY 10017 Tel.: (212) 450-4000 Neal A. Potischman, Esq. (pro hac vice) Andrew Yaphe, Esq. (pro hac vice) DAVIS POLK & WARDWELL LLP 1600 El Camino Real Menlo Park, CA 94025 Tel.: (650) 752-2000 Attorneys for Defendant Novo Nordisk Inc. Melissa A. Geist, Esq. REED SMITH LLP Princeton Forrestal Village 136 Main Street, Suite 250 Princeton, NJ 08540 Tel.: (609) 514-5978 Shankar Duraiswamy, Esq. Mark Lynch, Esq. (pro hac vice) Henry Liu, Esq. (pro hac vice) COVINGTON & BURLING LLP One CityCenter 850 Tenth Street, N.W. Washington, DC 20001 Tel.: (202) 662-6000 Attorneys for Defendant Eli Lilly and Company Liza M. Walsh, Esq. WALSH PIZZI O’REILLY FALANGA LLP 1037 Raymond Blvd, Suite 600 Newark, NJ 07102 Tel.: (973) 757-1100 Michael R. Shumaker, Esq. (pro hac vice) Julie E. McEvoy, Esq. (pro hac vice) William D. Coglianese, Esq. (pro hac vice) JONES DAY 51 Louisiana Avenue, N.W. Washington, DC 20001 Tel.: (202) 879-3939 Toni-Ann Citera, Esq. (pro hac vice) JONES DAY 250 Vesey Street New York, NY 10281 Tel.: (212) 326-3939 Attorneys for Defendant Sanofi-Aventis U.S. LLC UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY IN RE INSULIN PRICING LITIGATION Civil Action No. 17-699 (BRM) (LHG) ORAL ARGUMENT REQUESTED DEFENDANTS’ NOTICE OF MOTION TO DISMISS THE CONSOLIDATED AMENDED CLASS ACTION COMPLAINT Case 3:17-cv-00699-BRM-LHG Document 109 Filed 03/09/18 Page 2 of 4 PageID: 1040 TO: All Persons on ECF Service List COUNSEL: PLEASE TAKE NOTICE that Defendants Novo Nordisk Inc., SanofiAventis U.S. LLC, and Eli Lilly and Company (collectively, “Defendants”), by and through their respective undersigned counsel, shall move before the Honorable Brian R. Martinotti, U.S.D.J., at a date and time to be determined by the Court, at the Clarkson S. Fisher Building & U.S. Courthouse, 402 East State Street, Trenton, New Jersey 08608, for an Order, pursuant to Fed. R. Civ. P. 12(b)(6), dismissing the Consolidated Amended Class Action Complaint. PLEASE TAKE FURTHER NOTICE THAT in support of this Motion, Defendants will rely on: a) Defendants’ Memorandum of Law in Support of Motion to Dismiss the Consolidated Amended Class Action Complaint (Counts 16); b) Defendants’ Memorandum of Law in Support of Motion to Dismiss the Consolidated Amended Class Action Complaint (Counts 7-60); c) Defendants’ Appendix of Materials Referenced in Consolidated Amended Class Action Complaint and Materials in the Public Record; and d) all other pleadings and proceedings on file. PLEASE TAKE FURTHER NOTICE that a proposed form of order is submitted herewith. PLEASE TAKE FURTHER NOTICE that Defendants hereby request oral argument. 1 Case 3:17-cv-00699-BRM-LHG Document 109 Filed 03/09/18 Page 3 of 4 PageID: 1041 Dated: March 9, 2018 Respectfully submitted, By: /s/ Michael R. Griffinger, Esq. Michael R. Griffinger, Esq. Christopher Walsh, Esq. Calvin K. May, Esq. GIBBONS P.C. One Gateway Center Newark, NJ 07102-5310 Tel: (973) 596-4500 James P. Rouhandeh, Esq. (admitted pro hac vice) David B. Toscano, Esq. (admitted pro hac vice) DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, NY 10017 Tel: (212) 450-4000 Neal A. Potischman, Esq. (admitted pro hac vice) Andrew Yaphe, Esq. (admitted pro hac vice) DAVIS POLK & WARDWELL LLP 1600 El Camino Real Menlo Park, CA 94025 Tel: (650) 752-2000 Attorneys for Defendant Novo Nordisk Inc. By: /s/ Melissa A. Geist, Esq. Melissa A. Geist, Esq. REED SMITH LLP Princeton Forrestal Village 136 Main Street, Suite 250 Princeton, NJ 08540 Tel.: (609) 514-5978 Shankar Duraiswamy, Esq. Mark Lynch, Esq. (admitted pro hac vice) Henry B. Liu, Esq. (admitted pro hac vice) COVINGTON & BURLING LLP One CityCenter 850 Tenth Street, N.W. 2 Case 3:17-cv-00699-BRM-LHG Document 109 Filed 03/09/18 Page 4 of 4 PageID: 1042 Washington, DC 20001 Tel.: (202) 662-6000 Attorneys for Defendant Eli Lilly and Company By: /s/ Liza M. Walsh, Esq. Liza M. Walsh, Esq. WALSH PIZZI O’REILLY FALANGA LLP 1037 Raymond Blvd, Suite 600 Newark, NJ 07102 Tel.: (973) 757-1100 Michael R. Shumaker, Esq. (admitted pro hac vice) Julie E. McEvoy, Esq. (admitted pro hac vice) William D. Coglianese, Esq. (admitted pro hac vice) JONES DAY 51 Louisiana Avenue, N.W. Washington, DC 20001 Tel.: (202) 879-3939 Toni-Ann Citera, Esq. (admitted pro hac vice) JONES DAY 250 Vesey Street New York, NY 10281 Tel.: (212) 326-3939 Attorneys for Defendant Sanofi-Aventis U.S. LLC 3 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 1 of 64 PageID: 1043 Michael R. Griffinger, Esq. GIBBONS P.C. One Gateway Center Newark, NJ 07102-5310 Tel.: (973) 596-4500 James P. Rouhandeh, Esq. (pro hac vice) David B. Toscano, Esq. (pro hac vice) DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, NY 10017 Tel.: (212) 450-4000 Neal A. Potischman, Esq. (pro hac vice) Andrew Yaphe, Esq. (pro hac vice) DAVIS POLK & WARDWELL LLP 1600 El Camino Real Menlo Park, CA 94025 Tel.: (650) 752-2000 Attorneys for Defendant Novo Nordisk Inc. Liza M. Walsh, Esq. WALSH PIZZI O’REILLY FALANGA LLP 1037 Raymond Blvd, Suite 600 Newark, NJ 07102 Tel.: (973) 757-1100 Michael R. Shumaker, Esq. (pro hac vice) Julie E. McEvoy, Esq. (pro hac vice) William D. Coglianese, Esq. (pro hac vice) JONES DAY 51 Louisiana Avenue, N.W. Washington, DC 20001 Tel.: (202) 879-3939 Toni-Ann Citera, Esq. (pro hac vice) JONES DAY 250 Vesey Street New York, NY 10281 Tel.: (212) 326-3939 Attorneys for Defendant Sanofi-Aventis U.S. LLC Melissa A. Geist, Esq. REED SMITH LLP Princeton Forrestal Village 136 Main Street, Suite 250 Princeton, NJ 08540 Tel.: (609) 514-5978 Shankar Duraiswamy, Esq. Mark Lynch, Esq. (pro hac vice) Henry Liu, Esq. (pro hac vice) COVINGTON & BURLING LLP One CityCenter 850 Tenth Street, N.W. Washington, DC 20001 Tel.: (202) 662-6000 Attorneys for Defendant Eli Lilly and Company UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY Civil Action No. 17-699(BRM)(LHG) IN RE INSULIN PRICING LITIGATION ORAL ARGUMENT REQUESTED DEFENDANTS’ MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DISMISS THE CONSOLIDATED AMENDED CLASS ACTION COMPLAINT (COUNTS 1-6) Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 2 of 64 PageID: 1044 TABLE OF CONTENTS PAGE PRELIMINARY STATEMENT ...............................................................................1 ALLEGATIONS ........................................................................................................5 A. The Parties .............................................................................................5 B. The Distribution of, and Payment for, Branded Prescription Drugs .....................................................................................................6 C. Manufacturer-PBM Rebate Negotiations ............................................13 D. The Alleged “Scheme” ........................................................................17 LEGAL STANDARDS ...........................................................................................20 A. Rule 8(a) ..............................................................................................20 B. Rule 9(b) ..............................................................................................20 C. RICO Claims .......................................................................................21 D. NJCFA Claims ....................................................................................23 ARGUMENT ...........................................................................................................24 I. The RICO Claims Should Be Dismissed.......................................................26 A. Plaintiffs’ Claims Are Barred by the Indirect Purchaser Rule ............26 B. Plaintiffs Do Not Plead Facts Amounting to Mail or Wire Fraud ......29 C. 1. The Complaint Fails to Allege a Misrepresentation .................30 2. The Complaint Fails to Allege Any Omission in Violation of a Duty to Disclose ................................................34 Plaintiffs Do Not Plead an Actionable RICO Enterprise ....................35 i Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 3 of 64 PageID: 1045 D. II. 1. The Complaint Alleges a Legally Deficient Rimless “Hub and Spoke” Enterprise .....................................................36 2. The Complaint Fails to Plead that Each Enterprise Had a “Common Purpose” or that Defendants Participated in the Conduct of Any Such Enterprise ........................................38 Plaintiffs Do Not Adequately Plead Proximate Causation .................42 The New Jersey Consumer Fraud Act Claims Should Be Dismissed for Failure to State a Claim .................................................................................46 A. The Complaint Fails to Plead the “Deceptive Practices” and “Unconscionable Pricing” Claims with Specificity ............................46 B. The Complaint Does Not Plead Unlawful Conduct by Defendants ...........................................................................................47 C. The Complaint Does Not Allege that Plaintiffs Suffered Any “Ascertainable Loss” ...........................................................................49 CONCLUSION ........................................................................................................52 ii Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 4 of 64 PageID: 1046 TABLE OF AUTHORITIES PAGE Cases Advanced Oral Techs., L.L.C. v. Nutres Research, Inc., 2011 WL 198029 (D.N.J. Jan. 20, 2011) .............................................................21 Anderson v. Ayling, 396 F.3d 265 (3d Cir. 2005).................................................................................43 Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006) ...................................................................................... 43, 44 Arthur v. Guerdon Indus., Inc., 827 F. Supp. 273 (D. Del. 1993) ................................................................... 40, 45 Ashcroft v. Iqbal, 556 U.S. 662 (2009) .............................................................................................20 Beck v. Prupis, 529 U.S. 494 (2000) .............................................................................................21 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) ...............................................................................................5 Benak ex rel. Alliance Premier Growth Fund v. Alliance Capital Mgmt. L.P., 435 F.3d 396 (3d Cir. 2006).................................................................................16 Bible v. United Student Aid Funds, Inc., 799 F.3d 633 (7th Cir. 2015)................................................................................39 Billings v. Am. Express Co., 2011 WL 5599648 (D.N.J. Nov. 16, 2011) .................................................. 47, 48 Bonilla v. Volvo Car Corp., 150 F.3d 62 (1st Cir. 1998) ..................................................................................31 iii Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 5 of 64 PageID: 1047 Bosland v. Warnock Dodge, Inc., 964 A.2d 741 (N.J. 2009) .....................................................................................51 Boyle v. United States, 556 U.S. 938 (2009) ...................................................................................... 36, 38 Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (2008) ................................................................................ 21, 23, 43 City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159 (3d Cir. 2014)...................................................................................5 Crichton v. Golden Rule Ins. Co., 576 F.3d 392 (7th Cir. 2009)................................................................................40 DeGennaro v. Am. Bankers Ins. Co. of Fla., 2017 WL 2693881 (D.N.J. June 22, 2017) ....................................... 23, 24, 46, 49 Delaware Valley Surgical Supply Inc. v. Johnson & Johnson, 523 F.3d 1116 (9th Cir. 2008) .............................................................................29 Dow Chem. Co. v. Exxon Corp., 30 F. Supp. 2d 673 (D. Del. 1998) .......................................................................45 Dugan v. TGI Fridays, Inc., 171 A.3d 620 (N.J. 2017) .....................................................................................51 Eike v. Allergan, 850 F.3d 315 (7th Cir. 2017)................................................................................30 Eller v. EquiTrust Life Ins. Co., 778 F.3d 1089 (9th Cir. 2015) .............................................................................34 Franulovic v. Coca Cola Co., 2007 WL 3166953 (D.N.J. Oct. 25, 2007)...........................................................51 Grant v. Turner, 2010 WL 4004719 (D.N.J. Oct. 12, 2010)...........................................................22 Gray v. Bayer Corp., 2009 WL 1617930 (D.N.J. June 9, 2009) ............................................................46 iv Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 6 of 64 PageID: 1048 Gross v. Waywell, 628 F. Supp. 2d 475 (S.D.N.Y. 2009)..................................................................22 Hale v. Stryker Orthopaedics, 2009 WL 321579 (D.N.J. Feb. 9, 2009) ................................................. 27, 28, 29 Hemi Grp., LLC v. City of New York, 559 U.S. 1 (2010) .................................................................................... 35, 42, 43 Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) .............................................................................................26 In re Aetna UCR Litig., 2015 WL 3970168 (D.N.J. June 30, 2015) ..........................................................39 In re Avandia Mktg., Sales Practices & Prod. Liab. Litig., 804 F.3d 633 (3d Cir. 2015).......................................................................... 42, 45 In re Brand Name Prescription Drugs Antitrust Litig., 248 F.3d 668 (7th Cir. 2001)................................................................................29 In re Fleet, 95 B.R. 319 (E.D. Pa. 1989) ................................................................................48 In re Gerber Probiotic Sales Practices Litig., 2014 WL 3446667 (D.N.J. July 11, 2014).................................................... 49, 50 In re Ins. Brokerage Antitrust Litig., 2007 WL 1062980 (D.N.J. Apr. 5, 2007) ............................................................38 In re Ins. Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir. 2010).......................................................................... 36, 37 In re Nat’l Credit Mgmt. Grp., 21 F. Supp. 2d 424 (D.N.J. 1998) ........................................................................48 In re Pharm. Indus. Average Wholesale Price Litig., 230 F.R.D. 61 (D. Mass. 2003) ............................................................................33 In re Schering Plough Corp. Intron/Temodar Consumer Class Action, 678 F.3d 235 (3d Cir. 2012).................................................................................23 v Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 7 of 64 PageID: 1049 In re Schering-Plough Corp. Intron/Temodar Consumer Class Action, 2009 WL 2043604 (D.N.J. July 10, 2009)...........................................................52 J.B.D.L. Corp. v. Wyeth-Ayerst Labs., Inc., 2005 WL 1396940 (S.D. Ohio June 13, 2005) ....................................................12 Jaye v. Oak Knoll Vill. Condo. Owners Ass’n, Inc., 2016 WL 7013468 (D.N.J. Nov. 30, 2016) .........................................................29 Kansas v. UtiliCorp United Inc., 497 U.S. 199 (1998) .............................................................................................26 Katzman v. Victoria’s Secret Catalogue, 167 F.R.D. 649 (S.D.N.Y. 1996) .........................................................................22 Kolar v. Preferred Real Estate Invs., Inc., 361 F. App’x 354 (3d Cir. 2010) .........................................................................23 Kugler v. Romain, 279 A.2d 640 (N.J. 1971) .....................................................................................48 Langford v. Rite Aid of Alabama, Inc., 231 F.3d 1308 (11th Cir. 2000) .............................................................. 31, 34, 35 Lee v. Carter-Reed Co., 4 A.3d 561 (N.J. 2010) .........................................................................................51 Lind v. New Hope Prop., LLC, 2010 WL 1493003 (D.N.J. Apr. 13, 2010) ..........................................................41 Link v. Mercedes-Benz of N. Am., Inc., 788 F.2d 918 (3d Cir. 1986).................................................................................28 Lum v. Bank of Am., 361 F.3d 217 (3d Cir. 2004).............................................................. 20, 29, 33, 34 Lynch v. Capital One Bank (USA), N.A., 2013 WL 2915734 (E.D. Pa. June 14, 2013) .......................................................43 McCarthy v. Recordex Serv., Inc., 80 F.3d 842 (3d Cir. 1996) ...................................................................... 26, 27, 28 vi Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 8 of 64 PageID: 1050 Nat’l Ass’n of Chain Drug Stores v. New England Carpenters Health Benefits Fund, 582 F.3d 30 (1st Cir. 2009) ....................................................................................8 New Jersey Citizen Action v. Schering-Plough Corp., 842 A.2d 174 (N.J. Super. Ct. App. Div. 2003) ..................................................52 Payne v. DeLuca, 433 F. Supp. 2d 547 (W.D. Pa. 2006) ..................................................................41 Pharm. Research & Mfrs. of Am. v. Walsh, 538 U.S. 644 (2003) .............................................................................................15 Pro v. Hertz Equip. Rental Corp., 2012 WL 12906183 (D.N.J. June 25, 2012) ........................................................48 Quigley v. Esquire Deposition Servs., LLC, 975 A.2d 1042 (N.J. Super. Ct. App. Div. 2009) ................................................48 Ray v. Spirit Airlines, Inc., 836 F.3d 1340 (11th Cir. 2016) ...........................................................................40 Reves v. Ernst & Young, 507 U.S. 170 (1993) .............................................................................................41 Rogers v. Morrice, 2013 WL 1750004 (D.N.J. Apr. 23, 2013) ..........................................................22 Rosenson v. Mordowitz, 2012 WL 3631308 (S.D.N.Y. Aug. 23, 2012) .............................................. 21, 22 Schmidt v. Skolas, 770 F.3d 241 (3d Cir. 2014).................................................................................16 Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985) .............................................................................................23 Sickles v. Cabot Corp., 877 A.2d 267 (N.J. Super. Ct. App. Div. 2005) ..................................................47 vii Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 9 of 64 PageID: 1051 Travelers Indem. Co. v. Cephalon, Inc., 620 F. App’x 82 (3d Cir. 2015) .................................................................... 20, 29 Truglio v. Planet Fitness, Inc., 2016 WL 4084030 (D.N.J. July 28, 2016)...........................................................51 United Food & Commercial Workers Unions & Employers Midwest Health Benefits Fund v. Walgreen Co., 719 F.3d 849 (7th Cir. 2013)......................................................................... 41, 42 United States v. Ciavarella, 716 F.3d 705 (3d Cir. 2013).................................................................................34 United States v. Turkette, 452 U.S. 576 (1981) .............................................................................................38 Valcom, Inc. v. Vellardita, 2014 WL 1628431 (D.N.J. Apr. 23, 2014) ..........................................................37 Vanderklok v. United States, 868 F.3d 189 (3d Cir. 2017).................................................................................10 Warren Gen. Hosp. v. Amgen Inc., 643 F.3d 77 (3d Cir. 2011) ............................................................................ 28, 29 Wilson v. Bernstock, 195 F. Supp. 2d 619 (D.N.J. 2002) ........................................................................5 Yingst v. Novartis AG, 63 F. Supp. 3d 412 (D.N.J. 2014) ........................................................................48 Statutes 18 U.S.C. § 1961(1)(B) ............................................................................................21 18 U.S.C. § 1962(c) .................................................................................................41 18 U.S.C. § 1964(c) .................................................................................................23 42 C.F.R. § 100.952 .................................................................................................15 42 C.F.R. § 423.100 .................................................................................................10 viii Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 10 of 64 PageID: 1052 42 C.F.R. § 423.104(d) ............................................................................................10 42 C.F.R. § 423.104(e).............................................................................................10 42 C.F.R. § 423.104(f)(1) ........................................................................................10 42 C.F.R. § 423.104(g)(1) ........................................................................................10 42 U.S.C. § 1395w-114a(g)(6) ................................................................................10 42 U.S.C. § 1395w-3a(c)(6)(B) .................................................................... 