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United States v. Safeway, Inc.

United States District Court, C.D. Illinois, Springfield Division

November 30, 2016

SAFEWAY, INC., Defendant.


          RICHARD MILLS, U.S. District Judge:

         This is a qui tam action.

         The Relator alleges that Defendant Safeway, Inc. and all pharmacies under its operation and control knowingly perpetrated a false “usual and customary” pricing fraud scheme against government health programs as company policy to increase profits.

         The Plaintiffs and Relator assert violations of the Federal False Claims Act (“FCA”), 31 U.S.C. §§ 3729 et seq., and related acts under the applicable state laws.

         Pending is Safeway's Motion to Dismiss.

         I. BACKGROUND

         This is an action for damages and civil penalties on behalf of the United States of America and the Plaintiff States by the Relator against Defendant Safeway, Inc., arising from Safeway's alleged fraudulent pricing scheme perpetrated in its pharmacies nationwide against government health programs.

         According to the Complaint, Relator Thomas Proctor is a resident of the State of Texas. The Relator holds a BS in Pharmacy and Masters in Healthcare Administration and is a licensed pharmacist in the States of Texas, Oklahoma, Arkansas, Louisiana, Kentucky, Virginia, Arizona and Nebraska. The Relator has knowledge of, and experience in, the retail pharmacy industry through his many years of working as a pharmacist.

         Safeway is one of the largest food and drug retailers in the United States. At the time of the events in this case, Safeway operated under the trade name Safeway or through various Safeway-affiliated store banners across the United States including but not limited to: Vons, Pavilions, Dominick's, Genuardi's, Randalls, Tom Thumb, Pak'n'Save Foods and Carrs Quality Centers. In Illinois, for example, Safeway operated under the Dominick's banner. The Relator alleges that the policies, practices and procedures for all of the pharmacies are centrally managed and controlled by the national administration and upper corporate management.

         Most of the Defendant's stores include a pharmacy department. At the end of 2013, the Defendant operated 1041 pharmacies across 20 states and the District of Columbia. The Relator was employed as a pharmacist at Safeway's Tom Thumb #3625 in Grapevine, Texas between June and October of 2011.

         The Relator alleges Safeway violated the FCA and caused its subsidiaries to violate the FCA by routinely charging government health programs more than the general public for the same drugs. The scheme was conceived and directed by Safeway to fraudulently report inflated prices for prescription drugs sold to government health plan beneficiaries. Safeway knowingly failed to report its actual low drug prices in order to obtain higher reimbursements from government health programs than Safeway was legally and contractually entitled to receive.

         The Relator alleges that Safeway's fraud scheme was carried out nationwide at its affiliated pharmacies which are located in multiple states and jurisdictions, several of which are Plaintiffs in this case. The scheme began in or around 2007 and continues to the present. The Relator asserts Safeway administered the scheme in a uniform and consistent manner across the country through centralized policies and pharmaceutical pricing, using interconnected pharmacy and claims-processing computer systems shared by its subsidiaries.

         The Relator further contends that through this usual and customary pricing fraud scheme, Safeway submitted false claims and caused its subsidiaries and third parties to submit false claims in violation of the Federal False Claims Act, 31 U.S.C. § 3729 et seq., as amended (Count I). Moreover, Safeway's conduct violated the analogous false claims acts and health care fraud remedial statutes of the ten Plaintiff States and the District of Columbia (Counts II - XII). Like the FCA, the state statutes impose liability for defined conduct in the nature of fraud, for the submission of false claims, the use of false records and documents and the failure to disclose material information in presenting claims to each respective sovereign's Medicaid programs.

         The Relator asserts that Safeway has knowingly submitted or caused to be submitted fraudulent, inflated pricing information on tens of thousands of prescription drug reimbursement claims to government health plans, including Medicare, Medicaid, TRICARE, the Federal Employees Health Care Benefits Program (“FEHBP”) and other federal health care programs for the purpose of unlawfully obtaining reimbursement payments higher than those authorized by law.

         The Relator alleges venue is appropriate in this district pursuant to 31 U.S.C. § 3732(a) because the Defendant committed acts proscribed by 31 U.S.C. § 3729 in this judicial district. The material events pled here include Safeway causing the submission of false Illinois Medicaid claims, which are processed in this judicial district in Springfield, Illinois.

         The amended complaint states that the Relator believes there has been no prior public disclosure of the allegations and transactions on which the action is based. If the Court determined otherwise and the question arises, however, the Relator is an original source of the information on which the allegations and transactions in the Complaint are based, pursuant to 31 U.S.C. § 3730(e)(4)(B).

         The federal and state government health programs at issue, including Medicare, Medicaid, TRICARE and the FEHBP, among others, offer pharmaceutical benefits to their respective beneficiaries. These programs do not buy drugs. Instead, they reimburse providers who dispense covered drugs to program beneficiaries.

