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Cedra Pharmacy Houston LLC v. Unitedhealth Group Inc.

United States District Court, S.D. Texas, Houston Division

March 7, 2019




         Pending in this case that has been referred for all further pretrial proceedings is Defendants' Motion to Dismiss Plaintiffs' Complaint (Document No. 16). Having considered the motion, the response in opposition, the parties' additional briefing, the argument at a status conference held on January 23, 2019, the allegations in Plaintiffs' Complaint, and the applicable law, the Magistrate Judge RECOMMENDS, for the reasons set forth below, that Defendants' Motion to Dismiss (Document No. 16) be GRANTED.

         I. Background

         This is essentially an unfair competition case brought by three specialty pharmacies, Cedra Pharmacy Houston, LLC ("Cedra Houston"), Jammz Chemists, LLC d/b/a Cedra Dallas ("Cedra Dallas") and Cedra Pharmacy Los Angeles LLC ("Cedra LA"), against three groups of Defendants: (1) United Health Group, Inc. and United Healthcare Services, Inc. (the "United Defendants"); (2) OptumRx, Inc. ("ORX")[1]; and (3) Briovarx of Maine, Inc., Briovarx, LLC and Salveo Specialty Pharmacy, Inc. (referred to hereafter as "specialty pharmacy defendants"), who Plaintiffs allege have conspired to exclude them from participating in the pharmacy network maintained by pharmacy benefit manager ORX on behalf the United Defendants. According to Plaintiffs, they each applied for admission into Defendant ORX pharmacy network, and each application was either denied, or refused consideration. Plaintiffs maintain that the denial of their applications was not based on any legitimate reason, but was instead based on Defendants' desire to dominate and control the specialty drug market for themselves, and to the exclusion of Plaintiffs.

         Plaintiffs have alleged eight causes of action in their Complaint: (1) a Civil RICO claim against the United Defendants and ORX (18 U.S.C. § 1962(c)); (2) a RICO Conspiracy claim against the United Defendants and ORX (18 U.S.C. § 1962(d)); (3) an unlawful restraint of trade claim against all Defendants under § 1 of the Sherman Act (15 U.S.C. § 1); (4) a monopolization of the pharmacy benefit market (PBM) claim against all Defendants under § 2 of the Sherman Act (15 U.S.C. § 2); (5) a monopolization of the PBM market claim against all Defendants under § 7 of the Clayton Act (15 U.S.C. § 18); (6) an unfair competition claim against all Defendants under Texas common law; (7) a tortious interference with prospective business relationships claims by Plaintiff Cedra Houston against all Defendants under Texas law; and (8) Plaintiff Cedra LA's fair procedure claim against Defendants under California common law. Defendants move for dismissal of all these claims under Rule 12(b)(6) for failure to state a claim upon which relief may be granted.

         II. Standard of Review - 12(b)(6)

         Rule 12(b)(6) provides for dismissal of an action for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face."' Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is said to be plausible if the complaint contains "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S.Ct. at 1949. Plausibility will not be found where the claim alleged in the complaint is based solely on legal conclusions, or a "formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555. Nor will plausibility be found where the complaint "pleads facts that are merely consistent with a defendant's liability" or where the complaint is made up of'"naked assertions devoid of further factual enhancement.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 557)). Plausibility, not sheer possibility or even conceivability, is required to survive a Rule 12(b)(6) motion to dismiss. Twombly, 550 U.S. at 556-557; Iqbal, 129 S.Ct. at 1950-1951.

         In considering a Rule 12(b)(6) motion to dismiss, all well pleaded facts are to be taken as true, and viewed in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). But, as it is only facts that must be taken as true, the court may "begin by identifying the pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Iqbal, at 1950. It is only then that the court can view the well pleaded facts, "assume their veracity and [ ] determine whether they plausibly give rise to an entitlement to relief." Iqbal, at 950.

         III. Discussion

         Prior to consideration of Plaintiffs' claims, and Defendants' arguments for dismissal of those claims, it is important to note that several of the Defendants named by Plaintiffs, referred to herein as the Catamaran Defendants (Catamaran Corporation, Catamaran PBM of Illinois, Inc., and Catamaran, LLC), do not exist, and have not existed as separate, independent entities since 2015, when they were acquired by the United Defendants and otherwise merged with Defendant ORX. That acquisition and merger pre-dated most of the conduct about which Plaintiffs complain in this case, including most particularly, Plaintiffs' exclusion from the ORX network, which occurred in 2016 and 2017.