8, 32, 33 42 U.S.C. § 1396r-8(a) .............................................................................................15 42 U.S.C. § 1396r-8(k)(1) ..........................................................................................9 42 U.S.C. §§ 1396r-8(b)(3)(A) ..................................................................................9 68 Fed. Reg. 23731 (May 5, 2003) ..........................................................................15 Patient Protection and Affordable Care Act, Pub. L. 111-148, § 2501(c), 124 Stat. 119 (2010) ...............................................15 ix Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 11 of 64 PageID: 1053 Defendants Novo Nordisk Inc. (“Novo Nordisk”), Eli Lilly and Company (“Lilly”), and Sanofi-Aventis U.S. LLC (“Sanofi”) (together, “defendants”) respectfully submit this memorandum of law in support of their Motion to Dismiss the Consolidated Amended Class Action Complaint (the “complaint” or “CAC”) pursuant to Federal Rule of Civil Procedure 12(b)(6). PRELIMINARY STATEMENT Through this lawsuit, plaintiffs seek to criminalize a fundamental aspect of the pharmaceutical industry. Plaintiffs’ grievance is that pharmaceutical manufacturers pay rebates to entities called pharmacy benefit managers (“PBMs”) to ensure that the manufacturers’ prescription medications are available to consumers, but that these rebates are not passed on to plaintiffs at the pharmacy counter. From this, plaintiffs conclude that defendants must be engaged in criminal fraud. But plaintiffs do not allege that they were deceived about the price they paid for insulin at the pharmacy or that they were promised the benefit of any rebate. Indeed, none of the allegations in plaintiffs’ 200-page-long complaint shows that defendants have done anything fraudulent, unfair, or unconscionable. The rebates about which plaintiffs complain arise from negotiations between the defendant manufacturers and PBMs. PBMs are hired by commercial and government-run health insurers to manage their prescription drug costs. As the complaint alleges, the rebates paid to PBMs are integral to defendants’ ability to 1 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 12 of 64 PageID: 1054 make their insulin medications available to consumers. In fact, the three largest PBMs together govern access to prescription medication for approximately 180 million people. As a result, the PBMs determine with their health insurer clients whether they will cover a particular drug and how much an insured individual will pay for it. These determinations often dictate which insulin an insured individual uses—for example, Novo Nordisk’s Levemir or Sanofi’s Lantus. Because of their market position, the PBMs are able to extract substantial pricing concessions (i.e., “rebates”) from prescription drug manufacturers.1 As plaintiffs allege, the PBMs demand rebates from the manufacturers in exchange for placing manufacturers’ products on insurance formularies. And, as plaintiffs further allege, the PBMs pass along “a large portion” of these rebates to their health insurer clients. CAC ¶ 185. The fact that manufacturers pay rebates to PBMs in order to obtain access to patients is widely known. It is also entirely rational and lawful for manufacturers to discount their products (through the 1 Before making the strategic decision to toll their claims against the PBMs, some plaintiffs alleged that the PBMs named as defendants in their complaints— CVS Health, Express Scripts, and OptumRx—are “engaging in extortion” by extracting rebates from manufacturers. See Boss, et al. v. CVS Health Corp., et al., Case No. 2:17-cv-01823 (D.N.J. Mar. 17, 2017), Dkt. No. 1 ¶ 25; see also Christensen, et al. v. Novo Nordisk Inc., et al., Case No. 3:17-cv-02678 (D.N.J. Apr. 20, 2017), Dkt. No. 1 ¶ 10 (“The contest rigged up by the PBMs creates the incentive and framework for the Drug Manufacturers to raise their insulin list prices.”). 2 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 13 of 64 PageID: 1055 payment of rebates) in exchange for having their products appear on formularies that insurers use to make coverage decisions for the vast majority of patients. The crux of plaintiffs’ complaint is that the rebates defendants pay to PBMs do not directly reduce the amount that consumers pay to pharmacies. This does not state a legal claim. A manufacturer’s decision to offer a rebate for formulary placement does not defraud the end consumer, and plaintiffs cannot blame the manufacturers for how PBMs and health insurers distribute (or retain) the rebates that they receive. Although discounting is a common and permissible feature of many industries, plaintiffs try to portray PBM rebates as fraudulent by asserting that defendants misrepresented that their “benchmark prices” reflected “the ‘rebates’ drug manufacturers offer PBMs.” Id. ¶ 11. But plaintiffs do not identify a single instance in which a defendant represented that its “benchmark prices” accounted for PBM rebates—or even that plaintiffs believed that to be true. Indeed, plaintiffs do not—because they cannot—even allege that manufacturers set the prices that pharmacies charge consumers for medication. And to the extent that insured consumers are unhappy that they do not receive the benefit of rebates paid to their insurers and PBMs, their complaint is not with defendants. Defendants acknowledge that pharmaceutical pricing is an important issue, especially given how recent trends in the design of insurance benefits have affected certain patients’ out-of-pocket costs. As plaintiffs recognize, manufacturer rebate 3 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 14 of 64 PageID: 1056 payments to PBMs are not unique to sales of insulin.2 It is how the entire branded pharmaceutical industry functions. As a result, the relief plaintiffs seek in this litigation would not only require this Court to regulate sales of insulin, but also would have an impact on the entire pharmaceutical industry at large. While the pricing system may benefit from reforms, this issue is not properly addressed via in terrorem claims seeking treble-damages liability under the federal racketeering statute or via conclusory invocations of every state’s consumer-protection laws. As demonstrated below, the Court should dismiss plaintiffs’ RICO and New Jersey Consumer Fraud Act (“NJCFA”) claims (i.e., Counts 1 through 6). The Court should also dismiss plaintiffs’ myriad other state law claims (i.e., Counts 7 through 60).3 2 Plaintiffs suggest that the amount of rebates paid by insulin manufacturers to PBMs in some way renders insulin pricing deceptive. This theory has no basis in law and no logical limit. 3 In a separate brief contemporaneously filed with this one, defendants explain why plaintiffs’ state law claims (in addition to plaintiffs’ NJCFA claims) all fail. See Defendants’ Memorandum of Law in Support of Motion to Dismiss the Consolidated Amended Class Action Complaint (Counts 7-60) (“State Law Brief”). Because plaintiffs fail to plead facts showing that defendants did anything fraudulent, unfair, or unconscionable—as demonstrated in this brief—all of their state law claims necessarily fail as well. In addition to that fundamental flaw, the State Law Brief explains a number of other defects in the state law claims. 4 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 15 of 64 PageID: 1057 ALLEGATIONS4 A. The Parties Defendants are pharmaceutical companies headquartered in the United States. See CAC ¶¶ 169-171. Defendants research, develop, and manufacture prescription medications, including insulins. See id. Defendants have been at the cutting edge of innovation in insulin treatments for decades, and consistently have brought to market in the United States new insulin products representing “leap[s] forward.” See id. ¶¶ 229-233. The insulins at issue in this case are “analog” insulins, which are synthetic insulin products created by modifying the molecular structure of natural insulin created by the human body. See id. ¶ 231. Defendants’ analog insulins are widely viewed as the best-in-class treatments for insulin-dependent diabetics, based on their ability to “more closely mimic the way the human body naturally absorbs insulin released by the pancreas.” Id. ¶¶ 234-238. 4 These allegations are assumed to be true solely for purposes of defendants’ motion to dismiss. In considering a motion to dismiss, the Court may consider the materials referenced and incorporated into the complaint and matters of public record. See, e.g., Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 568 n.13 (2007) (“the District Court was entitled to take notice of the full contents of the published articles referenced in the complaint”); City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 166 (3d Cir. 2014) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)); Wilson v. Bernstock, 195 F. Supp. 2d 619, 623 (D.N.J. 2002) (on a motion to dismiss, a court may consider matters of public record and “may properly refer to the full text” of documents cited in the complaint). 5 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 16 of 64 PageID: 1058 Plaintiffs are seventy-one identified individuals with diabetes or their relatives (and one Jane Doe), who allege that they have used various analog insulins produced by defendants and have made out-of-pocket payments based on a “benchmark price.” Id. ¶¶ 25-168.5 Plaintiffs define the “benchmark price” as the defendants’ “Wholesale Acquisition Cost” and “Average Wholesale Price.” Id. ¶ 187. Plaintiffs bring this action on behalf of a putative class of “[a]ll individual persons in the United States . . . who paid any portion of the purchase price for a prescription of Lantus, Levemir, Novolog, Humalog, Apidra, and/or Toujeo at a price calculated by reference to a benchmark price . . . for purposes other than resale.” Id. ¶ 279. B. The Distribution of, and Payment for, Branded Prescription Drugs The physical distribution of a branded prescription drug such as analog insulin involves three discrete transactions. First, a drug manufacturer sells its medication to a wholesaler. Id. ¶¶ 176-177. Second, the wholesaler takes possession of the medication and re-sells it to a pharmacy. Id. ¶¶ 177, 183 fig. 3. 5 Three plaintiffs allege that they currently use prior-generation insulins known as “human insulins.” See CAC ¶¶ 88, 128, 150. Human insulins sell for a fraction of the cost of analog insulins and are safe alternatives for many consumers. Id. ¶¶ 233 tab. 2, 237. 6 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 17 of 64 PageID: 1059 Third, the pharmacy sells the medication to consumers. Id. ¶¶ 179, 180, 183 fig. 3; Follow the Pill at 9-10.6 Figure 1 The Physical Path of a Prescription Drug Manufacturer Wholesaler Pharmacy Consumer Health insurers and PBMs, which many insurers hire to manage their prescription drug benefits, are not directly involved in this distribution chain because they do not take physical possession of the medication. CAC ¶¶ 178-179. 6 “Follow the Pill” refers to The Health Strategies Consultancy LLC, Follow the Pill: Understanding the U.S. Commercial Pharmaceutical Supply Chain, Kaiser Family Foundation (Mar. 2005) (incorporated by reference by CAC ¶ 179 n.19). The appendix to this brief includes relevant excerpts of the materials incorporated by reference in the complaint that are cited in this brief, as well as excerpts of certain materials in the public record also cited in it. See Defendants’ Appendix of Materials Referenced in Consolidated Amended Class Action Complaint and Materials in the Public Record. 7 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 18 of 64 PageID: 1060 Three separate payments are associated with these transactions: (1) from the wholesaler to the manufacturer; (2) from the pharmacy to the wholesaler; and (3) from the consumer—and her insurer, if any—to the pharmacy. Id. ¶ 181. In addition to these transactions, there frequently is an additional payment outside the distribution chain: the payment of a rebate from the manufacturer to the insurer or the insurer’s PBM. Id. ¶ 182. The nature of these payments, and the manner in which they are determined, are described below. Payments from Wholesalers to Manufacturers. Wholesalers pay manufacturers based on the publicly reported list price established by the manufacturer, which is known as the Wholesale Acquisition Cost (“WAC”). Id. ¶ 18. WAC is defined by federal statute. It is “the manufacturer’s list price for the drug or biological to wholesalers or direct purchasers in the United States, not including prompt pay or other discounts, rebates or reductions in price . . . .” 42 U.S.C. § 1395w-3a(c)(6)(B). Consistent with the statutory definition, wholesalers pay the manufacturer WAC minus small percentage discounts that they can earn for prompt payment and meeting other incentives. CAC ¶¶ 181, 186; Nat’l Ass’n of Chain Drug Stores v. New England Carpenters Health Benefits Fund, 582 F.3d 30, 36 (1st Cir. 2009); 8 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 19 of 64 PageID: 1061 Pricing and Reimbursement at 8.7 Manufacturers report the WAC for their drugs to third-party publishers, which publish the WAC in publicly available drugpricing compendia.8 Plaintiffs refer to WAC as a “benchmark price.”9 Payments from Pharmacies to Wholesalers. Wholesalers sell to pharmacies at a price they negotiate with each pharmacy. CAC ¶ 183 & fig. 3. In practice, wholesalers are able to negotiate a small percentage markup over what they paid to the manufacturer. See id. ¶ 13; Pricing and Reimbursement at 8. Thus, WAC is frequently very close to the prices paid by pharmacies. CAC ¶ 186; Prescription Drug Pricing at 3.10 The average prices paid by pharmacies are 7 “Pricing and Reimbursement” refers to Ernst R. Berndt & Joseph Newhouse, Pricing and Reimbursement in U.S. Pharmaceutical Markets, at 15 (Harvard Kennedy School, National Bureau of Economic Research, Sept. 2010) (incorporated by reference by CAC ¶ 176 n.11). 8 In addition, manufacturers are required to report to the federal government the average price that wholesalers pay for each drug after accounting for any discounts earned by the wholesalers, which is called Average Manufacturer Price (“AMP”). 42 U.S.C. §§ 1396r-8(b)(3)(A), 1396r-8(k)(1). 9 Plaintiffs also use “benchmark price” to refer to the Average Wholesale Price (“AWP”), which is mathematically related to WAC. CAC ¶ 187; see also Pricing and Reimbursement at 20 (AWP is typically determined by publishers of pricing compendia, which set AWP at a fixed percentage markup over the WAC reported by manufacturers). 10 “Prescription Drug Pricing” refers to Congressional Budget Office, Prescription Drug Pricing in the Private Sector (Jan. 2007) (incorporated by reference by CAC ¶ 209 n.30); see also CAC ¶ 187. 9 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 20 of 64 PageID: 1062 publicly available: The federal government publishes the average price for most prescription drugs on the internet on a weekly basis.11 Payments from Consumers and Their Insurers to Pharmacies. Drug manufacturers such as defendants do not set the price that a consumer pays for a prescription medication. Rather, the consumer’s payment is determined by her pharmacy and by insurance benefit design. CAC ¶¶ 192-208. If a consumer is uninsured, then the pharmacy unilaterally determines the price the consumer must pay; different pharmacies can charge different prices for the same medication. See id. ¶¶ 11 n.8, 190, 280. If a consumer is insured, the insurer or its PBM negotiates the price with the pharmacy. See id. ¶¶ 179, 183 fig. 3, 184; Prescription Drug Pricing at 10.12 The insurer and the consumer each pay a portion of this negotiated price, with the consumer’s share determined by the terms of her insurance 11 See Medicaid.gov, “Pharmacy Pricing,” available at https://goo.gl/AZa1ZY (linking to downloadable files providing weekly National Average Drug Acquisition Cost for most drugs). The Court can take judicial notice that this pricing information is publicly available. See, e.g., Vanderklok v. United States, 868 F.3d 189, 205 n.16 (3d Cir. 2017) (taking judicial notice of “information [that] is publicly available on government websites”). 12 See also 42 C.F.R. §§ 423.104(d), (e), (f)(1), (g)(1) (requiring Medicare Part D plans to provide beneficiaries with “access to negotiated prices”); id. § 423.100 (defining “negotiated price”); 42 U.S.C. § 1395w-114a(g)(6) (defining “negotiated price” for purposes of the Medicare coverage gap discount program). PBMs form pharmacy networks, and use their leverage to negotiate with pharmacies for discounted prices in exchange for access to their networks. See CAC ¶ 179 n.17 (incorporating by reference Thomas Gryta, “What Is a ‘Pharmacy Benefit Manager?,’” WALL ST. J., July 21, 2011). 10 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 21 of 64 PageID: 1063 coverage—namely, the deductible, copayment, or coinsurance requirements. See, e.g., CAC ¶¶ 11, 181, 192. In many cases, the consumer pays a fixed copayment and the insurer pays the remainder of the negotiated price. See id. ¶¶ 192, 202, 207. However, plaintiffs allege that consumers who have not met their deductible pay the full negotiated price, with no contribution from the insurer. Similarly, they allege that consumers subject to a coinsurance requirement pay a specified percentage of the negotiated price. See id. ¶¶ 190, 193, 203. Plaintiffs allege that the prices charged by pharmacies to uninsured consumers and the prices set by insurers and PBMs for consumers subject to deductible and coinsurance requirements are based on the benchmark price. See id. ¶¶ 184, 209-210.13 Plaintiffs seek to represent a putative class covering these consumers. Id. ¶¶ 279-281. Rebate Payments from Manufacturers to PBMs. PBMs do not purchase prescription drugs or make any payments to manufacturers. See id. ¶¶ 178-179. Rather, acting on behalf of insurers, PBMs negotiate discounts—in the form of rebates—from manufacturers. Id. ¶¶ 181, 183 fig. 3, 209. Plaintiffs allege that some portion of these rebate payments are retained by the PBMs, but “a large portion” are passed on to insurers. See id. ¶¶ 10, 185. These rebates “effectively 13 This includes coinsurance payments by consumers in Medicare Part D’s so-called “Donut Hole.” CAC ¶¶ 190, 208. 11 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 22 of 64 PageID: 1064 lower the cost paid for the product by the plan sponsor” and “lower the sponsor’s cost of providing the benefit.” J.B.D.L. Corp. v. Wyeth-Ayerst Labs., Inc., 2005 WL 1396940, at *9 (S.D. Ohio June 13, 2005). According to plaintiffs, however, some insurers have elected not to pass on manufacturer rebates to consumers who pay for prescription drugs during the deductible or coinsurance periods of their health insurance plans. See, e.g., CAC ¶ 20. Whether and how the insurer passes through the rebate to these consumers depends on the terms of the consumer’s insurance policy. Id. ¶ 211. Plaintiffs contend that the “benchmark prices” that defendants have reported for their insulin products are “fraudulent” because they do not account for manufacturer rebate payments to PBMs. Id. ¶¶ 11, 16. This conflates two unrelated sets of transactions involving different entities. The “benchmark prices” (WAC and AWP) relate to the prices paid by wholesalers and pharmacies to acquire a drug. Separately, manufacturers pay rebates to PBMs—who negotiate for them on behalf of insurers—to help secure favorable formulary placement. The rebate to the PBM does not reduce or offset the amounts that the wholesaler and pharmacy already have paid. A simple example based on prices from the complaint illustrates this point. See id. ¶ 210. Imagine that, based on the benchmark price set by the manufacturer, the wholesaler pays $367.50 to the manufacturer for analog insulin and the 12 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 23 of 64 PageID: 1065 pharmacy then pays $375.00 to the wholesaler. Assume further that the PBM has negotiated a price of $382.50 with the pharmacy. The pharmacy collects a $30.00 copayment from the consumer and $352.50 from the PBM (on the insurer’s behalf). Pursuant to a separately negotiated agreement, the manufacturer later pays a $150.00 rebate to the PBM. The rebate reduces the manufacturer’s net revenue to $217.50 ($367.50 – $150.00) and the PBM’s net cost to $202.50 ($352.50 – $150.00), but it does not change the prices paid by the wholesaler ($367.50) and pharmacy ($375.00). C. Manufacturer-PBM Rebate Negotiations Plaintiffs assert that PBM rebate payments are part of a scheme to inflate the price of analog insulin, but their specific allegations make clear that the rebates are simply a form of “negotiate[d] price discounts.” Id. ¶ 8. According to plaintiffs, the three largest PBMs (CVS Health, Express Scripts, and OptumRx) “aggregat[e] the business of multiple insurers” and collectively “control over 80% of the PBM market, covering 180 million insured lives.” Id. ¶¶ 7-8. Armed with this market power, the PBMs create formularies— ranked lists of drugs—that their insurers rely on “to determine how much of their members’ drug costs they will cover.” Id. ¶ 8. Plaintiffs allege that “[h]ealth insurers cover all or a portion of their members’ drug costs based on whether and where drugs fall on their PBMs’ formularies.” Id. ¶ 188. If a drug is excluded 13 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 24 of 64 PageID: 1066 from these formularies or placed in a less-favored reimbursement tier on the formulary, consumers may be required to pay the full cost of the medication or a larger share of the cost (through higher copayments or coinsurance percentages). Id. ¶¶ 8-9, 188, 202-203. That, in turn, will reduce demand for, and use of, the drug. Id. ¶¶ 8-9, 188. The use of formularies thus gives the PBMs enormous “power” to extract rebates from manufacturers. Id.; see also id. ¶ 247 (“PBMs control the formularies that determine whether people living with diabetes will purchase Novo Nordisk, Eli Lilly, or Sanofi’s drugs.”). The PBMs’ power to negotiate rebates from drug manufacturers is especially pronounced in the case of analog insulin. Analog insulins are “in the same therapeutic class and are perceived to have similar effectiveness and risk profile” (CAC ¶ 212), giving PBMs the power to exclude a more expensive analog insulin from a formulary in favor of a less expensive one. See id. ¶ 9; Prescription Drug Coverage at 104 (“Manufacturers of brand-name drugs that treat conditions for which an alternative brand-name treatment is available . . . have a strong incentive to grant discounts to the PBM in return for the inclusion of their drugs in the formulary.”).14 Plaintiffs allege that as a result, Novo Nordisk, Lilly, and Sanofi 14 “Prescription Drug Coverage” refers to U.S. Dep’t of Health and Human Servs., Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices (Apr. 1, 2000) (incorporated by reference by CAC ¶ 186 n.23); see also Prescription Drug Pricing at 12 (“[I]n negotiating with a (….continued) 14 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 25 of 64 PageID: 1067 aggressively compete against each other by offering rebates to PBMs for formulary placement. See CAC ¶¶ 188, 247.15 Plaintiffs characterize the rebates defendants pay to the PBMs as illegal “kickbacks” (see CAC ¶¶ 16, 216), but the federal government expressly exempts such rebate payments to PBMs from the federal Anti-Kickback Statute. See 42 C.F.R. § 100.952 (2017); see also 68 Fed. Reg. 23731 (May 5, 2003) (explaining that the anti-kickback safe harbor protects “rebates or other payments by drug manufacturers to PBMs”). Further, federal and state governments have long relied on rebate payments to reduce their own expenditures on branded drugs. See, e.g., 42 U.S.C. § 1396r-8(a) (2016) (requiring manufacturers, since the 1990s, to pay rebates to the Medicaid program as a condition of providing insurance coverage for the manufacturer’s medications); Patient Protection and Affordable Care Act, Pub. L. 111-148, § 2501(c), 124 Stat. 119 (2010) (substantially increasing the amount of Medicaid rebates that manufacturers must pay); Pharm. Research & Mfrs. of Am. (continued….) manufacturer, the PBM has the greatest leverage for brand-name drugs with close substitutes available on the market.”). 15 See also Allison Tsai, The Rising Cost of Insulin at 2, Diabetes Forecast (Mar. 2016) (manufacturers “offer [PBMs] big discounts” to “better position their drug against competitors — so their drug ends up on a lower tier while their competitor’s is on a higher tier with higher copays”) (incorporated by reference by CAC ¶ 183 n.22). 15 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 26 of 64 PageID: 1068 v. Walsh, 538 U.S. 644, 649 (2003) (describing how states negotiate “supplemental” Medicaid rebate agreements with manufacturers). Although manufacturer rebates have been a fixture of the U.S. pharmaceutical industry for decades,16 plaintiffs accuse defendants of “refus[ing] to disclose” the specific rebates paid to the PBMs for analog insulin. CAC ¶ 13.17 The amounts of the rebates paid by manufacturers to PBMs for specific drugs are subject to strict confidentiality agreements. See, e.g., id. Moreover, the Federal 16 See, e.g., Robert F. Atlas, The Role of PBMs in Implementing the Medicare Prescription Drug Benefit, 23 Health Affairs w4-504, w4-507 (July 2004) (incorporated by reference by CAC ¶ 188 n.24); Follow the Pill, passim; Prescription Drug Pricing, passim. 