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BELLEVUE DRUG CO. v. ADVANCE PCS

United States District Court, E.D. Pennsylvania


March 2, 2004.

BELLEVUE DRUG CO., ROBERT SCHREIBER, INC., d/b/a BURNS PHARMACY, and REHN-HUERBINGER DRUG CO., d/b/a PARKWAY DRUGS #4, on behalf of themselves and all others similarly situated, and the PHARMACY FREEDOM FUND and the NAT'L COMMUNITY PHARMACISTS ASS'N, Plaintiffs,
v.
ADVANCE PCS, Defendant.

The opinion of the court was delivered by: EDUARDO ROBRENO, District Judge

MEMORANDUM

Bellevue Drug Co., Robert Schreiber, Inc., d/b/a Burns Pharmacy, and Rehn-Huerbinger Drug Co., d/b/a Parkway Drugs #4, on behalf of themselves and others similarly situated (collectively "plaintiffs"),*fn1 along with the Pharmacy Freedom Fund and the National Pharmacists Associations bring this action against Advance PCS under section 1 of the Sherman Act, 15 U.S.C. § 1, based on allegations of a horizontal agreement among competitors having the effect of restraining trade in the drug dispensing industry. Based on the defendant's allegedly illegal activities, plaintiffs seek treble damages and injunctive relief under sections 4 and 16 of the Clayton Act, 15 U.S.C. § 15 and 26.

Presently before the Court is defendant's motion to dismiss the complaint for failure to state a claim upon which relief can be granted. For the reasons that follow, the motion shall be denied.

  I. BACKGROUND*fn2

  As a prescription benefit manager ("PBM"), Advance PCS contracts individually with various plan sponsors to provide a variety of services related to the prescription drug industry, including purchasing brand name and generic prescription drugs and dispensing services from retail pharmacies; managing networks of retail pharmacies; and processing and adjudicating claims made by retail pharmacies for prescriptions they fill for members of prescription plans ("plan members") that Advance PCS administers.*fn3

  In its role as a plan administrator, Advance PCS is not itself the real purchaser of dispensing services or prescription drugs from network retail pharmacies. Instead, it acts as a purchasing agent on behalf of the plan sponsors that individually contract with Advance PCS. Specifically, the complaint alleges that "by jointly conferring their pharmacy purchase decisions upon Advance PCS" the plan sponsors accomplish a horizontal agreement. Further, the complaint alleges that the arrangement that the individual plan sponsors have with Advance PCS eliminates competition because they no longer actively compete with one another for the dispensing services and prescription drugs sold by the retail pharmacies. The arrangement — alleged by plaintiffs to have the effect of a "horizontal price fixing" agreement — enables the participants to agree not to bid up the price or bid against each other, thereby reducing the apparent demand for filling prescriptions, and concomitantly reducing the market price for prescription drugs and dispensing services provided by retail pharmacies.*fn4

  As alleged by plaintiffs, the "aggregated economic power" that Advance PCS yields enables it to set reimbursement rates for retail pharmacies' brand name and prescription drugs and dispensing services below that which would prevail in a competitive marketplace.*fn5 Although plaintiffs do not allege that the plan sponsors conspire with each other directly to effect this arrangement, the complaint does allege that each plan sponsor is aware of and understands the involvement of other plan sponsors and the role of Advance PCS as a common agent for these plan sponsors.

  Advance PCS, in addition to administering prescription drug benefit plans, operates its own mail-order pharmacy business. On top of the horizontal price-fixing agreement discussed above, plaintiffs allege that Advance PCS engages in anti-competitive conduct by using its aggregated market power derived from the combination of plan sponsors to create artificial vertical advantages for its own dispensing activities. More specifically, plaintiffs allege that Advance PCS contractually prohibits retail pharmacies from dispensing more than a 30-day supply of drugs. Meanwhile, mail-order pharmacies operated by Advance PCS are permitted to dispense a 90-day supply. Using information provided by the retail pharmacies it deals with, Advance PCS contacts plan members and advertises that the plan member can purchase a 90-day supply of a drug from Advance PCS's mail-order operation for one co-payment. This co-payment is advertised to be less than the total of three co-payments which would be paid for three, 30-day supplies of the same drug from a competing retail pharmacy subject to Advance PCS's co-payment and drug distribution restrictions. This activity diverts the refill and follow-on prescription business, alleged to be the most profitable part of the prescription drug dispensing business, from the retail pharmacies to Advance PCS's mail-order operation.

