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Pirelli Armstrong Tire Corp. v. Walgreen Co.

August 31, 2009


The opinion of the court was delivered by: Judge Virginia M. Kendall


Plaintiff Pirelli Armstrong Tire Corporation, Retiree Medical Benefits Trust ("Pirelli") filed suit against Defendant Walgreen Company ("Walgreens") individually and on behalf of all others similarly situated, alleging unjust enrichment (Count I) and violation of thirty-five (35) state consumer protection statutes (Count II). Pursuant to Federal Rule of Civil Procedure 12(b)(6), Walgreens moves this Court to dismiss Pirelli's Complaint for failure to state a claim upon which relief can be granted. For the reasons stated below Walgreens' Motion to Dismiss is granted.


The following facts are taken from the allegations in the Plaintiff's Complaint, which are accepted as true for the purpose of deciding this Motion to Dismiss. Pirelli, a voluntary employee benefits association maintained pursuant to the federal Employment Retirement Security Act, 29 U.S.C. §§ 1132, et seq., provides health and medical benefits to participants and their beneficiaries. Compl. ¶ 5. Walgreens operates approximately 7,000 retail pharmacies in forty-nine (49) states, the District of Columbia, and Puerto Rico. Compl. ¶ 6. As a third-party payor ("TPP"), Pirelli reimburses pharmacies such as Walgreens for prescription drugs purchased by plan participants and their beneficiaries. Compl. ¶ 1. Pirelli alleges that Walgreens engaged in an unlawful scheme to overcharge TPPs when dispensing generic versions of three brand-name drugs: (1) ranitidine HCI ("ranitidine"); (2) fluoxetine hydrochloride ("fluoxetine"); and (3) selegiline hydrochloride ("selegiline"). Id.

The alleged scheme revolved around the price differential between generic drugs in tablet and capsule form. Id. When a generic drug is found to be bioequivalent to the brand-name drug, the FDA assigns it an "AB" rating, and it can be used interchangeably with the brand-name drug. Compl. ¶¶ 8, 10. Although pharmacists can substitute an AB-rated generic for a brand-name drug absent a dispense as written order in the prescription, because of the differences in form and administration schedules between capsules and tablets, they may not substitute a capsule version of a drug with the tablet form, or vice versa. Compl. ¶ 11. As part of the alleged scheme, between July 1, 2001 and 2005, Walgreens would fill prescriptions written for the drugs in tablet form with the more expensive capsule form, and vice versa, and as a result of these substitutions, Pirelli and other TPPs reimbursed Walgreens two to four times more than they would have had the prescriptions been filled as written. Compl. ¶ 1.

This reimbursement rate is the primary source of dispute between Pirelli and Walgreens. Individuals with private insurance through a TPP such as Pirelli only pay a flat percentage or "co-pay" when purchasing prescription drugs, and the remainder is paid by the TPP. Compl. ¶ 12.

While pharmacies determine what price they charge insured customers, the reimbursement rate is generally established by pharmacy benefit managers ("PBMs") acting on behalf of TPPs. Compl. ¶ 13. The reimbursement rate almost universally consists of the ingredient cost portion and the dispensing fee. Compl. ¶ 14. The ingredient cost for most generic drugs is based on a Maximum Allowable Cost ("MAC") that is determined by a TPP or PBM as the most they will reimburse the pharmacy for that drug. Compl. ¶ 15. The MAC is determined by gathering the prices of each manufacturer's version of a generic drug and using a formula based on Average Wholesale Price ("AWP"). Compl ¶ 17. The AWP, published by drug manufacturers, is the standard benchmark for reimbursement of brand-name drugs, but it is only used to determine the reimbursement rate of generic drugs when there is no MAC price available. Id. Pharmacies tend to earn greater profits selling generic drugs that are priced based on AWP as opposed to those subject to MAC limitations. Compl. ¶ 18.