17 Any suggestion that manufacturers hid the fact that they pay rebates to PBMs, or that such rebates have been substantial and growing along with list price increases, is belied by public disclosures of which the Court can take judicial notice. See, e.g., Novo Nordisk, Annual Report 2015, at 64 (Feb. 2, 2016); Novo Nordisk’s (NVO) CEO Lars Rebien Sorensen on Q4 2015 Results—Earnings Call Transcript, Seeking Alpha (Feb. 3, 2016); Novo Nordisk, Annual Report 2014, at 23, 63-64 (Jan. 29, 2015); Novo Nordisk, Annual Report 2013, at 32, 42, 64 (Jan. 29, 2014); Sanofi 2016 Annual Report at 9 (noting increased Lantus rebates “in order to maintain favorable formulary positions”); Sanofi 2015 Annual Report at 8 (same); Lilly, 2016 Annual Report at F7, F12; Lilly, 2015 Annual Report at F7, F12; Lilly 2016 Integrated Summary Report at 1 (“The increase in discounts on Lilly sales creates a gap between list prices for our medications and the actual prices realized by Lilly.”). On a motion to dismiss, the Court may take judicial notice of such publicly disclosed information. Benak ex rel. Alliance Premier Growth Fund v. Alliance Capital Mgmt. L.P., 435 F.3d 396, 401 n.15 (3d Cir. 2006) (affirming decision to take judicial notice of newspaper articles “to indicate what was in the public realm at the time”); see also Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014) (“SEC filings are . . . matters of public record of which the court can take judicial notice”). 16 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 27 of 64 PageID: 1069 Trade Commission (“FTC”) has openly criticized legislative proposals to require public disclosure of manufacturer rebates. As the FTC concluded, the required disclosure of aggregate rebates paid to the PBMs would increase the risk that manufacturers would not compete aggressively through rebates, and “may lead to higher prices for PBM services and pharmaceuticals.”18 D. The Alleged “Scheme” Plaintiffs argue that defendants have raised the “benchmark” prices of their analog insulins “in an astounding and unjustifiable manner.” CAC ¶¶ 2, 6. Plaintiffs attribute these price increases to “purported ‘rebate’ schemes” between each defendant and the three largest PBMs (CVS Health, Express Scripts, and OptumRx). Id. ¶¶ 6-7. Plaintiffs accuse defendants of increasing their benchmark prices while holding their “real” prices constant (through correspondingly increased rebates) in order to increase the “spread” (which, according to plaintiffs, is the difference between “the benchmark price and the real price”) offered to PBMs. Id. ¶¶ 6, 213. According to plaintiffs, higher spreads are attractive to PBMs because “[t]he larger the spread between a drug’s benchmark and real price, the greater the headroom for the PBM to earn money on that drug.” Id. ¶ 10; see also id. ¶ 306 (“[H]igher 18 Susan A. Creighton, et al., Federal Trade Commission, Letter to Assembly Member Greg Agharzarian, at 4, 9 (Sept. 7, 2004), available at https://goo.gl/z8R6j5. 17 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 28 of 64 PageID: 1070 spreads result in increased profits for PBMs.”). Thus, manufacturers such as defendants allegedly have an “incentive” to offer a larger spread to PBMs than those offered by their competitors because they “‘don’t want their products disadvantaged.’” Id. ¶ 214 (quoting Net Pricing Trends at 1).19 Although plaintiffs characterize this as an illegal “scheme,” they do not allege that it is unlawful for defendants to raise the publicly reported benchmark prices for their insulin products. Nor do they allege that it is unlawful for defendants to offer substantial rebates to PBMs and their insurer clients for insulin. Instead, plaintiffs assert that the combination of these actions is somehow “fraudulent” because “the ‘rebates’ drug manufacturers offer PBMs are not reflected in th[e] prices” paid by consumers at the pharmacy counter. Id. ¶ 11; see also id. ¶¶ 6, 209, 318. But plaintiffs do not identify a single instance in which a defendant represented that its “benchmark prices” for insulin accounted for PBM rebates. Nor do they allege any facts showing that consumers were under the impression that the prices they paid for insulin at the pharmacy reflected the rebates defendants paid to the PBMs. 19 “Net Pricing Trends” refers to Richard Evans, Scott Hinds & Ryan Baum, US Rx Net Pricing Trends Thru 2Q16, SSR LLC (Oct. 5, 2016) (incorporated by reference by CAC ¶ 214 n.32). 18 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 29 of 64 PageID: 1071 Plaintiffs’ allegations of fraud boil down to the contention that the price they paid for insulin at the pharmacy should have been directly and fully offset by the rebates that the defendant manufacturers paid to their PBMs. See, e.g., id. ¶ 6 (“[C]onsumers do not see these lower prices because when they make their contribution—for example, as cash payers, or when making co-insurance payments, at the pharmacy point-of-sale—the transaction is based on the benchmark price . . .”).20 Defendants have no control, however, over whether or how a PBM or health insurer passes through the rebate to the insured consumers. Instead, the amount an insured consumer pays for insulin during deductible or coinsurance periods depends on the terms of the consumer’s insurance policy. Id. ¶¶ 8, 11, 188, 190, 193, 203, 204. Plaintiffs nevertheless allege that Novo Nordisk, Sanofi, and Lilly each formed a distinct “association-in-fact” enterprise with the three largest PBMs. Each “enterprise” allegedly engaged in “a fraudulent payoff scheme” to “exchang[e] kickbacks . . . for preferred formulary positions” for a defendant’s insulin products. See id. ¶¶ 295, 336, 377. Plaintiffs argue that each of the alleged 20 This is actually a generous interpretation of plaintiffs’ position. Plaintiffs apparently believe not only that insured consumers should have received rebated amounts at the point of sale, but that uninsured consumers—who by definition do not have health insurers and PBMs negotiating on their behalf, and whose purchases thus do not trigger the payment of rebates—should have received lower point-of-sale pricing too. 19 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 30 of 64 PageID: 1072 schemes entails a “pattern” of predicate acts of federal mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343. See id. ¶¶ 312-317, 353-358, 394-399. Plaintiffs allege in conclusory fashion that the asserted RICO violations “have directly and proximately caused plaintiffs and class members to be injured . . . because plaintiffs and class members have paid inflated out-of-pocket expenses” for insulin. Id. ¶¶ 324, 365, 406. LEGAL STANDARDS A. Rule 8(a) A complaint should be dismissed if, assuming its well-pleaded allegations of fact are true, it fails to plausibly show that the plaintiff is entitled to relief. See, e.g., Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). Legal conclusions and other conclusory allegations, however, are not assumed to be true. Id. at 678. B. Rule 9(b) In addition, claims sounding in fraud must be pleaded with the particularity required by Rule 9(b), including identification of “specific fraudulent statements, omissions, or misrepresentations.” Travelers Indem. Co. v. Cephalon, Inc., 620 F. App’x 82, 85-86 (3d Cir. 2015). The allegations must be specific enough not only to put “defendants on notice of the precise misconduct with which they are charged,” but also—and more importantly—“to safeguard defendants against spurious charges of immoral and fraudulent behavior.” Lum v. Bank of Am., 361 20 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 31 of 64 PageID: 1073 F.3d 217, 223-24 (3d Cir. 2004), abrogated on other grounds as recognized by In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 323 n.22 (3d Cir. 2010). C. RICO Claims Congress enacted RICO as part of the Organized Crime Control Act of 1970 “for the purpose of seek[ing] the eradication of organized crime in the United States.” Beck v. Prupis, 529 U.S. 494, 496 (2000) (internal quotation marks and citation omitted). RICO targets criminal activity, including conduct that is “indictable” as federal mail or wire fraud. 18 U.S.C. § 1961(1)(B) (2012) (citing federal criminal statutes including 18 U.S.C. §§ 1341 & 1343); see, e.g., Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 647 (2008). Thus, a prerequisite for any civil liability under RICO claims premised on mail and wire fraud, like plaintiffs’ claims, is that the defendants engaged in deceptive conduct with the specific intent to defraud. See, e.g., Advanced Oral Techs., L.L.C. v. Nutres Research, Inc., 2011 WL 198029, at *8 (D.N.J. Jan. 20, 2011). “[A]ll too frequently,” however, civil RICO plaintiffs “attempt to mold their claims to the RICO form even though their injuries do not fall within those intended to be addressed by the [statute].” Rosenson v. Mordowitz, 2012 WL 3631308, at *4 (S.D.N.Y. Aug. 23, 2012). “‘[E]xperience reveals that many plaintiffs, rather than fostering RICO’s mission as private attorneys general aiding public law enforcement, actually appear as private prospectors digging for RICO’s 21 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 32 of 64 PageID: 1074 elusive gold, and more often than not generating substantial costs rather than net gains to the public.’” Id. (quoting Gross v. Waywell, 628 F. Supp. 2d 475, 481 (S.D.N.Y. 2009)). Complaints that successfully plead a bona fide claim under RICO are “rare.” Id. at *5; see also Gross, 628 F. Supp. 2d at 479-80, 495 (“the incidence of favorable judgments for RICO plaintiffs is . . . stunningly awful” (internal quotation marks omitted)). This backdrop makes clear why civil RICO claims are among the most difficult claims to plead. See, e.g., Rogers v. Morrice, 2013 WL 1750004, at *6 (D.N.J. Apr. 23, 2013) (“fraud and civil RICO claims are subject to demanding pleading standards”). “Because the mere assertion of a RICO claim . . . has an almost inevitable stigmatizing effect on those named as defendants, . . . courts should strive to flush out frivolous RICO allegations at an early stage of the litigation.” Grant v. Turner, 2010 WL 4004719, at *3 (D.N.J. Oct. 12, 2010); see also Katzman v. Victoria’s Secret Catalogue, 167 F.R.D. 649, 655 (S.D.N.Y. 1996) (“Civil RICO is an unusually potent weapon—the litigation equivalent of a thermonuclear device.” (citation omitted)), aff’d, 113 F.3d 1229 (2d Cir. 1997). This is especially true of RICO claims premised on mail or wire fraud, which “must be particularly scrutinized because of the relative ease with which a plaintiff may mold a RICO pattern from allegations that, upon closer scrutiny, do not 22 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 33 of 64 PageID: 1075 support it.” Kolar v. Preferred Real Estate Invs., Inc., 361 F. App’x 354, 363 (3d Cir. 2010) (quotation omitted). To state a civil RICO claim, plaintiffs must plead particularized facts that plausibly show (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985). In addition, plaintiffs must allege that they have suffered a cognizable injury to their business or property, and that their injury was caused “by reason of” a violation of RICO. 18 U.S.C. § 1964(c) (2012); see, e.g., In re Schering Plough Corp. Intron/Temodar Consumer Class Action, 678 F.3d 235, 246 (3d Cir. 2012). The RICO violation must be both a “but-for” and a proximate cause of the plaintiff’s injury. See Bridge, 553 U.S. at 654. To plead proximate causation, a complaint must demonstrate a “‘direct relation between the injury asserted and the injurious conduct alleged.’” Id. (quoting Holmes v. Secs. Investor Prot. Corp., 503 U.S. 258, 268 (1992)). D. NJCFA Claims To state a claim under the NJCFA, a plaintiff must show (1) unlawful conduct by the defendant, (2) an “ascertainable loss” by the plaintiff, and (3) a causal relationship between the unlawful conduct and the ascertainable loss. See DeGennaro v. Am. Bankers Ins. Co. of Fla., 2017 WL 2693881, at *6 (D.N.J. June 22, 2017) (Martinotti, J.). Where, as here, plaintiffs’ allegations sound in fraud, 23 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 34 of 64 PageID: 1076 claims under the NJCFA are subject to Rule 9(b)’s heightened pleading standard. Id. at *5. ARGUMENT As set forth in greater detail below, plaintiffs’ RICO claims fail for a number of reasons. First, plaintiffs lack statutory standing to assert any RICO claims because they are “indirect purchasers” who do not purchase analog insulin directly from any defendant. This indisputable fact alone disposes of plaintiffs’ RICO claims. Second, even if plaintiffs had standing, they have not alleged the most basic element of a RICO claim: the existence of a predicate act. Plaintiffs assert violations of the criminal mail and wire fraud statutes, but the complaint does not allege a single instance in which a defendant misrepresented its prices or withheld information that it had a duty to disclose—much less that any defendant specifically intended to defraud consumers (or anyone else). The mere fact that some consumers pay a relatively higher price for insulin because they do not receive the benefit of rebates paid to PBMs cannot plausibly support a claim of criminal fraud. Third, plaintiffs fail to plead the existence of a RICO enterprise. The complaint is devoid of plausible allegations that defendants formed any kind of enterprise or participated in conducting any such enterprise. At most, the 24 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 35 of 64 PageID: 1077 complaint describes a classic “hub-and-spoke” arrangement in which a common defendant (each manufacturer) supposedly committed acts of fraud with the aid of different entities (the PBMs). Such rimless “hub-and-spoke” allegations fail as a matter of law to support a RICO claim. Plaintiffs also fail to allege other essential elements of a RICO enterprise: a common purpose among the defendants and the PBMs, and the participation of the defendants in conducting the affairs of the alleged enterprise. Fourth, plaintiffs fail to plead that any purported misrepresentation or omission proximately caused any injury to plaintiffs. Even if defendants had fully disclosed the amount of rebates paid to the PBMs for insulin, it would not have changed the amounts that plaintiffs paid for insulin. The prices paid by plaintiffs are dictated by pharmacies and their own insurers, not by defendants. The NJCFA claims fail for similar reasons. Plaintiffs cannot state a NJCFA claim because they do not allege with the required specificity how defendants violated the statute, when and where any purported misrepresentations were made, or who made any such statements. Plaintiffs also fail to allege that they suffered the “ascertainable loss” necessary to state a NJCFA claim. Although plaintiffs claim that defendants’ scheme “inflated” the price of insulin, courts have rejected attempts to rely on a price inflation theory to establish a claim under the NJCFA. 25 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 36 of 64 PageID: 1078 I. The RICO Claims Should Be Dismissed A. Plaintiffs’ Claims Are Barred by the Indirect Purchaser Rule Plaintiffs lack RICO standing because they are not the first party in the distribution chain who pay for insulin based on the “benchmark price.” Plaintiffs’ core allegation is that defendants each engaged in a “scheme” to “inflate the benchmark prices of rapid- and long-acting analog insulin drugs.” CAC ¶ 24. Plaintiffs acknowledge, however, that consumers are not the first party (or even the second) to pay for analog insulin based on the purportedly inflated benchmark price. Instead, defendants’ analog insulins are sold to wholesalers at prices based on WAC, which in turn sell them to pharmacies, hospitals, and clinics at prices that approximate WAC. See id. ¶ 177; Pricing and Reimbursement at 8; Follow the Pill at 18; Prescription Drug Pricing at 3.21 Because plaintiffs are three levels down the distribution chain from defendants, they are classic “indirect purchasers” who lack standing under RICO. See McCarthy v. Recordex Serv., Inc., 80 F.3d 842, 848, 855 (3d Cir. 1996) (“only the purchaser immediately downstream” has standing to assert RICO claims for payment of “excessive prices”). The indirect purchaser rule originated in the antitrust context. In Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) and Kansas v. UtiliCorp United Inc., 497 21 See also CAC ¶ 187 (explaining that “a drug’s benchmark price” refers to “its Average Wholesale Price (AWP) or the mathematically-related, Wholesale Acquisition Price (WAC)”). 26 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 37 of 64 PageID: 1079 U.S. 199 (1998), the Supreme Court established a bright-line rule that only the immediate purchaser has standing to sue a manufacturer for violations of federal antitrust laws. Any other approach would pose “the risk of duplicative recovery and the potential for overly-complex damages and apportionment calculations.” McCarthy, 80 F.3d at 851 n.14. Because RICO’s private cause of action, 18 U.S.C. § 1964(c), was modeled on the Clayton Act, “antitrust standing principles apply equally to allegations of RICO violations.” Id. at 855. Accordingly, the Third Circuit has held that the “precepts taught by Illinois Brick and Utilicorp apply to RICO claims, thereby denying RICO standing to indirect victims.” Id.; see also, e.g., Hale v. Stryker Orthopaedics, 2009 WL 321579, at *3 (D.N.J. Feb. 9, 2009) (“The Third Circuit has extended application of the ‘direct purchaser’ standing rule to RICO claims.”). The bright-line indirect purchaser rule is an insurmountable obstacle to plaintiffs’ RICO claims. Plaintiffs do not, and cannot, allege that they purchase analog insulin directly from any defendant; instead, their allegations confirm that defendants’ products are sold “from manufacturer to wholesaler, wholesaler to retailer (or mail order), and retailer to patient.” CAC ¶ 180; see also id. ¶¶ 18, 176-177, 181, 186. And plaintiffs allege that both wholesalers and retailers pay prices based on the allegedly inflated “benchmark prices” before plaintiffs 27 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 38 of 64 PageID: 1080 purchased insulin from pharmacies. See id. ¶¶ 313, 354, 395 (alleging that “the distribution chain” relies on “benchmark prices”). Accordingly, the indirect purchaser rule requires dismissal of plaintiffs’ RICO claims, “even if the majority of the injury is borne by [consumers].” Warren Gen. Hosp. v. Amgen Inc., 643 F.3d 77, 94 (3d Cir. 2011); see also McCarthy, 80 F.3d at 849 (indirect purchaser rule applies even if “the full cost of the product (and hence one hundred percent of any overcharge) had been passed on”); Link v. Mercedes-Benz of N. Am., Inc., 788 F.2d 918, 930 (3d Cir. 1986) (indirect purchaser rule applies even if inflated prices are “passed on” and “direct purchasers” lack incentive to sue). Hale v. Stryker Orthopaedics is directly on point. There, the plaintiffs alleged that manufacturers of artificial hip and knee implants violated RICO through a “collusive kickback scheme” that “allegedly inflated the prices charged” for patients’ implants. 2009 WL 321579, at *1. Judge Martini dismissed the RICO claim because the plaintiffs did “not plead that they purchased the joints used in their knee replacement surgeries directly from [the defendants].” Id. at *3. The Court explained that “[b]etween [p]laintiffs and [d]efendants in the chain of distribution stand several actors, including the hospitals performing the joint surgeries and plaintiffs’ insurers.” Id. at *4. Accordingly, “[p]laintiffs’ co- 28 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 39 of 64 PageID: 1081 payment alone does not allow them to stand in the shoes of a direct purchaser for standing purposes.” Id. The same is true here. Any putative injury to plaintiffs necessarily first passed through the intermediary entities in the distribution chain. Accordingly, plaintiffs lack standing to assert their RICO claims against defendants. See Warren, 643 F.3d at 91, 95 (downstream purchaser of drugs lacks standing to sue manufacturer under antitrust laws); see also Delaware Valley Surgical Supply Inc. v. Johnson & Johnson, 523 F.3d 1116, 1122 (9th Cir. 2008) (downstream purchaser of medical products lacked standing under the “sensible and straightforward” and “bright line rule” set forth in Illinois Brick); In re Brand Name Prescription Drugs Antitrust Litig., 248 F.3d 668, 670 (7th Cir. 2001) (consumers who “had not purchased . . . drugs directly from the defendants” would lack standing to assert federal antitrust claims). B. Plaintiffs Do Not Plead Facts Amounting to Mail or Wire Fraud Plaintiffs fail to plead the existence of any “fraudulent misrepresentation or omission reasonably calculated to deceive persons of ordinary prudence and comprehension,” Lum, 361 F.3d at 223 (internal citation omitted), much less with the particularity required by Rule 9(b), see Cephalon, 620 F. App’x at 85-86. Absent “a specific fraudulent statement,” identified by “the time, place, speaker and [its] content,” a civil RICO claim grounded in fraud should be dismissed. Jaye 29 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 40 of 64 PageID: 1082 v. Oak Knoll Vill. Condo. Owners Ass’n, Inc., 2016 WL 7013468, at *15 (D.N.J. Nov. 30, 2016). Plaintiffs accuse each defendant of having made “false or incomplete statements intended to mislead health care payers and consumers” concerning benchmark prices and the “existence, amount, and purpose of . . . rebates.” CAC ¶¶ 318, 359, 400. These allegations are based on two theories. First, plaintiffs allege that the benchmark price defendants charge to wholesalers is “false and misleading” because it fails to account for the rebates paid to the PBMs. Id.; see also id. ¶¶ 6, 11, 209, 300. Second, plaintiffs allege that defendants engaged in fraudulent omissions by failing to disclose to the public “the existence and amount of steep rebates” that are provided “to the PBMs in exchange for preferred formulary positions.” Id. ¶¶ 297, 338, 379. As shown below, neither of these allegations is sufficient to state a plausible predicate act of mail or wire fraud. 