  Finally, plaintiffs allege that Advance PCS uses its aggregated power to unilaterally impose "onerous" contract terms on retail pharmacies that choose to participate in the Advance PCS network. These terms include co-payment restrictions and limitations on the fees plaintiffs are permitted to charge for the submission of claims, checks on patient eligibility, drug checks, and plan-member use of a particular pharmacy.

  II. DISCUSSION

  A. Standard for Motion to Dismiss.

  A motion to dismiss for failure to state a claim serves to test the sufficiency of a complaint. See Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). A plaintiff's allegations are considered true and are construed in the light most favorable to him, see Rocks v. Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989), and his complaint should not be dismissed "unless it appears beyond doubt that [he] can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

  Under Fed.R.Civ.P. 8(a)(2), the complaint "shall contain a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). The main purpose behind Rule 8(a)(2) is to give the defendant adequate notice of the claim asserted against him in order for him to adequately respond. Loftus v. SEPTA, 843 F. Supp. 981, 986 (E.D. Pa. 1994) (citing Conley, 355 U.S. at 47)). A plaintiff need not anticipate probable defenses and respond to them in his complaint. Campbell v. D'Agostino, No. 03-5328, U.S. Dist. LEXIS 24520, at *9 (E.D. Pa. Dec. 11, 2003). There is no heightened pleading standard in antitrust cases, and the general principles governing Rule 12(b)(6) motions apply. See In re Mercedes-Benz Antitrust Litig., 157 F. Supp.2d 355, 359 (D.N.J. 2001) (citing MCM Partners, Inc. v. Andrews-Bartlett & Assocs., Inc., 62 F.3d 967, 976 (7th Cir. 1995)).

  It has long been the rule in this Circuit that a complaint alleging a conspiracy "must contain sufficient information for the Court to determine whether or not a valid claim for relief has been stated and to enable the opposing side to prepare an adequate pleading." Rose v. Bartle, 871 F.2d 331, 366 n. 60 (3d Cir. 1989). What this means is that

the plaintiffs must plead with particularity the "circumstances" of the alleged wrongdoing in order to place the defendants on notice of the precise misconduct with which they are charged. Only allegations of conspiracy which are particularized, such as those addressing the period of the conspiracy, the object of the conspiracy, and certain actions of the alleged conspirators taken to achieve that purpose, will be deemed sufficient. . . . An inference [of conspiracy] . . . from the Complaint . . . [is] no substitute for the requirement that the circumstances of the conspiracy be pleaded with specificity.
Rose, 871 F.2d at 366 (quoting Kalmanovitz v. G. Heilman Brewing CO., 595 F. Supp. 1385, 1401 (D. Del. 1984)).

  B. Standing to Sue: "Antitrust Injury". Section 4 of the Clayton Act provides that "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws" may maintain a private action for treble damages. 15 U.S.C. § 15(b). "A showing of antitrust injury is necessary, but not always sufficient, to establish standing under § 4, because a party may have suffered antitrust injury but may not be a proper plaintiff under § 4 for other reasons." Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 110 (1986); see also Barton & Pittinos v. Smithkline Beecham Corp., 118 F.3d 178, 181 (3d Cir. 1997). "[I]njury, although casually related to an antitrust violation, nevertheless will not qualify as `antitrust injury' unless it is attributable to an anti-competitive aspect of the practice under scrutiny, `since it is inimical to [the antitrust] laws to award damages' for losses stemming from continued competition." Atlantic Richfield Co., v. USA Petroleum Co., 495 U.S. 328, 334 (1990) (quoting Cargill, 479 U.S. at 109-110)). If the injury is not of the recognized type, even though the would-be plaintiff may have suffered an injury as a result of conduct that violated the antitrust laws, he or she has no standing to bring a private action under the antitrust laws to recover for it. Smithkline Beecham Corp., 118 F.3d at 181.