During the relevant period, Pirelli's PBM established the reimbursement rate for generic drugs at AWP-14% plus a $2.50 dispensing fee or MAC plus a $2.50 dispensing fee, whichever was applicable, for certain plan beneficiaries, and AWP-35% plus a $1.90 dispensing fee or MAC plus a $1.90 dispensing fee, whichever was applicable, for other plan beneficiaries. Compl. ¶ 20. Of the three drugs in question, ranitidine and selegiline are generally manufactured and marketed in tablet form, while fluoxetine is generally manufactured and marketed in capsule form. Compl. ¶¶ 21, 23, 25. Because ranitidine and selegiline capsules and fluoxetine tablets were produced by so few manufactures and rarely prescribed, MACs were not adopted for these drugs in those respective forms. Compl. ¶¶ 22, 24, 26. Absent a MAC, reimbursement for the drugs in these forms generally involves the application of an AWP-based formula, resulting in a higher reimbursement rate. Id.

Citing to information revealed by a former Walgreens pharmacist in a previous qui tam suit, Pirelli alleges that it was Walgreens corporate policy to systematically change prescriptions written for dosage forms that were subject to MAC reimbursement limits, enabling Walgreens to evade the MACs and take advantage of the pricing differential between the tablet and capsule forms. Compl. ¶ 28. Pirelli claims that Walgreens pharmaceutical distribution system was set up so that it was difficult to fill prescriptions in dosage forms that were subject to MACs. Compl. ¶ 29. In support of its allegation, Pirelli cites to testimony by the former Walgreens pharmacist in the qui tam suit which claims that: 1) Walgreens personnel could not process orders for ranitidine tablets as written but instead filled the prescriptions with capsules; 2) Walgreens pharmaceutical dispensing computer system allowed pharmacists to switch dosage forms and they regularly did so when refilling prescriptions for ranitidine tablets, and; 3) they did this without obtaining the legally required physician's authorization. Id.

Pirelli claims that on several occasions Walgreens was reimbursed by Pirelli for the more expensive dosage form when the less expensive form was available. Compl. ¶ 34. A single patient's prescription history from November 2001 to May 2005 shows that the average reimbursement rate charged by Walgreens for ranitidine was $62.11 more than what Pirelli paid to other pharmacies. Id. While the reimbursement rate paid by Pirelli to Walgreens was substantially higher for ranitidine, the individual patient's co-payment remained constant, ranging from $8-$10 during the period in question. Id. On June 4, 2008, the qui tam proceeding was unsealed and Pirelli learned of Walgreens practice of switching dosage forms. Comp. ¶ 35. Ten months later Pirelli brought these claims against Walgreens.


When considering a motion to dismiss under Rule 12(b)(6), a court must accept as true all facts alleged in the complaint and construe all reasonable inferences in favor of the plaintiff. See Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995). To state a claim upon which relief can be granted, a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). A plaintiff need not allege all facts involved in the claim. See Sanjuan v. Am. Bd. of Psychiatry & Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1994). However, in order to survive a motion to dismiss for failure to state a claim, the claim must be supported by facts that, if taken as true, at least plausibly suggest that the plaintiff is entitled to relief. See Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1974 (2007). Such a set of facts must "raise a reasonable expectation that discovery will reveal evidence" of illegality. Id. at 1965.


As an initial matter, both parties devote substantial analysis to the viability of a nationwide class action alleging consumer fraud. The putative class, all similarly situated TPPs who had beneficiaries fill prescriptions at Walgreens (Compl. ΒΆ 38), presents serious potential problems of manageability and conflict between the various states' consumer protection statutes. Nonetheless, it is premature to engage in this analysis at the motion to dismiss stage, before Pirelli has even moved for class certification. See e.g., Szabo v. Bridgeport Machines., Inc., 249 F.3d 672, 677 (7th Cir. 2001) (highlighting the differing standard and factors considered for a Rule 23 motion as opposed to a Rule 12 motion); Walker v. County of Cook, 05 C 5634, 2006 WL 2161829, at *2 (N.D. Ill. July 28, 2006) (holding that issues regarding commonality and typicality required under Rule 23 were prematurely raised in a 12(b)(6) motion); Oxman v. ...

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