1. The Complaint Fails to Allege a Misrepresentation Plaintiffs’ RICO claims fail to allege a misrepresentation by defendants with the specificity required by Rule 9(b) or otherwise. Plaintiffs assert that defendants have increased the “spread” between their benchmark prices and “the real price arranged between the manufacturers and the PBMs.” Id. ¶ 6. But allegedly excessive pricing is not fraudulent. See, e.g., Eike v. Allergan, 850 F.3d 315, 318 (7th Cir. 2017) (en banc) (“The fact that a seller does not sell the product that you 30 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 41 of 64 PageID: 1083 want, or at the price you’d like to pay, is not an actionable injury.”). Even charging different prices to consumers for prescription medications is not unlawful. See Langford v. Rite Aid of Alabama, Inc., 231 F.3d 1308, 1313-14 (11th Cir. 2000) (dismissing RICO claim based on allegations that pharmacy “charged plaintiffs more for their prescription medication than it charged other consumers” because “variable pricing is the norm in many industries”); Bonilla v. Volvo Car Corp., 150 F.3d 62, 71 (1st Cir. 1998) (“price disparity is not itself fraud” because “nothing in the law of fraud [] prevents even a single seller from charging different markups”). No doubt aware of this fundamental problem with their claims, plaintiffs try to manufacture an argument that defendants misrepresented that their “benchmark prices” reflect rebates that they pay to PBMs. See CAC ¶ 11 (“rebates drug manufacturers offer PBMs are not reflected in these prices”). As shown below, however, plaintiffs offer no well-pleaded allegations to support that contention. First, plaintiffs fail to identify—anywhere in their 200-page complaint—a single instance in which defendants represented that the benchmark prices reflected rebates paid to PBMs. To the contrary, the specific statements in the complaint attributed to defendants expressly represent that there is a difference between defendants’ benchmark price and the net price that defendants receive after the payment of PBM rebates. See, e.g., CAC ¶ 249 (quoting Novo Nordisk statement 31 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 42 of 64 PageID: 1084 emphasizing that focusing on increases in its list prices is “misleading” because the “net price” Novo Nordisk realizes after “rebates, fees and other price concessions we provide to the payer . . . more closely reflects our actual profits”); id. ¶ 250 (quoting Lilly statement explaining that “higher rebates” demanded by PBMs result in increases in “benchmark prices without a corresponding increase in net price”); id. ¶ 251 (quoting Sanofi statement explaining that the company had “increased the level of rebates granted for Lantus® in order to maintain favorable formulary positions with key payers”); see also supra at 16 n.17 (identifying examples of defendants’ public rebate disclosures). Second, having failed to identify any actual misstatements, plaintiffs are left arguing that defendants’ “benchmark prices” are themselves fraudulent misrepresentations. CAC ¶¶ 308, 349, 390. Plaintiffs’ position appears to be that the “benchmark prices” were generally understood to mean a “real” or “net” price realized by the manufacturer after paying rebates to PBMs. Id. Plaintiffs do not offer a single allegation that would support that claim. Indeed, any such understanding would be directly contrary to federal law, which defines WAC as “the manufacturer’s list price for the drug or biological to wholesalers or direct purchasers in the United States, not including prompt pay or other discounts, rebates or reductions in price.” 42 U.S.C. § 1395w-3a(c)(6)(B) (emphasis added). 32 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 43 of 64 PageID: 1085 Moreover, plaintiffs’ assertion that WAC was understood to be a price net of PBM rebates defies common sense. WAC relates to prices paid by wholesalers and pharmacies that purchase and re-sell prescription drugs as part of the physical distribution chain. See id.; see also supra at 8-9. By contrast, rebates are paid separately and subsequently to PBMs and do not reduce or offset the amounts that the wholesaler and pharmacy already paid. See supra at 12-13.22 The Third Circuit has dismissed analogous allegations of fraud. See Lum, 361 F.3d at 223. In Lum, the plaintiffs argued that the term “‘prime rate’ [was] so generally understood to mean the lowest rate available to a bank’s most creditworthy borrowers that the failure to disclose that some borrowers obtain loans with interest rates below the prime rate constitutes fraud.” Id. at 226. The court rejected the argument, finding that the “the term ‘prime rate’ is sufficiently indefinite that it is reasonable for the parties to have different understandings of its meaning,” and holding that the plaintiffs’ RICO claim boiled down to a 22 Likewise, plaintiffs do not allege any facts suggesting that AWP was defined or understood to be a price net of rebates to PBMs. Indeed, counsel for the putative class are well aware that AWP and WAC are not understood to reflect PBM rebates. More than fifteen years ago, they brought a nationwide class action alleging that these benchmark prices should reflect the price paid by pharmacies, not PBMs. See In re Pharm. Indus. Average Wholesale Price Litig., 230 F.R.D. 61, 65 (D. Mass. 2003) (case brought by Hagens Berman alleging that “providers like pharmacies and doctors” acquire drugs “at prices far below AWP and WAC,” but “defendant manufacturers send publishers their AWPs (or their WACs) knowing that [health insurers] consider them indicators of prices to providers”). 33 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 44 of 64 PageID: 1086 “disagreement about the meaning” of that term, but that such a disagreement “does not rise to the level of fraud.” Id. Even more clearly here, plaintiffs’ arguments about what “benchmark prices” supposedly represent do not support their accusation of criminal fraud. 2. The Complaint Fails to Allege Any Omission in Violation of a Duty to Disclose Plaintiffs’ allegations of fraudulent omissions fare no better. Mail or wire fraud can be premised on non-disclosure only when the defendant has a duty to disclose. See, e.g., United States v. Ciavarella, 716 F.3d 705, 728-29 (3d Cir. 2013). Here, plaintiffs criticize defendants for “refus[ing] to disclose” the “real prices they offer PBMs.” CAC ¶ 13. Plaintiffs also allege that defendants “concea[l] . . . the existence and amount of steep rebates” provided “to the PBMs in exchange for preferred formulary positions.” Id. ¶¶ 297, 338, 379. But defendants were under no legal obligation to disclose either the rebates they pay to PBMs or the net prices they realize after paying rebates.23 It is a “settled premise that a seller generally has no duty to disclose internal pricing policies or its method for valuing what it sells.” Eller v. EquiTrust Life Ins. Co., 778 F.3d 1089, 1092-93 (9th Cir. 2015) (collecting cases); see also, e.g., Langford, 231 F.3d at 1313 (“As a general matter of federal law, retailers are under 23 While defendants were under no duty to disclose, they in fact did disclose the PBMs’ demands for increasingly steep rebates. See supra at 16 n.17. 34 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 45 of 64 PageID: 1087 no obligation to disclose their pricing structure to consumers.”). In Langford, the plaintiffs asserted a civil RICO claim against a pharmacy, alleging that the pharmacy had implemented a scheme to defraud uninsured customers by charging them higher prices than insured customers. The court affirmed the dismissal of the RICO claim, reasoning that “plaintiffs have not alleged any facts that would suggest that Rite Aid was subject to a duty to disclose the fact that it charged plaintiffs more for their prescription medication than it charged other consumers.” Id. at 1314. Likewise, here, defendants had no duty to disclose the amount of rebates paid to the PBMs. See Hemi Grp., LLC v. City of New York, 559 U.S. 1, 18 (2010) (Ginsburg, J., concurring) (explaining that where defendant “would have owed no duty to disclose [its] sales to anyone,” its “failure to disclose could not conceivably be deemed fraud of any kind” (citation omitted)).24 C. Plaintiffs Do Not Plead an Actionable RICO Enterprise Plaintiffs plead the existence of three association-in-fact enterprises, each comprising one manufacturer and the three largest PBMs (CVS Health, OptumRx, and Express Scripts). CAC ¶¶ 295, 336, 377. Plaintiffs allege that each manufacturer and all three PBMs “share the common fraudulent purpose of 24 The FTC opposes disclosure of manufacturer rebates to PBMs because it “may lead to higher prices for PBM services and pharmaceuticals.” See supra at 16-17 & n.18. 35 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 46 of 64 PageID: 1088 providing kickbacks in exchange for an exclusive or favorable formulary position” for insulin. Id. ¶¶ 303, 344, 385. Plaintiffs’ enterprise allegations fail for two reasons. First, each alleged enterprise constitutes a rimless “hub-and-spoke” conspiracy, which the Third Circuit has deemed insufficient, as a matter of law, to satisfy RICO. Second, plaintiffs challenge the independent commercial behavior of the defendant manufacturers and PBMs, and thus have failed to properly allege either a “common purpose” that is the sine qua non of a RICO enterprise, or that defendants participated in the conduct of a RICO enterprise. 1. The Complaint Alleges a Legally Deficient Rimless “Hub and Spoke” Enterprise An association-in-fact enterprise requires “at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose.” Boyle v. United States, 556 U.S. 938, 946 (2009). A rimless hub-and-spoke enterprise—in which various parties allegedly enter into separate agreements with a common defendant, but have no connection with one another aside from the common defendant’s involvement with each—inherently lacks those structural features. See In re Ins. Brokerage, 618 F.3d at 374-75. As the Third Circuit has reasoned, absent a “rim” unifying the entities serving as “spokes,” there is nothing to “tie [] together the various [parties] 36 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 47 of 64 PageID: 1089 allegedly comprising the association in fact into a single entity . . . formed for the purpose of working together—acting in concert—by means of racketeering acts.” Id. at 374 (internal quotation marks and citation omitted). Thus, allegations of a rimless wheel enterprise “fail the basic requirement that the components function as a unit, that they be ‘put together to form a whole.’” Id. (quoting Boyle, 556 U.S. at 945). If such allegations were sufficient to plead an association-in-fact enterprise, “competitors who independently engaged in similar types of transactions with the same firm could be considered associates in a common enterprise”—a result that “would contravene Boyle’s definition of ‘enterprise.’” Id. at 375. Plaintiffs’ enterprise allegations exemplify a legally deficient “hub and spoke” enterprise. The complaint does not even attempt to allege any direct relationships between the PBMs in connection with the alleged enterprises, but instead asserts only that “[t]here is regular communication between [each defendant] and each of the PBMs.” CAC ¶¶ 298, 339, 380. In other words, each defendant is alleged to have served as the hub for three unconnected PBM spokes. Routine business relationships between a single manufacturer and three different PBMs are “not a RICO enterprise.” Valcom, Inc. v. Vellardita, 2014 WL 1628431, at *7 (D.N.J. Apr. 23, 2014). 37 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 48 of 64 PageID: 1090 2. The Complaint Fails to Plead that Each Enterprise Had a “Common Purpose” or that Defendants Participated in the Conduct of Any Such Enterprise Plaintiffs’ enterprise allegations fail for the additional reason that they do not plausibly allege either that the enterprise members share a common purpose, or that defendants participated in the “conduct” of a RICO enterprise. First, an essential element of an association-in-fact enterprise is that its members are united in a “common purpose.” Boyle, 556 U.S. at 948; United States v. Turkette, 452 U.S. 576, 583 (1981). Allegations showing that a defendant is engaged in the “normal affairs” of a business relationship cannot satisfy the “common purpose” element of a RICO enterprise. See In re Ins. Brokerage Antitrust Litig., 2007 WL 1062980, at *13 (D.N.J. Apr. 5, 2007) (citation omitted). Plaintiffs assert that members of each alleged enterprise “share the common fraudulent purpose of providing kickbacks in exchange for exclusive or favorable formulary positions” for the analog insulin manufactured by the defendant. CAC ¶¶ 303, 344, 385. But the complaint contains no well-pleaded factual allegations indicating that each manufacturer and the PBMs shared each other’s interests. According to the complaint, “‘PBMs demand higher rebates in exchange for including [a] drug on their preferred-drug lists.’” CAC ¶ 250 (quoting Lilly); see also id. ¶¶ 8-9, 188, 212. In this “exchange,” it is not a PBM’s purpose to include or favor in its formulary any particular defendant’s analog insulin. Instead, each 38 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 49 of 64 PageID: 1091 PBM leverages its ability to “exclude, or place in a non-preferred position,” more expensive medications from its formulary, in order to extract rebates. Id. ¶ 9; see also id. ¶ 188. Conversely, it is not any defendant’s purpose to pay higher rebates to PBMs. Instead, each defendant offers rebates to PBMs because it is competing against other defendants for inclusion and preferred placement on PBMs’ formularies. See id. ¶ 209.25 The “type of interaction” alleged by plaintiffs thus “show[s] only that” the manufacturers and PBMs “ha[ve] a commercial relationship”—involving arm’slength negotiations against each other—“not that they had joined together to create a distinct entity” for the purpose of improperly inflating list prices of analog insulin. In re Aetna UCR Litig., 2015 WL 3970168, at *31 (D.N.J. June 30, 2015) (internal quotation marks and citation omitted) (dismissing RICO claims where “each defendant maintained an independent incentive to engage in the conduct alleged”). Such a “run-of-the-mill commercial relationship where each entity acts in its individual capacity to pursue its individual self-interest” does not amount to a RICO enterprise. Bible v. United Student Aid Funds, Inc., 799 F.3d 633, 655-56 25 See also, e.g., Denise Roland & Peter Loftus, Middlemen Fuel Insulin Price Rise, WALL ST. J., Oct. 10, 2016 (incorporated by reference by CAC ¶ 250 n.54) (“Net prices, or what drugmakers retain after discounts, have stayed the same or fallen in the past two years as the pharmaceutical companies compete to offer ever-deeper discounts to stay on the preferred drug lists at insurers and the PBM middlemen.”). 39 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 50 of 64 PageID: 1092 (7th Cir. 2015). Otherwise, any commercial transaction in which one party receives a payment and the other receives something of value could be deemed a criminal RICO enterprise. See, e.g., Ray v. Spirit Airlines, Inc., 836 F.3d 1340, 1352 n.3, 1354-55 (11th Cir. 2016) (dismissing RICO enterprise allegations where defendants “were engaged in no more than a series of legitimate commercial transactions”); Crichton v. Golden Rule Ins. Co., 576 F.3d 392, 400 (7th Cir. 2009) (dismissing RICO claim because “garden-variety” business relationships are “not what RICO penalizes”); Arthur v. Guerdon Indus., Inc., 827 F. Supp. 273, 279-80 (D. Del. 1993) (rejecting enterprise allegations based on mobile home manufacturer’s rebates to retailers, and noting that “[t]he state of the business world often requires a manufacturer . . . to provide incentives to a retailer or buyer in order to . . . be successful in the marketplace”). Indeed, plaintiffs’ argument that CVS Health, Express Scripts, and OptumRX share a “common purpose” with each defendant to disfavor or exclude the other defendants’ analog insulin is self-contradictory and nonsensical on its face. See id. ¶¶ 303, 311, 344, 352, 385, 393; see also id. ¶ 188. For example, if CVS Health formed an enterprise with Novo Nordisk to increase sales of Novo Nordisk’s insulin products, CVS Health could not also be part of separate enterprises with Lilly and Sanofi to increase sales of their competing insulin products. The three alleged enterprises would have directly opposing interests and 40 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 51 of 64 PageID: 1093 could not simultaneously share the alleged exclusionary purpose. The Court should not credit internally contradictory allegations such as these on a motion to dismiss. See, e.g., Lind v. New Hope Prop., LLC, 2010 WL 1493003, at *6 (D.N.J. Apr. 13, 2010) (dismissing plaintiffs’ conspiracy claim where conclusory assertions were contradicted by factual allegations); Payne v. DeLuca, 433 F. Supp. 2d 547, 612 (W.D. Pa. 2006) (holding, among other reasons, that “selfcontradictory” allegations were fatal to plaintiffs’ claims). Second, and for similar reasons, plaintiffs fail to adequately allege that defendants “conduct[ed] or participate[d], directly or indirectly, in the conduct of” a RICO enterprise’s affairs. 18 U.S.C. § 1962(c). To satisfy this requirement, plaintiffs must plausibly allege that “defendants conducted or participated in the conduct of the ‘enterprise’s affairs,’ not just their own affairs.” Reves v. Ernst & Young, 507 U.S. 170, 185 (1993). Where a plaintiff’s allegations “are entirely consistent with . . . each [enterprise member] going about its own business” within “the bounds of the parties’ normal commercial relationships,” the conduct requirement is unsatisfied. United Food & Commercial Workers Unions & Employers Midwest Health Benefits Fund v. Walgreen Co., 719 F.3d 849, 855 (7th Cir. 2013). Plaintiffs cannot show that defendants participated in the conduct of a RICO enterprise by engaging in arm’s-length negotiations with PBMs. This is simply the 41 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 52 of 64 PageID: 1094 negotiating framework inherent in any manufacturer-PBM relationship. Plaintiffs’ allegations are “entirely consistent with [defendants and the PBMs] each going about [their] own business.” Id. at 855. Crediting those allegations would effectively criminalize rebate negotiations across the entire pharmaceutical industry. That extreme position finds no support in RICO. D. Plaintiffs Do Not Adequately Plead Proximate Causation “[T]o state a claim under civil RICO, the plaintiff is required to show that a RICO predicate offense not only was a ‘but for’ cause of his injury, but was the proximate cause as well.” Hemi, 559 U.S. at 9 (internal quotation marks and citation omitted); see also In re Avandia Mktg., Sales Practices & Prod. Liab. Litig., 804 F.3d 633, 638 (3d Cir. 2015) (“The language of § 1964(c) requires a RICO plaintiff to show that the plaintiff suffered an injury to business or property and that the plaintiff’s injury was caused by the defendant’s violation of 18 U.S.C. § 1962.” (footnote omitted)). Plaintiffs fail to allege proximate causation because defendants’ supposed failure to disclose the “real price” of analog insulin—i.e., some measure of price net of rebates to PBMs—and how it differs from the “benchmark price” had no effect on the price that plaintiffs paid for insulin. Under RICO, proximate causation requires a “direct relation” between the injury asserted and the alleged predicate acts. Hemi, 559 U.S. at 9 (quoting Holmes, 503 U.S. at 268). Proximate causation is absent if the plaintiff’s alleged 42 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 53 of 64 PageID: 1095 injuries “could have resulted from factors other than [the defendants’] alleged acts of fraud.” Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 459 (2006); see also Hemi, 559 U.S. at 11 (holding that proximate causation was absent where “the conduct directly causing the harm was distinct from the conduct giving rise to the fraud”). “When a court evaluates a RICO claim for proximate causation, the central question it must ask is whether the alleged violation led directly to the plaintiff’s injuries.” Anza, 547 U.S. at 461; see also, e.g., Anderson v. Ayling, 396 F.3d 265, 270 (3d Cir. 2005) (dismissing complaint for failure to allege proximate causation where there was, among other factors, “little indication of specific intent to harm plaintiffs”).26 Plaintiffs fail to allege that defendants’ alleged misrepresentations are the direct cause of their alleged injuries. At bottom, plaintiffs assert that defendants concealed “from the general public and consumers . . . the existence and amount of steep rebates [defendants] gave to the PBMs in exchange for preferred formulary 26 Furthermore, where a RICO claim is based on predicate acts of mail or wire fraud, a plaintiff must plausibly allege that at least “someone relied on the defendant’s misrepresentations.” Bridge, 553 U.S. at 658-59; Lynch v. Capital One Bank (USA), N.A., 2013 WL 2915734, at *3 (E.D. Pa. June 14, 2013) (“some form of reliance on the defendant’s misrepresentation is necessary to properly establish proximate cause for a RICO violation based on mail or wire fraud”). 43 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 54 of 64 PageID: 1096 positions” (see CAC ¶¶ 297, 338, 379) and the “lower, but secret, real price” that is “arrived at after deducting the manufacturer’s ‘rebate’ to [the] PBMs.” Id. ¶ 6.27 However, plaintiffs cannot show that disclosure of the “real price” would have changed the amounts they paid for analog insulin. Plaintiffs themselves allege that the point-of-sale price charged to an insured consumer is determined by the consumer’s own PBM and insurer, and that the price charged to an uninsured consumer is determined unilaterally by the pharmacy. Id. ¶¶ 11 n.8, 190. They further allege that PBMs and pharmacies set prices based on defendants’ benchmark price. See id. But plaintiffs do not allege that disclosure of the difference between the benchmark price and the “real price” (i.e., a price net of rebates) would have (i) changed the benchmark price itself, (ii) caused PBMs or pharmacies to set a different point-of-sale price for plaintiffs, or (iii) entitled plaintiffs to any corresponding rebate or discount. To the extent that plaintiffs are dissatisfied with their own insurers’ failure to apply manufacturer rebates to reduce the prices that consumers pay at the point of sale, or with pharmacies’ unilateral pricing decisions, their injury has “resulted from factors other than [the defendants’] alleged acts of fraud.” Anza, 547 U.S. at 459. 27 As noted above, the fact that brand name drug manufacturers pay rebates to PBMs has been public knowledge for many years. See supra at 16 n.17. 44 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 55 of 64 PageID: 1097 Numerous courts have rejected RICO claims where the alleged misrepresentations did not cause the plaintiffs’ alleged injuries. As one district court has noted, a plaintiff cannot prove an injury (and thus lacks RICO standing) where “the rebates that were not disclosed had no effect on the decisions of the plaintiffs to incur [costs].” Arthur, 827 F. Supp. at 280. Likewise, here, defendants’ supposed misrepresentations or omissions about “rebates” have no connection to the prices plaintiffs ultimately paid for insulin. Knowing the details of the rebates would not have entitled consumers to any corresponding discount, nor would it have in any other way altered the prices pharmacies charge at the counter—which, again, are not set by defendants. See also Dow Chem. Co. v. Exxon Corp., 30 F. Supp. 2d 673, 695-96 (D. Del. 1998) (dismissing RICO claim where the plaintiff’s “losses do not stem directly from [the] alleged misrepresentations”).28 28 This case thus presents the opposite of the situation in Avandia. There, the Third Circuit found RICO’s proximate-causation requirement satisfied where the defendant manufacturer allegedly had misrepresented the safety of an insulin drug (Avandia) directly to the plaintiff third-party payors, which relied on the misrepresentation in deciding to “include[] Avandia in their formularies and cover[] Avandia at favorable rates in reliance on these misrepresentations.” 804 F.3d at 636. The court held that “[t]he conduct that allegedly caused plaintiffs’ injuries is the same conduct forming the basis of the RICO scheme alleged in the complaint—the misrepresentation of the heart-related risks of taking Avandia that caused [plaintiffs] and PBMs to place Avandia in the formulary.” Id. at 644. Unlike in Avandia, plaintiffs do not (and cannot) allege that defendants’ alleged nondisclosure of rebates directly impacted their purchasing decisions. 