  Advance PCS argues that the complaint should be dismissed because plaintiffs have not alleged an "antitrust injury . . . that is of the type the antitrust laws were intended to protect."*fn6 Although defendant argues that this injury is necessary to state a cause of action under the Sherman Act, as discussed above, antitrust injury is more accurately analyzed as an issue of standing for private plaintiffs bringing suit under the Clayton Act and is separate and distinct from the factual allegations necessary to state a cause of action under the antitrust laws.

  In attacking plaintiffs' complaint for failure to plead an "antitrust injury," Advance PCS argues that price-suppression generally benefits consumers.*fn7 Advance PCS relies primarily on the Supreme Court's decision in Atlantic Richfield Co., v. USA Petroleum Co., 495 U.S. 328 (1990), where the Court discussed at length what constitutes "antitrust injury" for the purposes of the Sherman Act. In ARCO, defendant ARCO was an integrated oil company that sold gasoline to consumers through its own stations and through independent retailers, such as the plaintiff in that case, USA Petroleum. 495 U.S. at 331. At some point, ARCO enacted a marketing strategy enabling its own dealers to lower prices. Id. at 331-32. USA Petroleum's complaint alleged that the marketing strategy was a conspiracy to fix prices below market levels and reduce competition among gas retailers. Id. at 332. The Supreme Court held that USA Petroleum failed to meet the antitrust injury requirement because its losses did "not flow from the aspects of a vertical, maximum price-fixing that render it illegal." Id. at 337. In dictum, which Advance PCS now relies on, the Supreme Court stated that "[l]ow prices benefit consumers regardless of how those prices are set, and as long as they are above predatory levels, they do not threaten competition." Id. at 339.

  The Court finds ARCO distinguishable from the present case. In contrast to the vertical price-fixing agreement alleged in ARCO (where the distributor was charging lower prices to the consumer), the situation alleged here is horizontal price-fixing agreement, where distributors are alleged to be colluding with one another to artificially suppress, not the prices charged to consumers, but the prices paid to their suppliers. Clearly, the potential anti-competitive effects of the latter are more pernicious than the former. While the vertical price-fixing agreement discussed by the Supreme Court may give rise to price competition between distributors, see ARCO, 495 U.S. at 341, the same cannot be said with the horizontal agreement alleged here because the distributors, instead of competitively bidding with the seller, act in concert with one another. The "low prices" favorably referred to in ARCO are not the same "low prices" at issue in the instant case. Indeed, when all reasonable inferences are drawn in favor of the plaintiffs, competition as between the distributors, is decreased and not increased in the case at bar. Thus, an antitrust injury of the type stemming from the reduction of competition has been alleged. Id. at 334.

  Despite defendant's arguments to the contrary, injury to sellers inflicted through a horizontal price-fixing conspiracy of buyers constitutes an antitrust injury which is actionable by the seller. See Mandeville Island Farms, 334 U.S. at 235. As framed by the Supreme Court in considering a dismissal of a plaintiff's complaint by the district court, the issue presented in Mandeville was "whether, in the circumstances pleaded, California sugar refiners who sell sugar in interstate commerce [the purchasers] may agree among themselves to pay a uniform price for sugar beets grown in California without incurring liability to the local beet growers [the sellers] under the Act." Id. at 221. The Court concluded that sugar refiners could not escape liability under the Sherman Act and found it "clear that the agreement is the sort of combination condemned by the Act, even though the price-fixing was by purchasers, and the persons specially injured under the treble damage claim are sellers, not customers or consumers." Id.

  In view of the above, the Court finds that plaintiffs have sufficiently pled a restraint in trade resulting in "antitrust injury" that is actionable by plaintiff under the antitrust laws. The "existence of an `antitrust injury' is not typically resolved through motions to dismiss," Brader v. Allegheny Gen. Hosp., 64 F.3d 869, 876 (3d Cir. 1995), and defendant has provided an insufficient basis for the Court to find the instant case to be an exception.