         The Relator alleges the reimbursement methodologies for different government health programs are functionally equivalent. The amended complaint generically refers to the usual and customary fraud scheme, which encompasses pricing fraud affecting Medicaid, TRICARE, FEHBP and Medicare. The Relator asserts truthful determination and reporting of the usual and customary or negotiated price by the pharmacy provider is a material component of the government health program's payment calculation. When a dispensing pharmacy knowingly charges above the usual and customary or negotiated price to government health plan beneficiaries, the reported pricing information is fraudulent since the lower usual and customary or negotiated prices were not provided to the government health plans. That is the gravamen of the Relator's amended complaint.

         The Defendant contends the amended complaint suffers from a number of deficiencies and, therefore, must be dismissed.


         After a lengthy investigation, the federal government declined to intervene in this case. When the United States declines to intervene in a qui tam FCA suit, the relator may pursue the case on his own, though the action is still technically on behalf of the United States. See Thulin v. Shopko Stores Operating Co., 771 F.3d 994, 998 (7th Cir. 2014) (citing 31 U.S.C. § 3730(c)(3)).

         The United States also advised that the States of Maryland and Colorado decline to intervene. Accordingly, all claims asserted on behalf of Maryland and Colorado have been dismissed with prejudice.

         A. Venue

         Safeway first contends the amended complaint must be dismissed because venue is improper in this district and service of process is flawed.

         The applicable statute provides:

Any action under section 3730 may be brought in any judicial district in which the defendant or, in the case of multiple defendants, any one defendant can be found, resides, transacts business, or in which any act proscribed by section 3729 occurred. A summons as required by the Federal Rules of Civil Procedure shall be issued by the appropriate district court and served at any place within or outside the United States.

31 U.S.C. § 3732(a). Safeway does not transact business in this judicial district and has never done so. Neither Safeway nor any of its subsidiaries has ever operated a Safeway store in this judicial district. Although Safeway once operated 72 Dominick's stores under its banner, all of those stores were located in the Northern District of Illinois. Because Safeway is not found and does not reside or transact business in the Central District of Illinois, venue would be improper under the first part of § 3732(a).

         The question thus is whether this judicial district is one “in which any act proscribed by section 3729 occurred.” The Relator alleges Safeway's scheme to defraud government health programs was carried out at 72 Dominick's stores in Illinois. The Relator also asserts Dominick's pharmacies submitted Illinois Medicaid claims. Paragraph 33 of the amended complaint provides that false claims for payment submitted by the Dominick's stores to Illinois Medicaid are sent to and processed in Springfield, Illinois. An individual who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment” is liable under the FCA. 31 U.S.C. § 3729(a)(1)(A).

         Given the allegations in the amended complaint, the Relator has sufficiently asserted that Safeway violated the FCA by causing false claims to be submitted in this district. Based on the plain language of § 3729, that is enough under the venue provision. This Court recently held that the Central District of Illinois was an appropriate forum for FCA actions under similar circumstances. See U.S. ex rel. Dismissed Relator v. Wilder, No. 11-cv-3286, 2012 WL 2503098, at *2 (C.D. Ill. June 28, 2012) (noting that the material events included the processing of allegedly false Medicaid claims in Springfield, Illinois, thus making the Central District a more convenient (and necessarily proper) forum.). Safeway has cited no controlling authority which holds that causing the submission of false claims in this district is insufficient to establish venue.

         Accordingly, the Court will deny the motion to dismiss for improper venue. Because the motion to dismiss for insufficient summons and insufficient service of process is based on the alleged lack of venue, the motion will be denied to that extent as well.

         B. Failure to state a claim

         (1) Legal standard

         In reviewing a motion to dismiss, the Court generally accepts the truth of the factual allegations of the complaint. Vinson v. Vermilion County, Illinois, 776 F.3d 924, 925 (7th Cir. 2015). In order to avoid dismissal under Rule 12(b)(6), “the complaint must state a claim that is plausible on its face.” Id. at 928.

         Because the FCA is an anti-fraud statute, however, the “claims under it are subject to the heightened pleading requirements of Rule 9(b).” United States ex rel. v. AIDS Research Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005). Therefore, “a party must state with particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b). “The requirement of pleading fraud with particularity includes pleading facts that make the allegation of fraud plausible.” U.S. ex rel. Grenadyor v. Ukranian Village Pharmacy, Inc., 772 F.3d 1102, 1106 (7th Cir. 2014). “The complaint must state the identity of the person making the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff.” Id. (internal quotation marks and citations omitted).

         (2) HIPAA disclosure and alleged violation

         The Defendant claims that Count I is fundamentally flawed. Paragraphs 186 to 188 of the amended complaint provide descriptions of 18 claims for drugs dispensed in Colorado. Safeway alleges these are the only relevant transaction-level details provided in support of Count I. Safeway asserts these transactions which rely on personal health information were obtained and disclosed in violation of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and cannot be used for that reason. Safeway moves to strike under Federal Rule of Civil Procedure 12(f) on that basis.

         The Relator claims he is protected by the HIPAA Whistleblower exception, which provides in part:

(1) Disclosures by whistleblowers. A covered entity is not considered to have violated the requirements of this subpart if a member of its workforce or a business associate discloses protected health information, provided that:
(i) The workforce member or business associate believes in good faith that the covered entity has engaged in conduct that is unlawful or otherwise violates professional or clinical standards, or that the care, services, or conditions provided by the covered entity ...

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