45 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 56 of 64 PageID: 1098 II. The New Jersey Consumer Fraud Act Claims Should Be Dismissed for Failure to State a Claim A. The Complaint Fails to Plead the “Deceptive Practices” and “Unconscionable Pricing” Claims with Specificity Plaintiffs’ NJCFA claims,29 like their RICO claims, sound in fraud, and thus should be dismissed because they lack the particularity required by Rule 9(b). See DeGennaro, 2017 WL 2693881, at *5 (“The heightened pleading standard set forth in Rule 9(b) applies to plaintiff’s [NJCFA] and common law fraud claims.”).30 Plaintiffs offer only unsupported allegations accusing defendants of “misrepresenting” or “concealing” pricing information, and claiming that defendants “knew, but did not disclose” information related to the cost of their insulin products and the existence and purpose of rebates. CAC ¶¶ 418-419, 434435. Because plaintiffs do not identify with specificity how defendants violated the NJCFA, when and where any purported misrepresentations about “true prices” 29 Plaintiffs bring three claims under the NJCFA: one against Sanofi for deceptive practices (Count Four), one against Novo Nordisk for deceptive practices (Count Five), and one against Lilly, Sanofi, and Novo Nordisk for unconscionable business practices (Count Six). Each claim fails for the reasons set forth in this section. Separately, plaintiffs assert a cursorily pleaded, duplicative NJCFA claim against all defendants (Count Forty) that fails for the same reasons. 30 Plaintiffs’ allegations of “unconscionable” pricing practices arise out the same alleged course of conduct as their other NJCFA claims and RICO claims. See CAC ¶¶ 439-448. “Because the underpinning of [plaintiffs’ NJCFA] claim is fraud,” Rule 9(b) applies to their unconscionable practices claim as well. Gray v. Bayer Corp., 2009 WL 1617930, at *2 (D.N.J. June 9, 2009). 46 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 57 of 64 PageID: 1099 were made, or who made any such statements, the NJCFA claims must be dismissed. B. The Complaint Does Not Plead Unlawful Conduct by Defendants Plaintiffs have failed to plead any unlawful conduct by defendants. Plaintiffs’ allegations are predicated on alleged “deceptive” and “unconscionable” practices. See, e.g., id. ¶¶ 418, 434, 448. The “capacity to mislead is the prime ingredient of deception or an unconscionable commercial practice.” Sickles v. Cabot Corp., 877 A.2d 267, 276 (N.J. Super. Ct. App. Div. 2005). As shown above, plaintiffs have failed to identify any actions by defendants that were capable of misleading consumers as to analog insulin pricing or rebates. See id. at 277 (dismissing NJCFA claim where plaintiff “failed to set forth any factual allegations to demonstrate a capacity to mislead”). Moreover, because plaintiffs have not identified a single affirmative misrepresentation or omission of material fact by any defendant, much less all of them, plaintiffs cannot state a claim for a “deceptive” practice. See Billings v. Am. Express Co., 2011 WL 5599648, at *9 (D.N.J. Nov. 16, 2011) (explaining that “affirmative misrepresentation[s]” and “knowing omission[s] . . . accompanied by an intent that others rely upon the omission” constitute unlawful conduct). Plaintiffs’ allegations of “unconscionable” pricing similarly fail. New Jersey courts have uniformly rejected the notion that allegedly “excessive prices” 47 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 58 of 64 PageID: 1100 themselves constitute an unconscionable commercial practice. See, e.g., Quigley v. Esquire Deposition Servs., LLC, 975 A.2d 1042, 1048 (N.J. Super. Ct. App. Div. 2009) (“Plaintiff has not cited any authority for his argument that a Consumer Fraud Act claim may be stated solely by an allegation that the price of a product was excessive . . . .”); Yingst v. Novartis AG, 63 F. Supp. 3d 412, 416 (D.N.J. 2014) (dismissing NJCFA claim where plaintiff’s “only contention [was] that [d]efendant engaged in an unconscionable commercial practice by charging a higher price”).31 Conduct that merely causes “consumer dissatisfaction” is not unconscionable. Billings, 2011 WL 5599648, at *9. 31 The cases cited in the complaint do not suggest otherwise. See CAC ¶ 441 n.86. In each of these cases, plaintiffs alleged that defendants had engaged in deceptive marketing aimed at vulnerable consumers and failed to deliver the goods or services that were promised, in addition to charging an allegedly excessive price. Kugler v. Romain, 279 A.2d 640, 651-53 (N.J. 1971) (defendants engaged in door-to-door canvassing, selling “educational packages” that were “practically worthless for that purpose” at an “exorbitant price”); In re Nat’l Credit Mgmt. Grp., 21 F. Supp. 2d 424, 452-53 (D.N.J. 1998) (defendant “prey[ed] upon economically disadvantaged individuals” and charged “grossly excessive” fees for credit screening while “provid[ing] services of limited value in return”); In re Fleet, 95 B.R. 319, 336 (E.D. Pa. 1989) (defendants marketed financial counseling services that it “could not and did not provide” to “financially troubled and distraught” consumers, then charged consumers an excessive fee “simply for referring them to an attorney”); Pro v. Hertz Equip. Rental Corp., 2012 WL 12906183, at *1 (D.N.J. June 25, 2012) (defendants deceptively collected $151 million in coverage fees for car rentals, but only provided coverage for a small number of loss claims). 48 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 59 of 64 PageID: 1101 C. The Complaint Does Not Allege that Plaintiffs Suffered Any “Ascertainable Loss” The NJCFA claims also fail because plaintiffs have not established (and cannot establish) the “ascertainable loss” required by the statute. To show “ascertainable loss,” a plaintiff must show one of the following: (1) that the “product received was essentially worthless,” under the “out-of-pocket theory,” or (2) that she was “misled into buying a product that [was] ultimately worth less than the product that was promised,” under the “benefit of the bargain theory.” DeGennaro, 2017 WL 2693881, at *7 (citations omitted). A plaintiff who seeks to demonstrate ascertainable loss under the “benefit of the bargain theory” must allege both a “reasonable belief about the product induced by a misrepresentation” and also that the “difference in value between the product promised and the one received can be reasonably quantified.” In re Gerber Probiotic Sales Practices Litig., 2014 WL 3446667, at *3 (D.N.J. July 11, 2014) (citation omitted). A “failure to quantify this difference in value results in the dismissal of a claim.” Id. The complaint fails to state any claims under the NJCFA because it does not plead ascertainable loss. See DeGennaro, 2017 WL 2693881, at *6. It does not state claims under the “out-of-pocket” theory because it contains numerous allegations that show the significant value of insulin to individuals with diabetes, which preclude any inference that the medication is “worthless.” See id. at *7. Indeed, plaintiffs repeatedly emphasize that insulins produced by defendants are 49 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 60 of 64 PageID: 1102 “unquestionably the best course of treatment” for those with Type I diabetes and the “most convenient initial insulin regimen” for those with Type II diabetes. CAC ¶¶ 234-238 (quotation omitted). Nor does the complaint state a claim under the “benefit of the bargain” theory. Indeed, plaintiffs make no attempt to allege that they were misled about any of the benefits of insulin, and their conclusory assertions that defendants “inflate” the prices of insulins (e.g., id. ¶¶ 2, 24) rest solely on allegations that the price paid by certain consumers is (not surprisingly) higher than the price paid by some insurers and the average net price received by the manufacturer. Instead of alleging that they were misled about the benefits of insulin, plaintiffs allege that defendants made unspecified misleading statements and omissions regarding “the true cost of insulin”—which is, among other problems, incoherent. See, e.g., id. ¶ 273. Plaintiffs do not allege any “reasonable belief about [insulin] induced by a misrepresentation” or that there was any “difference in value between the [insulin] promised and the [insulin] received”—much less that any such difference “can be reasonably quantified.” In re Gerber, 2014 WL 3446667, at *3. Therefore, plaintiffs have failed to allege an ascertainable loss under the “benefit of the 50 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 61 of 64 PageID: 1103 bargain” theory.32 See, e.g., Truglio v. Planet Fitness, Inc., 2016 WL 4084030, at *8 (D.N.J. July 28, 2016) (holding that plaintiff had failed to “plausibly allege that there is a difference in value between the gym membership [she was] promised . . . and the one received . . . or that such difference can be reasonably quantified”); see also Franulovic v. Coca Cola Co., 2007 WL 3166953, at *8-10 (D.N.J. Oct. 25, 2007) (explaining that “broad and conclusory allegations are not sufficient to demonstrate an ascertainable loss” under the NJCFA (citation omitted)). In effect, plaintiffs’ NJCFA claims rely on a novel and exceedingly amorphous “price inflation” theory. But New Jersey courts have expressly rejected attempts to rely on such theories in the NJCFA context. See Dugan v. TGI Fridays, Inc., 171 A.3d 620, 640 (N.J. 2017) (noting decisions explaining that permitting plaintiffs to rely on such a theory would “effectively eliminate the 32 Some judges in this District have identified “nominal overcharge” as a third category of ascertainable loss in dictum. See, e.g., Truglio, 2016 WL 4084030, at *6. However, that treatment of ascertainable loss appears to be a misinterpretation of New Jersey law. Courts discussing “nominal” charges have done so in the context of the type of loss for which class actions are an appropriate mechanism, rather than as a third cognizable type of loss. See Lee v. Carter-Reed Co., 4 A.3d 561, 583 (N.J. 2010) (explaining that a class action was a “superior adjudicative method” for resolving claims due in part to the nominal value of each class member’s claim); Bosland v. Warnock Dodge, Inc., 964 A.2d 741, 751 (N.J. 2009) (“When confronted, as we are here, with a plaintiff who asserts that she was the victim of an overcharge which itself is small in amount, and who seeks recovery for herself and on behalf of numerous others with ‘nominal’ claims, we cannot overlook the reality that, without the remedy that the [NJCFA] affords, all of those wrongs might go unvindicated.”). 51 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 62 of 64 PageID: 1104 ascertainable loss and causation requirements that differentiate consumer CFA claims from Attorney General enforcement actions under the statute”). Thus, courts dismiss NJCFA claims where it is clear that plaintiffs are attempting to rely on a “price inflation” theory in lieu of a concrete showing of ascertainable loss, and plaintiffs’ NJCFA claims should be dismissed for that reason as well. See, e.g., In re Schering-Plough Corp. Intron/Temodar Consumer Class Action, 2009 WL 2043604, at *20-21, *31(D.N.J. July 10, 2009); New Jersey Citizen Action v. Schering-Plough Corp., 842 A.2d 174, 178-79 (N.J. Super. Ct. App. Div. 2003). CONCLUSION For the foregoing reasons, defendants respectfully request that the RICO claims and the NJCFA claims in the Consolidated Amended Class Action Complaint be dismissed with prejudice. Dated: March 9, 2018 Respectfully submitted, By: /s/ Michael R. Griffinger, Esq. Michael R. Griffinger, Esq. Christopher Walsh, Esq. Calvin K. May, Esq. GIBBONS P.C. One Gateway Center Newark, NJ 07102-5310 Tel: (973) 596-4500 James P. Rouhandeh, Esq. (admitted pro hac vice) David B. Toscano, Esq. (admitted pro hac vice) DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, NY 10017 52 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 63 of 64 PageID: 1105 Tel: (212) 450-4000 Neal A. Potischman, Esq. (admitted pro hac vice) Andrew Yaphe, Esq. (admitted pro hac vice) DAVIS POLK & WARDWELL LLP 1600 El Camino Real Menlo Park, CA 94025 Tel: (650) 752-2000 Attorneys for Defendant Novo Nordisk Inc. By: /s/ Melissa A. Geist, Esq. Melissa A. Geist, Esq. REED SMITH LLP Princeton Forrestal Village 136 Main Street, Suite 250 Princeton, NJ 08540 Tel.: (609) 514-5978 Shankar Duraiswamy, Esq. Mark Lynch, Esq. (admitted pro hac vice) Henry B. Liu, Esq. (admitted pro hac vice) COVINGTON & BURLING LLP One CityCenter 850 Tenth Street, N.W. Washington, DC 20001 Tel.: (202) 662-6000 Attorneys for Defendant Eli Lilly and Company 53 Case 3:17-cv-00699-BRM-LHG Document 109-1 Filed 03/09/18 Page 64 of 64 PageID: 1106 By: /s/ Liza M. Walsh, Esq. Liza M. Walsh, Esq. WALSH PIZZI O’REILLY FALANGA LLP 1037 Raymond Blvd, Suite 600 Newark, NJ 07102 Tel.: (973) 757-1100 Michael R. Shumaker, Esq. (admitted pro hac vice) Julie E. McEvoy, Esq. (admitted pro hac vice) William D. Coglianese, Esq. (admitted pro hac vice) JONES DAY 51 Louisiana Avenue, N.W. Washington, DC 20001 Tel.: (202) 879-3939 Toni-Ann Citera, Esq. (admitted pro hac vice) JONES DAY 250 Vesey Street New York, NY 10281 Tel.: (212) 326-3939 Attorneys for Defendant Sanofi-Aventis U.S. LLC 54 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 1 of 38 PageID: 1107 Michael R. Griffinger, Esq. Liza M. Walsh, Esq. GIBBONS P.C. WALSH PIZZI O’REILLY FALANGA One Gateway Center LLP Newark, NJ 07102-5310 1037 Raymond Blvd, Suite 600 Tel.: (973) 596-4500 Newark, NJ 07102 Tel.: (973) 757-1100 James P. Rouhandeh, Esq. (pro hac vice) David B. Toscano, Esq. (pro hac vice) Michael R. Shumaker, Esq. (pro hac vice) DAVIS POLK & WARDWELL LLP Julie E. McEvoy, Esq. (pro hac vice) 450 Lexington Avenue William D. Coglianese, Esq.(pro hac vice) New York, NY 10017 JONES DAY Tel.: (212) 450-4000 51 Louisiana Avenue, N.W. Washington, DC 20001 Neal A. Potischman, Esq. (pro hac vice) Tel.: (202) 879-3939 Andrew Yaphe, Esq. (pro hac vice) DAVIS POLK & WARDWELL LLP Toni-Ann Citera , Esq. (pro hac vice) 1600 El Camino Real JONES DAY Menlo Park, CA 94025 250 Vesey Street Tel.: (650) 752-2000 New York, NY 10281 Tel.: (212) 326-3939 Attorneys for Defendant Novo Nordisk Inc. Attorneys for Defendant Sanofi-Aventis Melissa A. Geist, Esq. U.S. LLC REED SMITH LLP Princeton Forrestal Village 136 Main Street, Suite 250 Princeton, NJ 08540 Tel.: (609) 514-5978 Shankar Duraiswamy, Esq. Mark Lynch, Esq. (pro hac vice) Henry Liu, Esq. (pro hac vice) COVINGTON & BURLING LLP One CityCenter 850 Tenth Street, N.W. Washington, DC 20001 Tel.: (202) 662-6000 Attorneys for Defendant Eli Lilly and Company UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY Civil Action No. 17-cv-699 (BRM)(LHG) IN RE INSULIN PRICING LITIGATION ORAL ARGUMENT REQUESTED DEFENDANTS’ MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DISMISS THE CONSOLIDATED AMENDED CLASS ACTION COMPLAINT (COUNTS 7-60) Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 2 of 38 PageID: 1108 TABLE OF CONTENTS PAGE PRELIMINARY STATEMENT ...............................................................................1 ARGUMENT .............................................................................................................3 I. II. All of Plaintiffs’ State Law Claims Should Be Dismissed..............................3 A. All the Claims Fail Because Plaintiffs’ Allegations Fail to Show Fraudulent, Unfair, or Unconscionable Conduct ..................................3 B. All the Claims Fail Because They Are Nothing More Than Cursory Recitations of the Elements of Each Statute ...........................5 C. All the Claims Fail to Plead Proximate Causation ................................5 D. All the Claims Fail to Comply with Rule 9(b) ......................................6 E. All the Claims Fail Because Plaintiffs’ Alleged Damages Are Speculative ............................................................................................8 Certain State Law Claims Should Be Dismissed for Independent Reasons ............................................................................................................8 A. Eighteen of the Claims Lack a Plaintiff with Article III Standing .................................................................................................8 B. Certain Claims Fail as to One or More Defendants Because No Plaintiff Purchased That Defendant’s Products ..................................10 C. Eight of the Claims Fail Due to Statutory Prohibitions on Consumer Class Actions .....................................................................13 D. Six of the Claims Fail Because Plaintiffs Are Not Direct Purchasers or Otherwise in Privity with Defendants ..........................14 E. Six of the Claims Fail Because Plaintiffs Do Not Plead Reliance ...............................................................................................15 i Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 3 of 38 PageID: 1109 F. Five of the Claims Fail Because Plaintiffs Do Not Allege Any Wrongdoing Within the State ..............................................................16 G. Three of the Claims Fail Due to Plaintiffs’ Failure to Comply with Other Procedural Requirements ..................................................17 CONCLUSION ........................................................................................................18 ii Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 4 of 38 PageID: 1110 TABLE OF AUTHORITIES PAGE Cases Barge v. Bristol-Myers Squibb Co., 2009 WL 5206127 (D.N.J. Dec. 30, 2009) ..........................................................16 Bonilla v. Volvo Car Corp., 150 F.3d 62 (1st Cir. 1998) ....................................................................................4 Calnin v. Hillard, 2008 WL 336892 (E.D. Wis. Feb. 5, 2008) .........................................................17 City of Findlay v. Hotels.com, L.P., 441 F. Supp. 2d 855 (N.D. Ohio 2006) ................................................................18 Davis v. Ace Hardware Corp., 2014 WL 688132 (D. Del. Feb. 21, 2014) ...........................................................13 De David v. Alaron Trading Corp., 2015 WL 2208407 (N.D. Ill. May 7, 2015) .........................................................17 DeGennaro v. Am. Bankers Ins. Co. of Fla., 2017 WL 2693881 (D.N.J. June 22, 2017) ........................................................2, 7 Delgado v. Ocwen Loan Servicing, LLC, 2017 WL 5201079 (E.D.N.Y. Nov. 9, 2017) .......................................................14 Dimas v. JPMorgan Chase Bank, N.A., 2018 WL 809508 (N.D. Cal. Feb. 9, 2018) ..........................................................16 Encore Med., L.P. v. Jay Kennedy, D.C., 2013 WL 839838 (W.D. Pa. Mar. 6, 2013) ..........................................................17 Ford Motor Credit Co. v. Majors, 2005 WL 1021551 (Minn. Ct. App. May 3, 2005) ................................................4 Fraiser v. Stanley Black & Decker, Inc., 109 F. Supp. 3d 498 (D. Conn. 2015) ..................................................................13 iii Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 5 of 38 PageID: 1111 Frederico v. Home Depot, 507 F.3d 188 (3d Cir. 2007) ...................................................................................6 Goshen v. Mut. Life Ins. Co. of N.Y., 98 N.Y.2d 314 (N.Y. 2002) ..................................................................................17 Green v. Green Mountain Coffee Roasters, Inc., 279 F.R.D. 275 (D.N.J. 2011) ..............................................................................11 Humphrey v. CitiBank NA, 2013 WL 5407195 (N.D. Miss. Sept. 25, 2013) ..................................................18 Hunt v. U.S. Tobacco Co., 538 F.3d 217 (3d Cir. 2008) .................................................................................16 In re Flonase Antitrust Litig., 692 F. Supp. 2d 524 (E.D. Pa. 2010)....................................................................10 In re Hannaford Bros. Co. Customer Data Sec. Breach Litig., 660 F. Supp. 2d 94 (D. Me. 2009) ..........................................................................8 In re L’Oreal Wrinkle Cream Mktg. and Sales Practices Litig., 2013 WL 6450701 (D.N.J. Dec. 9, 2013) ............................................................11 In re Online Travel Co. (OTC) Hotel Booking Antitrust Litig., 997 F. Supp. 2d 526 (N.D. Tex. 2014) ...................................................................5 In re Schering Plough Corp. Intron/Temodar Consumer Class Action, 678 F.3d 235 (3d Cir. 2012) ...................................................................................9 In re Suboxone (Buprenorphine Hydrochloride & Naloxone) Antitrust Litig., 2017 WL 4642285 (E.D. Pa. Oct. 17, 2017) ..........................................................5 In re Target Corp. Customer Data Sec. Breach Litig., 66 F. Supp. 3d 1154 (D. Minn. 2014) ..................................................................14 In re: Niaspan Antitrust Litig., 2015 WL 8150588 (E.D. Pa. Dec. 8, 2015) ...........................................................9 John Boyd Co. v. Bos. Gas Co., 775 F. Supp. 435 (D. Mass. 1991)........................................................................15 iv Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 6 of 38 PageID: 1112 Kantner v. Merck & Co., Inc., 2007 WL 3092779 (Ind. Super. Ct. Apr. 18, 2007) ...........................................4, 8 Kussy v. Home Depot U.S.A. Inc., 2006 WL 3447146 (E.D. Mich. Nov. 28, 2006) ..................................................16 Lewis v. Casey, 518 U.S. 343 (1996) ...............................................................................................9 Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014) .......................................................................................2, 6 Lieberson v. Johnson & Johnson Consumer Cos., Inc., 865 F. Supp. 2d 529 (D.N.J. 2011).......................................................................11 Lisk v. Lumber One Wood Preserving, LLC, 792 F.3d 1331 (11th Cir. 2015) ............................................................................14 Martinelli v. Petland, Inc., 2010 WL 376921 (D. Ariz. Jan. 26, 2010) .............................................................6 McGarvey v. Penske Auto. Grp., Inc., 639 F. Supp. 2d 450 (D.N.J. 2009).....................................................................1, 5 Mueller Co. v. U.S. Pipe & Foundry Co., 2003 WL 22272135 (D.N.H. Oct. 2, 2003)..........................................................17 Neale v. Volvo Cars of N. Am., LLC, 794 F.3d 353 (3d Cir. 2015) ...................................................................................9 Otis-Wisher v. Medtronic, Inc., 616 F. App’x 433 (2nd Cir. 2015) ........................................................................15 Plaza 22, LLC v. Waste Mgmt. of La., LLC, 2015 WL 1120320 (M.D. La. Mar. 12, 2015) ......................................................14 Plumbers Local Union No. 690 Health Plan v. Apotex Corp., 2017 WL 4235773 (E.D. Pa. Sept. 25, 2017).................................................. 