  Having found that an injury of the type protected by the antitrust laws has been pled, the Court turns to the elements necessary to establish a cause of action under the Sherman Act.

  C. Section 1 Violations.

  Section 1 of Sherman Act states that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations is hereby declared illegal." 15 U.S.C. § 1. In this Circuit, three elements must be alleged to sustain a cause of action under section 1 of the Sherman Act: a contract, combination or conspiracy; a restraint of trade; and an effect on interstate commerce. See Fuentes v. South Hills Cardiology, 946 F.2d 196, 199 (3d Cir. 1990) (citing Weiss v. York Hospital, 745 F.2d 786, 812 (3d Cir. 1984), cert. denied, 470 U.S. 1060 (1985)). Because the effects of defendant's alleged activities on interstate commerce are not disputed by the parties, the Court will determine if the first two elements have been sufficiently pled to state a cause of action.

  1. Contract, Combination or Conspiracy.*fn8

  Advance PCS argues that the dismissal of the complaint is warranted because the plaintiffs have failed to plead the existence of a horizontal conspiracy. In its view, "[a] horizontal price-fixing agreement is an agreement among competitors fixing their prices . . . [but] the Complaint does not allege the existence of any agreement here." The Court disagrees.

  According to the Supreme Court, the "fixing of prices by one member of a group pursuant to express delegation, acquiescence, or understanding is just as illegal as the fixing of prices by direct, joint action." United States v. Masonite Corp. 316 U.S. 265, 276 (1942). Here, plaintiffs' complaint alleges that Advance PCS markets the number and size of the plan sponsors it represents and that each plan sponsor is fully aware that Advance PCS negotiates with network retail pharmacies on behalf of many other plan sponsors. Further, plaintiffs allege in their complaint that the aggregate market power possessed by Advance PCS through its representation of numerous plan sponsors allows it to set prices for prescription drugs and drug dispensing services below that which would have existed in a freely competitive market and allows it to unilaterally impose unreasonable and anti-competitive contract terms on plaintiffs. These lower prices, of course, provide an economic benefit to the plan sponsors as do the 30-day drug supply limitation when coupled with a co-payment limitation. These allegations, if accepted as true, may give rise to the inference that Advance PCS acted with the acquiescence and understanding of the plan sponsors it represented and that each plan sponsor "had an awareness of the general scope and purpose of the undertaking." Id. at 275.

  "No formal agreement is necessary to constitute an unlawful conspiracy. . . . The essential combination or conspiracy may be found in course of dealings or other circumstances as well as in any exchange of words." American Tobacco Co. v. United States, 328 U.S. 781, 809-810 (1946).*fn9 Based on the allegations made in the complaint, the Court finds that plaintiff has sets forth facts which establish the existence of a contract, combination, or conspiracy. Moreover, the Court finds that the facts pled — including, but not limited to, the object of the alleged agreements between defendant and the PBMs and actions taken to effect the object of the alleged agreements — are particularized enough to place defendants "on notice of the precise misconduct with which they are charged." Rose, 871 F.2d at 366. Thus, the Court will not dismiss the complaint for failure to sufficiently plead a horizontal agreement.

  2. Restraint of Trade.

  In view of Mandeville, 334 U.S. at 222, 234-35, discussed above, the Court finds that a price-suppression scheme effected by a group of buyers, who would otherwise compete with one another for goods sold by a seller, constitutes a restraint on trade.

  As for the contract provisions relating to fee charges, co-payment prices, and drug dispensing practices, which the plaintiffs claim curtail their ability to distribute their products and limit their ability to set prices, the Court finds that plaintiffs have sufficiently pled a restraint of trade cognizable under section 1 of the Sherman Act.

  III. CONCLUSION

  In view of the above, defendant's motion to dismiss shall be denied.

  An appropriate order follows.

  ORDER

  AND NOW, this day of March 2004, for the reasons set forth in the accompanying memorandum, it is hereby ORDERED that defendant's motion to dismiss (doc. no. 3) shall be DENIED.

  AND IT IS SO ORDERED.


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