9, 10 Prohias v. Pfizer, Inc., 485 F. Supp. 2d 1329 (S.D. Fla. 2009)...................................................................8 v Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 7 of 38 PageID: 1113 Robinson v. Deutsche Bank Nat’l Tr. Co., 932 F. Supp. 2d 95 (D.D.C. 2013) .......................................................................15 Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393 (2010) .............................................................................................13 Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401 (9th Cir. 1992) ................................................................................15 Taddeo v. Taddeo, 2011 WL 4074433 (D. Nev. Sept. 13, 2011) .......................................................16 Tallon v. Lloyd & McDaniel, 497 F. Supp. 2d 847 (W.D. Ky. 2007) .................................................................15 Taylor v. McNichols, 243 P.3d 642 (Idaho 2010) ...................................................................................15 Turner v. Purina Mills, Inc., 989 F.2d 1419 (5th Cir. 1993) ................................................................................4 Winer Family Trust v. Queen, 503 F.3d 319 (3d Cir. 2007) ...................................................................................8 Statutes ARK. CODE § 4-88-113(f)(1)(A) ...............................................................................16 IOWA CODE § 714H.7 ...............................................................................................18 vi Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 8 of 38 PageID: 1114 PRELIMINARY STATEMENT Counts 7 through 60 of the Consolidated Amended Class Action Complaint (“CAC” or the “complaint”) are nothing more than threadbare recitals of the elements of a bevy of state consumer protection laws. These causes of action expressly rely on the same allegations that underlie plaintiffs’ RICO claims, and fail for the same reasons that plaintiffs’ RICO claims fail. Fundamentally, all of plaintiffs’ claims depend on the assertion that they pay too much for insulin because they do not receive the benefit of rebates that the PBMs negotiate from defendants. See, e.g., CAC ¶¶ 21-22. But, as defendants demonstrate in their joint motion to dismiss the RICO claims (“RICO brief” or “RICO Br.”), none of the allegations in plaintiffs’ 200-page-long complaint come close to plausibly suggesting that defendants have done anything fraudulent, unfair, or unconscionable. Counts 7 through 60 should all be dismissed for that reason alone. These claims fail in their entirety for other reasons as well. First, the complaint does not plead facts showing how defendants violated each of the laws asserted in these counts, but instead offers cursory recitations of the elements of each statute. Formulaic recitals of a laundry list of claims, without any attempt to tether the claims to the facts alleged, are plainly insufficient to withstand a motion to dismiss. See, e.g., McGarvey v. Penske Auto. Grp., Inc., 639 F. Supp. 2d 450, 465-66 (D.N.J. 2009). Second, all of the claims require a showing of proximate 1 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 9 of 38 PageID: 1115 causation. See, e.g., Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1390 (2014). As shown in the RICO brief, plaintiffs have not demonstrated proximate causation, which is fatal to all of their state law claims as well. Third, all of plaintiffs’ state law claims sound in fraud and therefore should be dismissed for failure to comply with the heightened pleading standards of Rule 9(b). See, e.g., DeGennaro v. Am. Bankers Ins. Co. of Fla., 2017 WL 2693881, at *5 (D.N.J. June 22, 2017) (Martinotti, J.). Finally, all of plaintiffs’ state law claims should be dismissed because plaintiffs have alleged damages that are speculative and not ascertainable. Beyond the foregoing arguments for dismissing all of Counts 7 through 60, there are additional, independent grounds for dismissing many of these claims.1 • For the eighteen jurisdictions where no plaintiff resides, the claim should be dismissed for lack of Article III standing. • Plaintiffs’ claims fail as to certain defendants under a number of state laws because no named plaintiff from the state has purchased any of those defendants’ products. • Eight of the statutes prohibit class action claims. 1 Appendices A and B set out the claims as to which each of the following grounds for dismissal applies. 2 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 10 of 38 PageID: 1116 • Six of the claims should be dismissed because the statutes require plaintiffs to have directly purchased products from defendants or otherwise be in privity with defendants. • Six of the claims should be dismissed due to plaintiffs’ failure to plead reliance, which is a required element of certain statutes. • Five of the statutes require not only that an alleged victim be located in the state, but also require specific allegations that misconduct occurred within the state, which plaintiffs fail to plead. • Three of the claims should be dismissed due to plaintiffs’ failure to comply with procedural requirements under the statutes at issue. ARGUMENT I. All of Plaintiffs’ State Law Claims Should Be Dismissed A. All the Claims Fail Because Plaintiffs’ Allegations Fail to Show Fraudulent, Unfair, or Unconscionable Conduct At its core, plaintiffs’ theory of liability is that they paid “excessive” prices for insulin because they did not receive the benefit of rebates that manufacturers pay to PBMs. See, e.g., CAC ¶¶ 21-22; see also RICO Br. at pp. 13-20 (discussing plaintiffs’ allegations).2 It is clear, however, that none of the allegations in 2 “RICO Br.” refers to Defendants’ Memorandum of Law in Support of Motion to Dismiss the Consolidated Amended Class Action Complaint (Counts 1(….continued) 3 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 11 of 38 PageID: 1117 plaintiffs’ complaint come close to plausibly suggesting that defendants have done anything fraudulent, unfair, or unconscionable. For those reasons, as well as the other reasons set forth in the RICO brief, all of plaintiffs’ claims should be dismissed. See RICO Br. at pp. 26-45; see also, e.g., Bonilla v. Volvo Car Corp., 150 F.3d 62, 71-72, 76 (1st Cir. 1998) (reversing jury verdict and explaining that while “large markups and differential pricing may seem unfair to consumers,” such conduct “is not itself fraud”); see also, e.g., Kantner v. Merck & Co., Inc., 2007 WL 3092779, at ¶ 17 (Ind. Super. Ct. Apr. 18, 2007) (rejecting argument that consumer “allegedly paid more than she ‘should’ have as a result of the alleged acts or omissions of Merck even though she doesn’t allege any injuries or additional expenses as a result of taking Vioxx”); Ford Motor Credit Co. v. Majors, 2005 WL 1021551, at *7 (Minn. Ct. App. May 3, 2005) (a “consumer engaged in an arm’s length transaction with a retail seller is not entitled to assume that the retail seller is not making a profit” (citation omitted)); Turner v. Purina Mills, Inc., 989 F.2d 1419, 1422 (5th Cir. 1993) (“[Louisiana’s Unfair Trade Practices and Consumer Protection Law] does not forbid a business to do what everyone knows a business must do: make money.”). (continued….) 6), dated March 9, 2018. As explained in that brief, the Court should dismiss Counts 7-60 upon dismissal of Counts 1-6. See RICO Br. at p. 4 & n.3. 4 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 12 of 38 PageID: 1118 B. All the Claims Fail Because They Are Nothing More Than Cursory Recitations of the Elements of Each Statute Counts 7 through 60 should also be dismissed because the complaint merely offers threadbare recitations of the statutes asserted, and does not tie the complaint’s generic allegations to the particular requirements of those statutes. Courts in this Circuit routinely dismiss claims that are pleaded in this cursory manner. See, e.g., McGarvey, 639 F. Supp. 2d at 465-66 (dismissing state consumer protection claims where “[p]laintiffs do not . . . explain how the fifteen listed statutes apply to the facts of this case”), vacated in part on other grounds on reconsideration, 2010 WL 1379967 (D.N.J. Mar. 29, 2010); see also In re Suboxone (Buprenorphine Hydrochloride & Naloxone) Antitrust Litig., 2017 WL 4642285, at *14 (E.D. Pa. Oct. 17, 2017) (dismissing state consumer protection law claims where, after “[p]eeling away the allegations that are no more than legal conclusions,” the claims “contain no well-pled factual allegations” as to how defendants violated each law). C. All the Claims Fail to Plead Proximate Causation Although there is some variance between the elements of the different state consumer protection laws invoked in the complaint, every statute requires a plaintiff to allege that the defendant’s purportedly wrongful conduct proximately caused the injury suffered by the plaintiff. See, e.g., In re Online Travel Co. (OTC) Hotel Booking Antitrust Litig., 997 F. Supp. 2d 526, 546 (N.D. Tex. 2014) 5 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 13 of 38 PageID: 1119 (dismissing state consumer protection claims brought under thirty-five statutes because “each consumer protection statute at issue requires, in some form or another, that the defendant’s unlawful conduct proximately cause[d] the plaintiff’s complained-of-harm”); Martinelli v. Petland, Inc., 2010 WL 376921, at *8-9 (D. Ariz. Jan. 26, 2010) (dismissing claims brought under state consumer protection statutes because plaintiffs’ “conclusory allegations of causation” were inadequate); see generally Lexmark Int’l, 134 S. Ct. at 1390 (courts should “generally presume that a statutory cause of action is limited to plaintiffs whose injuries are proximately caused by violations of the statute”). As defendants explain in the RICO brief, plaintiffs have failed to allege proximate causation for at least two reasons. First, there are multiple entities on the distribution chain between plaintiffs and defendants—and indeed, plaintiffs made payments based on prices that were not set by defendants. See RICO Br. at pp. 26-29. Second, there is no causal link between the putative misrepresentations and plaintiffs’ alleged injury. See id. at pp. 43-45. Thus, just as plaintiffs’ RICO claims fail for lack of proximate causation, plaintiffs’ state law claims also fail. D. All the Claims Fail to Comply with Rule 9(b) To satisfy the “stringent pleading restrictions” of Rule 9(b), a plaintiff cannot rely on “generic references” to allegedly fraudulent statements. Frederico v. Home Depot, 507 F.3d 188, 200 (3d Cir. 2007). Instead, as defendants explain 6 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 14 of 38 PageID: 1120 in the RICO brief, a plaintiff must plead with particularity the circumstances of the alleged fraud. See RICO Br. at pp. 20-21. As established in the RICO brief, plaintiffs’ allegations—all of which sound in fraud—are not pleaded with the particularity required by Rule 9(b). Plaintiffs fail to identify any purportedly “misleading statements” or “misrepresentations” made by defendants. See id. at pp. 30-34. Plaintiffs likewise fail to plead Counts 7 through 60 with particularity. Instead, they attempt to support those counts with conclusory allegations (CAC ¶¶ 445-458) regarding defendants’ alleged conduct. See, e.g., id. ¶ 447 (alleging that defendants made “false or misleading statements regarding the real prices” of insulin drugs, but nowhere specifying what the allegedly “false or misleading statements” were); id. ¶ 450 (alleging generally that defendants engaged in “pricing deceit”).3 And each of Counts 7 through 60 incorporates by reference the previous (and insufficiently particularized) allegations appearing earlier in the complaint, without adding further detail. See, e.g., id. ¶¶ 459, 468. Because Counts 7 through 60 are all based on the same underlying allegations of fraudulent conduct, they are all subject to dismissal for failure to satisfy Rule 9(b). See, e.g., DeGennaro, 2017 WL 2693881, at *5 3 As explained in the RICO brief, the specific statements in the complaint attributed to defendants expressly represent that there is a difference between the defendants’ list price and the net price that defendants receive after the payment of PBM rebates. See RICO Br. at pp. 31-32. 7 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 15 of 38 PageID: 1121 (holding that “fraud based claims are subject to [the] heightened pleading standard” of Rule 9(b)). E. All the Claims Fail Because Plaintiffs’ Alleged Damages Are Speculative As explained in the RICO brief, plaintiffs’ state law claims rely on an amorphous “price inflation” theory. See RICO Br. at pp. 51-52. Plaintiffs allege that they paid “excessive” prices for analog insulin, but they have not provided the Court with any basis for determining what a theoretical “fair price” for insulin products should be. This failure is also fatal to plaintiffs’ state law claims. See, e.g., Prohias v. Pfizer, Inc., 485 F. Supp. 2d 1329, 1336-37 (S.D. Fla. 2009) (holding that determination of a “hypothetical price [for drugs], even with expert proof, is too speculative to be the premise of an ‘actual injury’”); In re Hannaford Bros. Co. Customer Data Sec. Breach Litig., 660 F. Supp. 2d 94, 100-01 (D. Me. 2009) (potential damages are too speculative where fact-finder would be required to “guess at a possible monetary value” of loss (citation omitted)); Kantner, 2007 WL 3092779, at ¶¶ 17-19 (holding that “hypothetical market price damages” are not cognizable). II. Certain State Law Claims Should Be Dismissed for Independent Reasons A. Eighteen of the Claims Lack a Plaintiff with Article III Standing “Plaintiffs have the burden to establish standing.” Winer Family Trust v. Queen, 503 F.3d 319, 325 (3d Cir. 2007). Carrying this burden requires a plaintiff 8 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 16 of 38 PageID: 1122 to allege “facts that affirmatively and plausibly suggest that the pleader has the right he claims.” In re Schering Plough Corp. Intron/Temodar Consumer Class Action, 678 F.3d 235, 243-44 (3d Cir. 2012) (internal quotation marks and citation omitted). Moreover, it is well settled that “even named plaintiffs who represent a class must allege and show that they personally have [standing].” Lewis v. Casey, 518 U.S. 343, 357 (1996). In a class action, moreover, named plaintiffs must have standing as to each claim in the complaint. See, e.g., In re Schering Plough Corp., 678 F.3d at 245. The threshold standing determination may not be postponed to class certification. Neale v. Volvo Cars of N. Am., LLC, 794 F.3d 353, 360, 366-67 (3d Cir. 2015) (“class representatives must meet Article III standing requirements the moment a complaint is filed”). Accordingly, plaintiffs must establish standing as to each of the state laws they seek to assert by alleging facts showing that they suffered injury in each state. See, e.g., Plumbers Local Union No. 690 Health Plan v. Apotex Corp., 2017 WL 4235773, at *13 (E.D. Pa. Sept. 25, 2017) (holding that plaintiffs “lack standing . . . to raise state law claims for states where they are not located and where they did not purchase any drugs or reimburse their members for the purchase of any drugs”); In re: Niaspan Antitrust Litig., 2015 WL 8150588, at *3 (E.D. Pa. Dec. 8, 2015) (citing decisions holding that plaintiffs “lack standing to 9 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 17 of 38 PageID: 1123 bring claims on behalf of putative classes under the laws of states where no named plaintiff is located and where no named plaintiff purchased the product at issue”). The complaint includes eighteen counts under the laws of states in which no named plaintiff resides or is alleged to have made any purchases.4 The Court should dismiss those claims for lack of Article III standing. Similarly, the Court should dismiss each plaintiff’s state law claims for states in which the plaintiff does not reside or is alleged to have made any purchase.5 B. Certain Claims Fail as to One or More Defendants Because No Plaintiff Purchased That Defendant’s Products Plaintiffs also lack standing to pursue claims against certain defendants because none of them suffered an alleged injury in a given state from that defendant’s products. See Lieberson v. Johnson & Johnson Consumer Cos., Inc., 4 Those are counts 7 (Alabama), 8 (Alaska), 14 (Connecticut), 15 (Delaware), 16 (District of Columbia), 20 (Hawaii), 29 (Maryland), 39 (New Hampshire), 43 (North Carolina), 44 (North Dakota), 46 (Oklahoma), 48 (Pennsylvania), 49 (Rhode Island), 50 (South Carolina), 51 (South Dakota), 56 (Virginia), 58 (West Virginia), and 60 (Wyoming). 5 Each plaintiff asserts claims under the state consumer protection laws of all fifty states and the District of Columbia. CAC ¶¶ 413-818. It is well settled, however, that plaintiffs “lack standing . . . to raise state law claims for states where they are not located and where they did not purchase any drugs or reimburse their members for the purchase of any drugs.” Apotex Corp., 2017 WL 4235773, at *13. Accordingly, none of the plaintiffs has standing to sue under any state law other than the state of their residence. See In re Flonase Antitrust Litig., 692 F. Supp. 2d 524, 533 (E.D. Pa. 2010) (“Case law supports the position that Plaintiffs suffered injury and have standing in states where they purchased a drug or reimbursed their members for purchases of a drug” (collecting cases)). 10 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 18 of 38 PageID: 1124 865 F. Supp. 2d 529, 537 (D.N.J. 2011) (“Because Plaintiff has not alleged that she purchased or used two of the four [] products at issue here, Plaintiff cannot establish an injury-in-fact with regard to those products.”); Green v. Green Mountain Coffee Roasters, Inc., 279 F.R.D. 275, 280 (D.N.J. 2011) (dismissing claims as to products that putative class action plaintiff “neither purchased nor used” (citation omitted)). Thus, for each state as to which no plaintiff alleges the purchase of relevant products6 from one or more of the defendants, the Court lacks subject matter jurisdiction to adjudicate any claim under that state’s law against the particular defendants.7 The claims that should be dismissed are: • Lilly: Counts 10 (Arkansas), 22 (Illinois), 26 (Kentucky), 34 (Mississippi), 41 (New Mexico), 47 (Oregon), 52 (Tennessee), and 55 (Vermont).8 6 The relevant products are those set forth in plaintiffs’ proposed class definition. See CAC ¶ 279. 7 Courts in this District have held that standing may be established by individual representatives as to products those individuals did not purchase, but only if all of the claims are brought against the same defendant. See, e.g., In re L’Oreal Wrinkle Cream Mktg. and Sales Practices Litig., 2013 WL 6450701, at *4 (D.N.J. Dec. 9, 2013). 8 See CAC ¶¶ 43-44 (Plaintiff Brewster, the only Arkansas plaintiff, does not allege having paid for any Lilly product); id. ¶¶ 27-28, 101-102 (Illinois plaintiffs Arnold and Levett do not allege having paid for any Lilly product); id. ¶¶ 129-130 (Plaintiff Ramsey, the only Kentucky plaintiff, does not allege having paid for any (….continued) 11 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 19 of 38 PageID: 1125 • Novo Nordisk: Counts 13 (Colorado), 30 (Massachusetts), 35 (Missouri), 38 (Nevada), and 57 (Washington).9 • Sanofi: Counts 27 (Louisiana), 28 (Maine), 34 (Mississippi), 52 (Tennessee), and 57 (Washington).10 (continued….) Lilly product); id. ¶¶ 161-162 (Plaintiff Weir, the only Mississippi plaintiff, does not allege having paid for any Lilly product); id. ¶¶ 29-32 (New Mexico plaintiffs Frank and Roseanna Barnett do not allege having paid for any Lilly product); id. ¶¶ 119-120, 163-164 (Oregon plaintiffs Palmer, Kim Wallan, and Jim Wallan do not allege having paid for any Lilly product); id. ¶¶ 125-126 (Plaintiff Phillips, the only Tennessee plaintiff, does not allege having paid for any Lilly product); id. ¶¶ 57-58 (Plaintiff Devins, the only Vermont plaintiff, does not allege having paid for any Lilly product). 9 See CAC ¶¶ 61-62 (Plaintiff Douthit, the only Colorado plaintiff, does not allege having paid for any Novo Nordisk product); id. ¶¶ 25-26, 45-46, 59-60, 7172 (Massachusetts plaintiffs Appleby, Chaires, Doe, and Girard do not allege having paid for any Novo Nordisk product); id. ¶¶ 35-36 (Plaintiff Bentele, the only Missouri plaintiff, does not allege having paid for any Novo Nordisk product); id. ¶¶ 33-34, 133-134 (Plaintiffs Bauer and Saffran, the only Nevada plaintiffs, do not allege having paid for any Novo Nordisk product); id. ¶¶ 145-146 (Plaintiff Stanford, the only Washington plaintiff, does not allege having paid for any Novo Nordisk product). 10 See CAC ¶¶ 131-132 (Plaintiff Rushing, the only Louisiana plaintiff, does not allege having paid for any Sanofi product); id. ¶¶ 151-152 (Plaintiff Thompson, the only Maine plaintiff, does not allege having paid for any Sanofi product); id. ¶¶ 161-162 (Plaintiff Weir, the only Mississippi plaintiff, does not allege having paid for any Sanofi product); id. ¶¶ 125-126 (Plaintiff Phillips, the only Tennessee plaintiff, does not allege having paid for any Sanofi product); id. ¶¶ 145-146 (Plaintiff Stanford, the only Washington plaintiff, does not allege having paid for any Sanofi product). 12 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 20 of 38 PageID: 1126 C. Eight of the Claims Fail Due to Statutory Prohibitions on Consumer Class Actions Under the Supreme Court’s opinion in Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., 559 U.S. 393 (2010), this Court should apply the statutory bars on class actions contained in eight state statutes and dismiss the class action claims brought under those statutes. As Justice Stevens reasoned in his controlling opinion in Shady Grove, federal courts should apply state procedural rules that “function as a part of the State’s definition of substantive rights and remedies.” Id. at 418 (Stevens, J., concurring).11 Accordingly, the Federal Rules of Civil Procedure “cannot govern a particular case in which the rule would displace a state law that is procedural in the ordinary use of the term but is so intertwined with a state right or remedy that it functions to define the scope of the state-created right.” Id. at 423. Following Shady Grove, federal courts have held that they are “compelled to . . . apply the class action bar incorporated in [state] consumer protection laws,” and have dismissed class claims under eight of the state laws invoked by plaintiffs 11 In Shady Grove, Justice Scalia wrote a plurality opinion for four justices, and Justice Stevens wrote a concurring opinion. Absent an opinion of the Court, lower courts are bound by the “position taken by those . . . who concurred . . . on the narrowest grounds.” Davis v. Ace Hardware Corp., 2014 WL 688132, at *8 n.10 (D. Del. Feb. 21, 2014) (citation omitted). Most courts follow Justice Stevens’ concurrence in Shady Grove. See, e.g., id. (collecting cases); see also Fraiser v. Stanley Black & Decker, Inc., 109 F. Supp. 3d 498, 505 (D. Conn. 2015). 13 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 21 of 38 PageID: 1127 here. See, e.g., Delgado v. Ocwen Loan Servicing, LLC, 2017 WL 5201079, at *10 (E.D.N.Y. Nov. 9, 2017). This Court should do the same and dismiss counts 7 (Alabama), 18 (Georgia’s FBPA), 26 (Kentucky), 27 (Louisiana), 34 (Mississippi), 36 (Montana), 50 (South Carolina), and 52 (Tennessee). See, e.g., Delgado, 2017 WL 5201079, at *9-11 (dismissing class claims under Alabama, Georgia, and Tennessee laws); In re Target Corp. Customer Data Sec. Breach Litig., 66 F. Supp. 3d 1154, 1164-66 (D. Minn. 2014) (“Plaintiffs cannot maintain a class action as to the alleged consumer-protection statutory violations in Alabama, Georgia, Kentucky, Louisiana, Mississippi, Montana, South Carolina, and Tennessee”); see also Plaza 22, LLC v. Waste Mgmt. of La., LLC, 2015 WL 1120320, at *2 (M.D. La. Mar. 12, 2015); but see Lisk v. Lumber One Wood Preserving, LLC, 792 F.3d 1331, 1337-38 (11th Cir. 2015) (holding that the Alabama statute’s prohibition on class actions did not apply). D. Six of the Claims Fail Because Plaintiffs Are Not Direct Purchasers or Otherwise in Privity with Defendants Under the consumer protection laws of six jurisdictions, a plaintiff may bring a claim only if he is in privity with the defendant and/or directly purchased a product from the defendant. As demonstrated in the RICO brief, plaintiffs have not alleged that they made any purchases directly from defendants. Instead, defendants sell their analog insulin to wholesalers, who in turn re-sell these products to pharmacies. Accordingly, plaintiffs’ claims should be dismissed under 14 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 22 of 38 PageID: 1128 the laws of jurisdictions that require plaintiffs to be in privity with and/or have directly purchased a product from the defendant. Those are counts 9 (Arizona), 16 (D.C.), 21 (Idaho), 26 (Kentucky), 30 (Massachusetts), and 55 (Vermont).12 E. Six of the Claims Fail Because Plaintiffs Do Not Plead Reliance Plaintiffs have failed to plead how they relied on any allegedly misleading statements or acts of defendants. As explained in the RICO brief, plaintiffs’ RICO claims fail because they do not (and cannot) allege that anyone relied on defendants’ alleged misrepresentations in making their purchases of insulin. See RICO Br. at pp. 43-45 & n.26. This failure is fatal to plaintiffs’ claims under the consumer protection laws of six jurisdictions that require a plaintiff to establish 12 See, e.g., Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 407 (9th Cir. 1992) (dismissing Arizona consumer protection claim where plaintiff and defendant were not in buyer-seller relationship); Robinson v. Deutsche Bank Nat’l Tr. Co., 932 F. Supp. 2d 95, 102-03 (D.D.C. 2013) (dismissing D.C. consumer protection claim “[s]ince no transaction was consummated” between parties); Taylor v. McNichols, 243 P.3d 642, 662 (Idaho 2010) (affirming dismissal of Idaho consumer protection claims because “aggrieved party must have been in a contractual relationship with the party alleged to have acted unfairly”); Tallon v. Lloyd & McDaniel, 497 F. Supp. 2d 847, 854-55 (W.D. Ky. 2007) (explaining that “privity of contract [must] exist between the parties in a suit alleging a violation of the [Kentucky statute]” (citation omitted)); John Boyd Co. v. Bos. Gas Co., 775 F. Supp. 435, 440 (D. Mass. 1991) (“[T]he existence of some contractual or business relationship between the parties [is] a precursor to liability under [Massachusetts consumer protection law].”); Otis-Wisher v. Medtronic, Inc., 616 F. App’x 433, 435 (2nd Cir. 2015) (affirming dismissal of Vermont consumer protection claim where plaintiff was not a “consumer” because she did not purchase medical device for personal use, but “was prescribed the medical device by her doctor”). 15 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 23 of 38 PageID: 1129 reliance. Those are counts 10 (Arkansas), 12 (California’s UCL), 18 (Georgia’s FBPA), 31 (Michigan), 38 (Nevada), and 48 (Pennsylvania).13 F. Five of the Claims Fail Because Plaintiffs Do Not Allege Any Wrongdoing Within the State Under five of the consumer protection statutes, at least some portion of the defendant’s alleged wrongdoing must have occurred within the state, and the mere presence in the state of an alleged victim is insufficient. For example, plaintiffs do not allege that defendants made any pricing decisions for their insulin products outside of the location of their corporate headquarters. Because plaintiffs do not allege any misconduct occurring within any particular jurisdiction, their claims under such consumer protection statutes must be dismissed. Those are counts 22 13 See, e.g., ARK. CODE § 4-88-113(f)(1)(A) (private citizens may sue under the Arkansas statute if they suffered loss “as a result of his or her reliance” on deceptive practices); Dimas v. JPMorgan Chase Bank, N.A., 2018 WL 809508, at *9 (N.D. Cal. Feb. 9, 2018) (explaining that UCL claims predicated on misrepresentations require a demonstration of actual reliance); Barge v. BristolMyers Squibb Co., 2009 WL 5206127, at *8 (D.N.J. Dec. 30, 2009) (noting that Georgia’s Fair Business Practices Act incorporates the reliance element of the common law tort of misrepresentation); Kussy v. Home Depot U.S.A. Inc., 2006 WL 3447146, at *7 (E.D. Mich. Nov. 28, 2006) (a plaintiff asserting claims under the Michigan Consumer Protection Act “must show reliance”); Taddeo v. Taddeo, 2011 WL 4074433, at *5 (D. Nev. Sept. 13, 2011) (under Nevada statute, a plaintiff must show his “justifiable reliance upon the misrepresentation”); Hunt v. U.S. Tobacco Co., 538 F.3d 217, 221 (3d Cir. 2008) (“[A] private plaintiff pursuing a claim under [Pennsylvania’s consumer protection] statute must prove justifiable reliance.”). 16 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 24 of 38 PageID: 1130 (Illinois), 39 (New Hampshire), 42 (New York), 52 (Tennessee), and 59 (Wisconsin).14 G. Three of the Claims Fail Due to Plaintiffs’ Failure to Comply with Other Procedural Requirements Three statutes include procedural requirements that plaintiffs do not allege that they have complied with. In particular, certain statutes contain a pre-suit requirement that a class action suit must be approved by the state attorney general or a requirement that a complaint specifically allege rules or judicial decisions under which an alleged practice has been found to be deceptive. Due to plaintiffs’ 14 See, e.g., De David v. Alaron Trading Corp., 2015 WL 2208407, at *5 (N.D. Ill. May 7, 2015) (noting the requirement that “the circumstances that relate to the disputed transaction occur primarily and substantially in Illinois”); Mueller Co. v. U.S. Pipe & Foundry Co., 2003 WL 22272135, at *6 (D.N.H. Oct. 2, 2003) (“In the absence of any alleged unfair method of competition or unfair or deceptive act or practice which took place within New Hampshire, the harm suffered by [plaintiff] within the state does not state a claim under [the New Hampshire statute].”); Goshen v. Mut. Life Ins. Co. of N.Y., 98 N.Y.2d 314, 324-25 (N.Y. 2002) (“[T]o qualify as a prohibited act under [the New York consumer protection statute], the deception of a consumer must occur in New York”); Encore Med., L.P. v. Jay Kennedy, D.C., 2013 WL 839838, at *30 (W.D. Pa. Mar. 6, 2013) (holding that “both the language of the [Tennessee Consumer Protection Act] and the jurisprudence of the Tennessee courts indicate that the [Act] prohibits only acts or practices occurring within Tennessee’s borders”); Calnin v. Hillard, 2008 WL 336892, at *13 (E.D. Wis. Feb. 5, 2008) (holding that the scope of the Wisconsin statute “is limited to publications in this state”). 17 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 25 of 38 PageID: 1131 failure to comply with such requirements, their claims under these statutes should be dismissed. Those are counts 24 (Iowa), 34 (Mississippi), and 45 (Ohio).15 CONCLUSION For the foregoing reasons, as well as the reasons set forth in the RICO brief, the Court should dismiss Counts 7-60 of the Consolidated Amended Class Action Complaint. 15 See, e.g., IOWA CODE § 714H.7 (under provision of Iowa statute permitting a private right of action, a “class action lawsuit alleging a violation of this chapter shall not be filed with a court unless it has been approved by the attorney general”); Humphrey v. CitiBank NA, 2013 WL 5407195, at *6 (N.D. Miss. Sept. 25, 2013) (“Mississippi law is clear that failure to satisfy the prerequisite of an attempt at informal dispute resolution [through a settlement program approved by the state attorney general] is fatal to a [Mississippi Consumer Protection Act] claim.” (citation and internal quotation marks omitted)); City of Findlay v. Hotels.com, L.P., 441 F. Supp. 2d 855, 863 (N.D. Ohio 2006) (dismissing claims under Ohio Consumer Sales Practices Act for failing to meet prerequisites requiring pleading of rule promulgated by the Ohio attorney general or Ohio case that found the practice deceptive). 18 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 26 of 38 PageID: 1132 Dated: March 9, 2018 Respectfully submitted, By: /s/ Michael R. Griffinger, Esq. Michael R. Griffinger, Esq. Christopher Walsh, Esq. Calvin K. May, Esq. GIBBONS P.C. One Gateway Center Newark, NJ 07102-5310 Tel: (973) 596-4500 James P. Rouhandeh, Esq. (admitted pro hac vice) David B. Toscano, Esq. (admitted pro hac vice) DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, NY 10017 Tel: (212) 450-4000 Neal A. Potischman, Esq. (admitted pro hac vice) Andrew Yaphe, Esq. (admitted pro hac vice) DAVIS POLK & WARDWELL LLP 1600 El Camino Real Menlo Park, CA 94025 Tel: (650) 752-2000 Attorneys for Defendant Novo Nordisk Inc. By: /s/ Melissa A. Geist, Esq. Melissa A. Geist, Esq. REED SMITH LLP Princeton Forrestal Village 136 Main Street, Suite 250 Princeton, NJ 08540 Tel.: (609) 514-5978 Shankar Duraiswamy, Esq. Mark Lynch, Esq. (admitted pro hac vice) Henry B. Liu, Esq. (admitted pro hac vice) 19 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 27 of 38 PageID: 1133 COVINGTON & BURLING LLP One CityCenter 850 Tenth Street, N.W. Washington, DC 20001 Tel.: (202) 662-6000 Attorneys for Defendant Eli Lilly and Company By: /s/ Liza M. Walsh, Esq. Liza M. Walsh, Esq. WALSH PIZZI O’REILLY FALANGA LLP 1037 Raymond Blvd, Suite 600 Newark, NJ 07102 Tel.: (973) 757-1100 Michael R. Shumaker, Esq. (admitted pro hac vice) Julie E. McEvoy, Esq. (admitted pro hac vice) William D. Coglianese , Esq. (admitted pro hac vice) JONES DAY 51 Louisiana Avenue, N.W. Washington, DC 20001 Tel.: (202) 879-3939 Toni-Ann Citera, Esq. (admitted pro hac vice) JONES DAY 250 Vesey Street New York, NY 10281 Tel.: (212) 326-3939 Attorneys for Defendant Sanofi-Aventis U.S. LLC 20 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 28 of 38 PageID: 1134 APPENDIX A This Appendix summarizes grounds for dismissing claims under state consumer protection statutes ( = ground for dismissal). Further details and support for each ground for dismissal are provided in Appendix B. AL AK AZ AR CA CO CT DE DC FL GA HI I.A. Not Unlawful for Company to Charge Any Particular Price for a Product             I.B. Claims Are Merely Cursory Recitations of Elements of Statute             I.C. Plaintiffs Do Not Allege Proximate Cause             I.D. Plaintiffs’ Allegations Do Not Comply with Rule 9(b)             I.E. Damages are Merely Speculative             II.A. Lack of Article III Standing; No Named Plaintiff      II.B. No Named Plaintiff Purchased Product in State   Eli Lilly  Novo Nordisk Sanofi II.C. Statutory Prohibition on Class Actions II.D. Lack of Privity/Direct Business Relationship II.E. Failure to Adequately Allege Reliance      II.F. No Alleged Wrongdoing Within State II.G. Failure to Comply with Procedural Requirements A-1   Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 29 of 38 PageID: 1135 ID IL IN IA KS KY LA ME MD MA MI MN MS I.A. Not Unlawful for Company to Charge Any Particular Price for a Product              I.B. Claims Are Merely Cursory Recitations of Elements of Statute              I.C. Plaintiffs Do Not Allege Proximate Cause              I.D. Plaintiffs’ Allegations Do Not Comply with Rule 9(b)              I.E. Damages are Merely Speculative              II.A. Lack of Article III Standing; No Named Plaintiff   Eli Lilly II.B. No Named Plaintiff Purchased Novo Nordisk Product in State Sanofi     II.C. Statutory Prohibition on Class Actions II.D. Lack of Privity/Direct Business Relationship   II.G. Failure to Comply with Procedural Requirements       II.E. Failure to Adequately Allege Reliance II.F. No Alleged Wrongdoing Within State    A-2  Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 30 of 38 PageID: 1136 MO MT NE NV NH NJ NM NY NC ND OH OK OR I.A. Not Unlawful for Company to Charge Any Particular Price for a Product              I.B. Claims Are Merely Cursory Recitations of Elements of Statute              I.C. Plaintiffs Do Not Allege Proximate Cause              I.D. Plaintiffs’ Allegations Do Not Comply with Rule 9(b)              I.E. Damages are Merely Speculative                II.A. Lack of Article III Standing; No Named Plaintiff II.B. No Named Plaintiff Purchased Product in State   Eli Lilly Novo Nordisk     Sanofi II.C. Statutory Prohibition on Class Actions  II.D. Lack of Privity/Direct Business Relationship II.E. Failure to Adequately Allege Reliance   II.F. No Alleged Wrongdoing Within State II.G. Failure to Comply with Procedural Requirements   A-3 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 31 of 38 PageID: 1137 PA RI SC SD TN TX UT VT VA WA WV WI WY I.A. Not Unlawful for Company to Charge Any Particular Price for a Product              I.B. Claims Are Merely Cursory Recitations of Elements of Statute              I.C. Plaintiffs Do Not Allege Proximate Cause              I.D. Plaintiffs’ Allegations Do Not Comply with Rule 9(b)              I.E. Damages are Merely Speculative              II.A. Lack of Article III Standing; No Named Plaintiff     II.B. No Named Plaintiff Purchased Product in State   Eli Lilly    Novo Nordisk  Sanofi  II.C. Statutory Prohibition on Class Actions   II.D. Lack of Privity/Direct Business Relationship II.E. Failure to Adequately Allege Reliance     II.F. No Alleged Wrongdoing Within State II.G. Failure to Comply with Procedural Requirements A-4  Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 32 of 38 PageID: 1138 APPENDIX B Section I(A) - Not Unlawful for Company to Charge Any Particular Price for a Product Bonilla v. Volvo Car Corp., 150 F.3d 62, 71-72, 76 (1st Cir. 1998) All 50 States and the District of Columbia Kantner v. Merck & Co., Inc., 2007 WL 3092779, at ¶ 17 (Ind. Super. Ct. Apr. 18, 2007) Ford Motor Credit Co. v. Majors, 2005 WL 1021551, at *7 (Minn. Ct. App. May 3, 2005) Turner v. Purina Mills, Inc., 989 F.2d 1419, 1422 (5th Cir. 1993) Section I(B) - Claims Are Merely Cursory Recitations of Elements of Statute All 50 States and the District of Columbia McGarvey v. Penske Auto. Grp., Inc., 639 F. Supp. 2d 450, 465-66 (D.N.J. 2009) In re Suboxone (Buprenorphine Hydrochloride & Naloxone) Antitrust Litig., 2017 WL 4642285, at *14 (E.D. Pa. Oct. 17, 2017) Section I(C) - Plaintiffs Do Not Allege Proximate Cause All 50 States and the District of Columbia In re Online Travel Co. (OTC) Hotel Booking Antitrust Litig., 997 F. Supp. 2d 526, 546 (N.D. Tex. 2014) Martinelli v. Petland, Inc., 2010 WL 376921, at *8-9 (D. Ariz. Jan. 26, 2010) Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1390 (2014) B-1 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 33 of 38 PageID: 1139 Section I(D) - Plaintiffs’ Allegations Do Not Comply with Rule 9(b) All 50 States and the District of Columbia Frederico v. Home Depot, 507 F.3d 188, 200 (3d Cir. 2007) DeGennaro v. Am. Bankers Ins. Co. of Fla., 2017 WL 2693881, at *5 (D.N.J. June 22, 2017) (Martinotti, J.) Section I(E) - Damages are Merely Speculative Prohias v. Pfizer, Inc., 485 F. Supp. 2d 1329, 1336-37 (S.D. Fla. 2009) All 50 States and the District of Columbia In re Hannaford Bros. Co. Customer Data Sec. Breach Litig., 660 F. Supp. 2d 94, 100-01 (D. Me. 2009) Kantner v. Merck & Co., Inc., 2007 WL 3092779, at ¶¶ 17-19 (Ind. Super. Ct. Apr. 18, 2007) B-2 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 34 of 38 PageID: 1140 Section II(A) - Lack of Article III Standing Due to the Absence of Any Named Plaintiff Alabama Alaska Connecticut Delaware District of Columbia Hawaii Maryland New Hampshire North Carolina North Dakota Oklahoma Pennsylvania Rhode Island South Carolina South Dakota Virginia West Virginia Wyoming Winer Family Trust v. Queen, 503 F.3d 319, 325 (3d Cir. 2007) In re Schering Plough Corp. Intron/Temodar Consumer Class Action, 678 F.3d 235, 243-45 (3d Cir. 2012) Lewis v. Casey, 518 U.S. 343, 357 (1996) Neale v. Volvo Cars of N. Am., LLC, 794 F.3d 353, 360, 366-67 (3d Cir. 2015) Plumbers Local Union No. 690 Health Plan v. Apotex Corp., 2017 WL 4235773, at *13 (E.D. Pa. Sept. 25, 2017) In re: Niaspan Antitrust Litig., 2015 WL 8150588, at *3 (E.D. Pa. Dec. 8, 2015) In re Flonase Antitrust Litig., 692 F. Supp. 2d 524, 533 (E.D. Pa. 2010) B-3 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 35 of 38 PageID: 1141 Section II(B) – No Named Plaintiff Purchased Defendant’s Product in State, so No Injury in that State Eli Lilly Novo Nordisk Sanofi Arkansas Illinois Kentucky Mississippi New Mexico Oregon Tennessee Vermont Colorado Massachusetts Missouri Nevada Washington Louisiana Maine Mississippi Tennessee Washington Lieberson v. Johnson & Johnson Consumer Cos., Inc., 865 F. Supp. 2d 529, 537 (D.N.J. 2011) Green v. Green Mountain Coffee Roasters, Inc., 279 F.R.D. 275, 280 (D.N.J. 2011) Lieberson v. Johnson & Johnson Consumer Cos., Inc., 865 F. Supp. 2d 529, 537 (D.N.J. 2011) Green v. Green Mountain Coffee Roasters, Inc., 279 F.R.D. 275, 280 (D.N.J. 2011) Lieberson v. Johnson & Johnson Consumer Cos., Inc., 865 F. Supp. 2d 529, 537 (D.N.J. 2011) Green v. Green Mountain Coffee Roasters, Inc., 279 F.R.D. 275, 280 (D.N.J. 2011) B-4 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 36 of 38 PageID: 1142 Section II(C) – Statutory Prohibitions on Class Actions Alabama ALA. CODE § 8-19-10(f) Delgado v. Ocwen Loan Servicing, LLC, 2017 WL 5201079, at *9-11 (E.D.N.Y. Nov. 9, 2017) Georgia (Fair Business Practices Act) O.C.G.A. § 10-1-399(a) Kentucky In re Target Corp. Customer Data Sec. Breach Litig., 66 F. Supp. 3d 1154, 1164-66 (D. Minn. 2014) Louisiana Mississippi Montana South Carolina Tennessee Delgado v. Ocwen Loan Servicing, LLC, 2017 WL 5201079, at *9-11 (E.D.N.Y. Nov. 9, 2017) LA. REV. STAT. § 51:1409(A) In re Target Corp. Customer Data Sec. Breach Litig., 66 F. Supp. 3d 1154, 1164-66 (D. Minn. 2014) MISS. CODE § 75-24-15(4) In re Target Corp. Customer Data Sec. Breach Litig., 66 F. Supp. 3d 1154, 1164-66 (D. Minn. 2014) MCA § 30-14-133(1) In re Target Corp. Customer Data Sec. Breach Litig., 66 F. Supp. 3d 1154, 1164-66 (D. Minn. 2014) S.C. CODE § 39-5-140(a) In re Target Corp. Customer Data Sec. Breach Litig., 66 F. Supp. 3d 1154, 1164-66 (D. Minn. 2014) TENN. CODE § 47-18-109(a)(1) Delgado v. Ocwen Loan Servicing, LLC, 2017 WL 5201079, at *9-11 (E.D.N.Y. Nov. 9, 2017) B-5 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 37 of 38 PageID: 1143 Section II(D) – Lack of Privity or Direct Business Relationship with Defendants Arizona Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 407 (9th Cir. 1992) District of Columbia Robinson v. Deutsche Bank Nat’l Tr. Co., 932 F. Supp. 2d 95, 102-03 (D.D.C. 2013) Idaho Taylor v. McNichols, 243 P.3d 642, 662 (Idaho 2010) Kentucky Tallon v. Lloyd & McDaniel, 497 F. Supp. 2d 847, 854-55 (W.D. Ky. 2007) Massachusetts John Boyd Co. v. Bos. Gas Co., 775 F. Supp. 435, 440 (D. Mass. 1991) Vermont Otis-Wisher v. Medtronic, Inc., 616 F. App’x 433, 435 (2nd Cir. 2015) Section II(E) – Failure to Adequately Allege Reliance Arkansas ARK. CODE § 4-88-113(f)(1)(A) California (Unfair Competition Law) Dimas v. JPMorgan Chase Bank, N.A., 2018 WL 809508, at *9 (N.D. Cal. Feb. 9, 2018) Georgia (Fair Business Practices Act) GA. CODE ANN. § 10-1-399(b) Michigan Kussy v. Home Depot U.S.A. Inc., 2006 WL 3447146, at *7 (E.D. Mich. Nov. 28, 2006) Nevada Taddeo v. Taddeo, 2011 WL 4074433, at *5 (D. Nev. Sept. 13, 2011) Pennsylvania Barge v. Bristol-Myers Squibb Co., 2009 WL 5206127, at *8 (D.N.J. Dec. 30, 2009) PA. CONS. STAT. § 201-9.2(a) Hunt v. U.S. Tobacco Co., 538 F.3d 217, 221 (3d Cir. 2008) B-6 Case 3:17-cv-00699-BRM-LHG Document 109-2 Filed 03/09/18 Page 38 of 38 PageID: 1144 Section II(F) – No Alleged Wrongdoing Within the State Illinois New Hampshire New York Tennessee Wisconsin De David v. Alaron Trading Corp., 2015 WL 2208407, at *5 (N.D. Ill. May 7, 2015) N.H. REV. STAT. § 358-A:2 Mueller Co. v. U.S. Pipe & Foundry Co., 2003 WL 22272135, at *6 (D.N.H. Oct. 2, 2003) N.Y. GEN. BUS. LAW § 349(a) Goshen v. Mut. Life Ins. Co. of N.Y., 98 N.Y.2d 314, 324-25 (N.Y. 2002) TENN. CODE ANN. § 47-18-102(2) Encore Med., L.P. v. Jay Kennedy, D.C., 2013 WL 839838, at *30 (W.D. Pa. Mar. 6, 2013) WIS. STAT. § 100.18(1) Calnin v. Hillard, 2008 WL 336892, at *13 (E.D. Wis. Feb. 5, 2008) Section II(G) – Failure to Comply with Procedural Requirements Iowa IOWA CODE § 714H.7 Mississippi Humphrey v. CitiBank NA, 2013 WL 5407195, at *6 (N.D. Miss. Sept. 25, 2013) Ohio City of Findlay v. Hotels.com, L.P., 441 F. Supp. 2d 855, 863 (N.D. Ohio 2006) B-7 Case 3:17-cv-00699-BRM-LHG Document 109-3 Filed 03/09/18 Page 1 of 3 PageID: 1145 Michael R. Griffinger, Esq. GIBBONS P.C. One Gateway Center Newark, NJ 07102-5310 Tel.: (973) 596-4500 James P. Rouhandeh, Esq. (pro hac vice) David B. Toscano, Esq. (pro hac vice) DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, NY 10017 Tel.: (212) 450-4000 Neal A. Potischman, Esq. (pro hac vice) Andrew Yaphe, Esq. (pro hac vice) DAVIS POLK & WARDWELL LLP 1600 El Camino Real Menlo Park, CA 94025 Tel.: (650) 752-2000 Attorneys for Defendant Novo Nordisk Inc. Melissa A. Geist, Esq. REED SMITH LLP Princeton Forrestal Village 136 Main Street, Suite 250 Princeton, NJ 08540 Tel.: (609) 514-5978 Shankar Duraiswamy, Esq. Mark Lynch, Esq. (pro hac vice) Henry Liu, Esq. (pro hac vice) COVINGTON & BURLING LLP One CityCenter 850 Tenth Street, N.W. Washington, DC 20001 Tel.: (202) 662-6000 Attorneys for Defendant Eli Lilly and Company Liza M. Walsh, Esq. WALSH PIZZI O’REILLY FALANGA LLP 1037 Raymond Blvd, Suite 600 Newark, NJ 07102 Tel.: (973) 757-1100 Michael R. Shumaker, Esq. (pro hac vice) Julie E. McEvoy, Esq. (pro hac vice) William D. Coglianese, Esq. (pro hac vice) JONES DAY 51 Louisiana Avenue, N.W. Washington, DC 20001 Tel.: (202) 879-3939 Toni-Ann Citera, Esq. (pro hac vice) JONES DAY 250 Vesey Street New York, NY 10281 Tel.: (212) 326-3939 Attorneys for Defendant Sanofi-Aventis U.S. LLC UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY IN RE INSULIN PRICING LITIGATION Civil Action No. 17-699 (BRM)(LHG) DEFENDANTS’ APPENDIX OF MATERIALS REFERENCED IN CONSOLIDATED AMENDED CLASS ACTION COMPLAINT AND MATERIALS IN THE PUBLIC RECORD Case 3:17-cv-00699-BRM-LHG Document 109-3 Filed 03/09/18 Page 2 of 3 PageID: 1146 TABLE OF CONTENTS Exhibit 1 2 3 4 5 6 7 8 9 10 11 Short Title Document The Health Strategies Consultancy LLC, Follow the Pill: Understanding the U.S. Commercial Pharmaceutical Supply Chain, Kaiser Family Foundation (Mar. 2005) Ernst R. Berndt & Joseph Newhouse, Pricing and Reimbursement Pricing and Reimbursement in U.S. Pharmaceutical Markets, Harvard Kennedy School, National Bureau of Economic Research (Sept. 2010) Congressional Budget Office, Prescription Drug Pricing Prescription Drug Pricing in the Private Sector (Jan. 2007) N/A Thomas Gryta, What Is a ‘Pharmacy Benefit Manager?’, WALL ST. J. (July 21, 2011) U.S. Department of Health and Human Prescription Services, Report to the President: Drug Coverage Prescription Drug Coverage, Spending, Utilization, and Prices (Apr. 1, 2000) N/A Allison Tsai, “The Rising Cost of Insulin,” Diabetes Forecast (Mar. 2016) N/A Robert F. Atlas, The Role of PBMs in Implementing the Medicare Prescription Drug Benefit, 23 Health Affairs w4-504, w4-507 (July 2004) N/A Novo Nordisk, Annual Report 2015 (Feb. 2, 2016) N/A Novo Nordisk’s (NVO) CEO Lars Rebien Sorensen on Q4 2015 Results— Earnings Call Transcript, Seeking Alpha (Feb. 3, 2016) N/A Novo Nordisk, Annual Report 2014 (Jan. 29, 2015) N/A Novo Nordisk, Annual Report 2013 (Jan. 29, 2014) Follow the Pill 1 Reference in CAC ¶ 179 n.19 ¶ 176 n.11 ¶ 209 n.30 ¶ 179 n.17 ¶ 186 n.23 ¶ 183 n.22 ¶ 188 n.24 ¶ 169 N/A N/A N/A Case 3:17-cv-00699-BRM-LHG Document 109-3 Filed 03/09/18 Page 3 of 3 PageID: 1147 Exhibit Short Title 12 13 14 15 16 17 N/A N/A N/A N/A N/A N/A 18 Net Pricing Trends 19 N/A Document Sanofi 2016 Annual Report Sanofi 2015 Annual Report Lilly 2016 Annual Report Lilly 2015 Annual Report Lilly 2016 Integrated Summary Report Susan A. Creighton et al., Federal Trade Commission, Letter to Assembly Member Greg Agharzarian (Sept. 7, 2004) Richard Evans, Scott Hinds & Ryan Baum, US Rx Net Pricing Trends Thru 2Q16, SSR LLC (Oct. 5, 2016) Denise Roland & Peter Loftus, Middlemen Fuel Insulin Price Rise, WALL ST. J. (Oct. 10, 2016) 2 Reference in CAC ¶ 251 n.55 N/A N/A N/A N/A N/A ¶ 214 n.32 ¶ 250 n.54 Case Document 109-4 Filed 03/09/18 Page 1 of 7 PageID: 1148 Exhibit 1 Case 3:17-cv-00699-BRM-LHG Document 109-4 Filed 03/09/18 Page 2 of 7 PageID: 1149 Follow the Pill: Understanding the U.S. Commercial Pharmaceutical Supply Chain Prepared for The Kaiser Family Foundation by: The Health Strategies Consultancy LLC March 2005 Case 3:17-cv-00699-BRM-LHG Document 109-4 Filed 03/09/18 Page 3 of 7 PageID: 1150 Table of Contents I. Executive Summary II. The Flow of Goods from Manufacturers to Consumers in the U.S. Pharmaceutical Supply Chain Pharmaceutical Manufacturers Wholesale Distributors Pharmacies Pharmacy Benefit Managers (PBMs) III. The Flow of Money and Key Financial Relationships in the U.S. Pharmaceutical Supply Chain Pharmaceutical Manufacturers Wholesale Distributors Pharmacies Pharmacy Benefit Managers (PBMs) IV. Conclusion V. Appendix A. Special Pricing Rules Applicable to Federal Programs Medicaid Department of Veteran Affairs, Department of Defense, Public Health Service, Coast Guard Section 340B Drug Pricing Program B. Other Stakeholders in the U.S. Commercial Supply Chain Physicians Large Employers Health Plans VI. Key Acronyms and Glossary of Key Terms Case 3:17-cv-00699-BRM-LHG Document 109-4 Filed 03/09/18 Page 4 of 7 PageID: 1151 marketplace. Today, wholesale distributors provide a number of specialized services, including specialty drug distribution, drug repackaging, electronic order services, reimbursement support, and drug buy-back programs.3 The wholesale distribution industry has gone through significant change and consolidation in the last 30 years, due in part to the increasing pressures to lower costs. Between 1975 and 2000, the number of wholesale distributors in the U.S. declined from approximately 200 to fewer than 50.4 The top three wholesale distributors, McKesson, Cardinal Health, and Amerisource-Bergen, account for almost 90 percent of the entire wholesale drug market.5 This consolidation has forced the industry to change its revenue model, evolving its core distribution business into a low-margin enterprise that makes money by maximizing economies of scale, creating physical efficiencies in the distribution system (such as “just-in-time” deliveries to customers), and realizing financial efficiencies (such as retaining discounts for prompt payment). The industry has also extended and augmented its business model by moving into specialty pharmacy and disease management services. Pharmacies Pharmacies are the final step on the pharmaceutical supply chain before drugs reach the consumer/patient. Pharmacies purchase drugs from wholesalers, and occasionally directly from manufacturers, and then take physical possession of the drug products. After purchasing pharmaceuticals, pharmacies assume responsibility for their safe storage and dispensing to consumers. Pharmacy operations include maintaining an adequate stock of drug products, providing information to consumers about the safe and effective use of prescription drugs, and facilitating billing and payment for consumers participating in group health benefit plans. Pharmacies also serve as a vital information link between PBMs, drug manufacturers, and wholesale distributors. Unlike most other sectors of the health care delivery system in the U.S., the pharmaceutical supply chain is highly automated and virtually all claims transactions are handled electronically, rather than on paper. Since they are the final point of sale for pharmaceuticals and the interface between the supply chain and the consumer, pharmacies generate the prescription drug claims information that PBMs, as well as heath plans, employers, governments, and other payers, rely upon to measure consumer activity. Other types of information, both quality-focused (e.g., drug-drug interaction warnings) and utilization management-based (e.g., formulary compliance 3 Drug buy-back programs are offered by manufacturers and are facilitated by wholesale distributors. Buyback programs are intended to minimize the financial risk that pharmacies must assume in stocking products by allowing them to sell unused products or products with near-term expiration dates back to the manufacturer. 4 Goldman Sachs Industry Report: Health Care Technology & Distribution, February 27, 2003. 5 Standard & Poor's, GICS Sub-Industry Revenue Share, September 4, 2004. Page 9 Case 3:17-cv-00699-BRM-LHG Document 109-4 Filed 03/09/18 Page 5 of 7 PageID: 1152 messaging) can originate from other parts of the supply chain, in particular from PBMs, to the pharmacy as a prescription is being dispensed. As the final actor in the supply chain, it is up to the pharmacy to take action based on the information provided. For example, the pharmacy is expected to contact the prescribing physician if the drug prescribed is not on the patient’s health plan’s formulary or if a lower-cost therapeutic alternative is available. There are several types of pharmacies, including independent pharmacies, chain drug stores, pharmacies in supermarkets and other large retail establishments, and mail-order pharmacies. Most pharmacies purchase their drug supply from a wholesale distributor, although in some cases, large institutional and retail chain pharmacies, specialty pharmacies, and mail-order pharmacies obtain drugs directly from a manufacturer. These organizations can deal directly with manufacturers because they already possess the operational infrastructure necessary to bypass wholesalers – warehousing facilities, distribution vehicles, and inventory control systems. Once a pharmacy takes possession of the drug products, it distributes the products to physicians or directly to consumers. In addition, there are specialty pharmacies, which specialize in the distribution of high-cost and more complex drug therapies (e.g., self-injectable drugs and biologics). In 2003, there were 55,000 community retail pharmacies, including 19,000 independent drug stores, 21,000 chain drug stores, and 16,000 pharmacies in supermarkets and other retail merchants.6 In 2004, there were 3.5 billion prescriptions dispensed in the United States through community pharmacies, including about 1.8 billion filled at chain drug stores, 780 million filled at independent pharmacies, and 470 million filled in supermarkets. Another 214 million prescriptions were filled through the mail.7 6 National Association of Chain Drug Stores, http://www.nacds.org/userassets/PDF_files/Retail_Outlets2003.pdf. 7 IMS Health, National Prescription AuditTMPlus, January 2005, accesses 2/28/05 at http://www.imshealth.com/ims/portal/front/articleC/0,2777,6599_49695974_68913551,00.html Page 10 Case 3:17-cv-00699-BRM-LHG Document 109-4 Filed 03/09/18 Page 6 of 7 PageID: 1153 generally result in those programs getting lower prices than other purchasers. These rules are outlined in the Appendix. PRICING TERMS DEFINED • • • • • • Average Manufacturer Price (AMP): The average price paid to a manufacturer by wholesalers for drugs distributed to retail pharmacies. AMP was a benchmark created by Congress in 1990 in calculating Medicaid rebates and is not publicly available. (See Appendix for additional discussion of pharmaceutical pricing in Medicaid). Average Sales Price (ASP: The weighted average of all non-Federal sales to wholesalers net of chargebacks, discounts, rebates, and other benefits tied to the purchase of the drug product, whether it is paid to the wholesaler or the retailer. The basis for reimbursement for products covered under Medicare Part B changed under the Medicare Modernization Act of 2003 from AWP to ASP. Average Wholesale Price (AWP): Although not defined in statute, AWP is recognized as retail list price (sometimes referred to as a “sticker” price) and is currently used by some public and private third-party payers as the basis for reimbursement (e.g., AWP minus 5 or 25 percent). AWP has been widely criticized as a price that is (1) not reflective of the true market price, and (2) easily manipulated. The basis for reimbursement for products covered under Medicare Part B changed under the Medicare Modernization Act of 2003 from AWP to average sales price (ASP). Estimated Acquisition Cost (EAC): EAC is a state Medicaid Agency’s best estimate of the price generally paid by pharmacies for a particular drug. Maximum Allowable Cost (MAC): MAC lists are designed to cap reimbursement for certain generic and multi-source brand products. States and private payers with MAC programs typically publish lists of selected generic and multi-source brand drugs along with the maximum price at which the program will reimburse for those drugs. In general, pharmacies will receive payment no higher than the MAC price when billing for drugs on a MAC list. Wholesale Acquisition Cost (WAC): The price paid by a wholesaler for drugs purchased from the wholesaler's supplier, typically the manufacturer of the drug. Publicly disclosed or listed WAC amounts may not reflect all available discounts. Wholesale Distributors Wholesale distributors purchase drugs from manufacturers. For branded products, the purchase price is fairly uniform, with little negotiation on the part of the wholesale distributor. The distributor typically purchases branded products for a discounted rate off of WAC. Examples of discounts for branded products include volume discounts, prompt pay discounts, and discounts related to the sale of short-dated products (because the wholesaler is assuming a risk that the product will expire before it can be resold). The wholesale distributor then sells the product to its end consumer, typically a pharmacy, at WAC plus some negotiated percentage. For generic products, the purchase price is highly variable, largely depending upon competition in the class and the ability of the wholesale distributor to drive market share or increase the volume sold. In this case, wholesale distributors play a larger role in the negotiation of the price of the product. The price to the end consumer also is highly elastic depending upon the negotiated contracts with the retail pharmacies. Page 18 Case 3:17-cv-00699-BRM-LHG Document 109-4 Filed 03/09/18 Page 7 of 7 PageID: 1154 The Henry H. Kaiser Family Foundation 2400 Sand Hill Road, Menlo Park, CA 94025 Phone: 650-854-9400 Fax: 650-854-4800 Washington Office: 1330 G Street, NW Washington, DC 20005 Phone: 202-347-5270 Fax: 202-347-5274 www.kff.org Individual copies of this publication (#7296) are available on the Kaiser Family Foundation’s website at www.kff.org The Kaiser Family Foundation is a non-profit, private operating foundation dedicated to providing information and analysis on health care issues to policymakers, the media, the health care community, and the general public. The Foundation is not associated with Kaiser Permanente or Kaiser Industries. Case Document 109-5 Filed 03/09/18 Page 1 of 5 PageID: 1155 Exhibit 2 Case 3:17-cv-00699-BRM-LHG Document 109-5 Filed 03/09/18 Page 2 of 5 PageID: 1156 Pricing and Reimbursement in U.S. Pharmaceutical Markets Faculty Research Working Paper Series Ernst R. Berndt MIT Sloan School of Management and NBER Joseph P. Newhouse Harvard School of Public Health, Harvard Kennedy School, and NBER September 2010 RWP10-039 The views expressed in the HKS Faculty Research Working Paper Series are those of the author(s) and do not necessarily reflect those of the John F. Kennedy School of Government or of Harvard University. Faculty Research Working Papers have not undergone formal review and approval. Such papers are included in this series to elicit feedback and to encourage debate on important public policy challenges. Copyright belongs to the author(s). Papers may be downloaded for personal use only. www.hks.harvard.edu Case 3:17-cv-00699-BRM-LHG Document 109-5 Filed 03/09/18 Page 3 of 5 PageID: 1157 NBER WORKING PAPER SERIES PRICING AND REIMBURSEMENT IN U.S. PHARMACEUTICAL MARKETS Ernst R. Berndt Joseph P. Newhouse Working Paper 16297 http://www.nber.org/papers/w16297 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 2010 Revised version to appear in Patricia M. Danzon and Sean Nicholson, eds., The Economics of the Biopharmaceutical Industry. The authors have benefited from discussions with Richard G. Frank and E. Mick Kolassa, but are solely responsible for the views expressed herein. This research was not sponsored. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. © 2010 by Ernst R. Berndt and Joseph P. Newhouse. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Case 3:17-cv-00699-BRM-LHG Document 109-5 Filed 03/09/18 Page 4 of 5 PageID: 1158 Berndt and Newhouse “Draft Handbook Pricing Chapter” Brand manufacturers of small molecules sell their drugs primarily to certain providers, particularly wholesalers and chain warehouses, and have relatively limited direct sales to hospitals, retail and mail order pharmacies, and physician offices.19 The price at which brand manufacturers sell to wholesalers and chain warehouses is generally the Wholesale Acquisition Cost (WAC), a published list price, minus a few percent discount for prompt payment and other incentives. In turn, wholesalers sell branded small molecules to retail and mail order pharmacies, usually at the present time at a few percent above their WAC, and at a 15-20% or larger discount off of what is known as the misleadingly named Average Wholesale Price (“AWP”).20 Wholesalers face different markets for branded and generic drugs. They can purchase branded drugs only from a single manufacturer, whereas they can purchase most generic drugs from many manufacturers. As a result, they can create price competition among the various generic manufacturers of a particular small molecule. Large retail chains also buy directly from generic manufacturers, pitting one generic manufacturer against others to obtain the lowest generic price. As a result, gross profit margins for both wholesalers and large retail chains are larger for generic than branded small molecules.21 In contrast, many biologics are administered via injection or infusion by health care providers (i.e., physicians and nurses), rather than being patient self-administered oral tablets or capsules purchased from retail or mail order pharmacies. As a result, manufacturers of branded biologics sometimes sell directly to hospitals and physician offices rather than to the wholesalers to which the branded small molecule manufacturers usually sell. Firms known as “specialty pharmaceuticals,” however, often provide wholesaler-type intermediary services between biologic manufacturers and providers. Although the practice is not as firmly ingrained as it is with branded small molecules, biologic manufacturers generally sell products to the specialty pharmaceutical firms at a slightly discounted WAC, and often at slightly higher prices to the providers who are buying directly. Over the years a variety of intermediary services for all drugs have increasingly been provided by pharmaceutical benefit managers (“PBMs”). Services provided by PBMs include benefit design and contracting with manufacturers for third party payers Page 8 Case 3:17-cv-00699-BRM-LHG Document 109-5 Filed 03/09/18 Page 5 of 5 PageID: 1159 Berndt and Newhouse “Draft Handbook Pricing Chapter” D.4 Factors Locking in Branded Drugs’ AWP to WAC Relationships As the Drug Topics Red Book data description quoted above made clear, not all brand manufacturers provided data on the AWP of their drugs; others instead provided some form of alternative “suggested price.” In addition to surveying wholesalers and thereby generating their own estimates of AWP for data non-supplying manufacturers, price catalogs such as the Red Book and the Blue Book were able to generate AWPs for manufacturers who previously had but no longer provided such data by examining whether historically the manufacturer had a 20% or 25% markup over WAC for its AWP or other “suggested price”, and continued to use that markup factor in generating their AWP. Given the virtual universal presence of an AWP for drug products, whether supplied by the manufacturer or estimated by the price catalogs, transaction prices involving wholesalers, PBMs, pharmacies and other providers could all be specified with reference to AWP minus some x% discount. For example, a pharmacy could acquire all its brand drugs from the wholesaler at AWP – 18%, could be reimbursed by PBMs for dispensing any of its brand drugs at AWP – 13%, even as PBMs contracted with third party payers for all their brand drug costs at AWP – 10%. In this example, pharmacies‟ gross margin would be 5% of AWP for all its brand drug sales, while the common margin for PBMs would be 3% of AWP. The important point is that even though few if any transactions actually took place at the AWP price, the notional AWP served a valuable role as a common focal or reference point from which various discounts could be negotiated. While in theory pharmacies, PBMs and payers could negotiate separate AWP discounts that varied by manufacturer or drug, this would make electronic transactions more complicated and vulnerable to error. Rather, it was much simpler and more efficient for various contracts among PBMs, pharmacies and payers to specify the same percent off AWP for all branded drugs, regardless of manufacturer. Given AWP data entry into the networked computer system, very large numbers of various transactions among manufacturers, wholesalers, chain warehouses, retail and mail order pharmacies, other providers, PBMs and private and governmental payers could be processed and finalized expeditiously, efficiently and monitored very accurately. Hence, even though some observers Page 20 Case Document 109-6 Filed 03/09/18 Page 1 of 8 PageID: 1160 Exhibit 3 Case 3:17-cv-00699-BRM-LHG Document 109-6 Filed 03/09/18 Page 2 of 8 PageID: 1161 CONGRESS OF THB UNITED STATBS CONGRESSIONAL BUDGET OFFICE CBO PAPER Case 3:17-cv-00699-BRM-LHG Document 109-6 Filed 03/09/18 Page 3 of 8 PageID: 1162 CBO PAPER Prescription Drug Pricing in the Private Sector January 2007 The Congress of the United States •Congressional Budget Office Case 3:17-cv-00699-BRM-LHG Document 109-6 Filed 03/09/18 Page 4 of 8 PageID: 1163 Contents Summary 1 The Supply Chain 1 Price Measures 3 Single-Source Brand-Name Drugs 3 Multiple-Source Drugs 4 The Supply Chain 4 Pricing Strategies and Measures 6 Pricing Strategies 6 Price Measures 8 The Roles of Pharmacy Benefit Managers and Pharmacies 10 Pharmacy Benefit Managers 10 Pharmacies 12 Single-Source Brand-Name Drugs 13 Prices Paid by Retail Pharmacies 13 Prices Paid by Nonretail Providers 15 A Hypothetical Example 15 Cash Customers 17 Multiple-Source Drugs 17 Estimating the Amount Retained by Wholesalers and Discounts to Pharmacies 18 List Prices as Predictors of Transaction Prices 19 PBMs' Payments to Pharmacies 19 Appendix: Data and Methodology Used in 1bis Analysis 21 Glossary 25 Tables 1. 2. Average Prices for Single-Source Brand-Name Drugs Relative to the Average Wholesale Price 4 Different Purchasers' Reliance on Wholesalers for Prescription Drugs 6 Case 3:17-cv-00699-BRM-LHG Document 109-6 Filed 03/09/18 Page 5 of 8 PageID: 1164 VI PRFSCRll'ITON DRUG PRICING IN THE PRIVATE SECTOR Tubles (Continued) 3. 4. U.S. Sales of Prescription Drugs and Sellers' Market Shares, 1999 and 2005 7 Average Prices for Single-Source Brand-Name Drugs Relative to the Average Wholesale Price, at Different Points in the Supply Chain 14 The Average Manufacturer Price as a Percentage of the Average Price Paid by Independent Pharmacies 18 The Average Manufacturer Price and the Average Price Paid by Independent Pharmacies as a Percentage of the Average Wholesale Price 20 The Supply Chain Through Which Drugs Are Delivered to Consumers 2 2. Manufacturers' Shipments of Drugs Through the Supply Chain 5 3. Measures of Prices in the Retail Pharmacy Market 8 4. Flow of Funds for Single-Source Brand-Name Drugs Purchased at a Retail Pharmacy and Managed by a Pharmacy Benefit Manager for an Employer's Health Plan 11 Hypothetical Example of Payment for a Single-Source Prescription 17 5. 6. Figures l. 5. Boxes l. 2. The Average Manufacturer Price Is to Be Made Publicly Available Medicaid's Rebate Program 9 16 Case 3:17-cv-00699-BRM-LHG Document 109-6 Filed 03/09/18 Page 6 of 8 PageID: 1165 PR&'!CRIP'ITON DRUG PRICING IN TIIE PRIVATE SECTOR Price Measures There are three price measures that are important in understanding the payment system for prescription drugs in the retail pharmacy market: the average manufucturer price (AMP), the wholesale acquisition cost (WAC), and the average wholesale price (AWP). The AMP is an average of actual transaction prices. In contrast, the WAC and the AWP are list prices, like a sticker price in the automobile industry. The AMP is the average price paid by wholesalers to manufucrurers or by retail pharmacies that buy directly from manufucturers for drugs distributed through retail pharmacies. It reflects all rebates paid by manufucturers to wholesalers and to retail pharmacies. It does not include rebates paid by manufucturers to PBMs, Medicaid, or to other third-party payers. Manufacturers are required to report the AMP to the Department of Health and Human Services' Centers for Medicare & Medicaid Services (CMS), which uses it to calculate the rebates that manufucturers are required to pay state Medicaid programs for sales to Medicaid beneficiaries. For manufucturers, such rebates are a cost of participating in the Medicaid market. The WAC represents manufucturers' published catalog, or list, price fur sales of a drug (brand-name or generic) to wholesalers. However, in practice, the WAC is not what wholesalers pay fur drugs. To the extent that the WAC is meaningful in conveying infurmation about acrual transaction costs, the utility is limited to single-source drugs (that is, brand-name drugs still under patent protection). For those drugs, the WAC often approximates the prices that retail pharmacies pay to wholesalers. The AWP is a published list price fur a drug sold by wholesalers to retail pharmacies and nonretail providers. However, in practice, the AWP is not what retail pharmacies and nonretail providers pay fur drugs but, instead, is often used as a basis fur payment to retail pharmacies by, for example, the Medicaid program, PBMs, and health plans. Those organizations often pay pharmacies a price discounted off of the AWP. Single-Source Brand-Name Drugs Using a sample of single-source prescription drugs in oral solid forms (that is, tablets and capsules) that accounted for over 40 percent of all U.S. drug sales in 2003, CBO analyzed the average prices that retail pharmacies and nonretail providers paid. Those price data-which CBO purchased from IMS Health--