         A. RICO Claims - Claims 1 and 2

          Defendants argue that Plaintiffs have not alleged plausible RICO claims because they have not alleged a RICO "enterprise," have not alleged that the RICO Defendants conducted the affairs of a RICO enterprise, have not alleged a racketeering activity, and have not alleged a pattern of racketeering. These pleading allegations are crucial to a RICO claim.

         A plaintiff in a civil action may recover damages under the RICO statute, 18 U.S.C. § 1961, etseq., if he is able to allege and prove: 1) a violation of 18 U.S.C. § 1962(a), (b), (c), or (d), and 2) injury to business or property as a result of such violation.[2] 18 U.S.C. § 1964(c) ("Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court. . . "). Section 1962, as interpreted by the Fifth Circuit Court of Appeals, provides in its simplest terms, that:

(a) a person who has received income from a pattern of racketeering activity cannot invest that income in an enterprise;[3]
(b) a person cannot acquire or maintain an interest in an enterprise through a pattern of racketeering activity;[4]
(c) a person who is employed by or associated with an enterprise cannot conduct the affairs of the enterprise through a pattern of racketeering activity;[5] and
(d) a person cannot conspire to violate subsections (a), (b), or (c).[6]

Crowe v. Henry, 43 F.3d 198, 203 (5th Cir. 1995). All civil RICO claims require allegations and proof of "1) a. person who engages in 2) a. pattern of racketeering activity 3) [which is] connected to the acquisition, establishment, conduct or control of an enterprise.'" Id. at 204 (emphasis in original).

         A "person", within the meaning of § 1962, "includes any individual or entity capable of holding a legal or beneficial interest in property." 18 U.S.C. § 1961(3). To be liable as a "RICO person" under § 1962, however, the defendant must be "one that either poses or has posed a continuous threat of engaging in acts of racketeering." Delta Truck & Tractor, Inc. v. J.I. Case Co., 855 F.2d 241, 242 (5th Cir. 1988), cert, denied, 109 S.Ct. 1531 (1989).

         A "pattern of racketeering" within the meaning of § 1962 "requires at least two acts of racketeering activity." 18 U.S.C. § 1961(5). In this circuit, "a pattern of racketeering activity" has two elements: "1) predicate acts-the requisite racketeering activity, and 2) a pattern of such acts." In re Burzynski, 989 F.2d 733, 742 (5th Cir. 1993). Predicate acts are delineated in 18 U.S.C. § 1961(1), and include, for purposes of this case, extortion. To set out a pattern of predicate acts, a plaintiff must demonstrate that the predicate acts are related and that such acts have some type of continuity. Id.

         An "enterprise" within the meaning of § 1962 "includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). If the plaintiff is alleging an association-in-fact enterprise, there must be allegations and evidence demonstrating '"an ongoing organization, formal or informal, and . . . evidence that the various associates function as a continuing unit."' Whelan v. Winchester Prod. Co., 319 F.3d 225, 229 (5th Cir. 2003) (quoting United States v. Turkette, 101 S.Ct. 2524, 2528(1981)). "The enterprise is not a pattern of racketeering activity, but must exist separate and apart from the pattern of racketeering activity in which it engages." Id. at 229.

         Here, while Defendants argue, for a multitude of reasons, that Plaintiffs have not alleged plausible RICO claims, the plausibility of Plaintiffs' RICO claim is most directly and clearly affected by Plaintiffs' failure to allege a plausible "racketeering activity." Plaintiffs' RICO claims are subject to dismissal on that basis alone.[7]

         In their Complaint, Plaintiffs allege that the RICO Defendants, through one or both of their association-in-fact enterprises, "have engineered a wide-ranging campaign to economically extort Plaintiffs, by repeatedly threatening Plaintiffs and/or the Cedra Owners with economic harm in order to coerce Cedra Houston, and ultimately Cedra Dallas and Cedra LA, into respectively foregoing their exercising of their right and opportunity, under Federal and state law, to service customers whose pharmacy benefits were administered by ORX in their respective geographical areas." Complaint (Document No. 1) at ¶ 184 Plaintiffs also allege that the RICO Defendants subjected Cedra Houston to "arbitrary, capricious and protracted audits," Id. at ¶ 185 and also "arranged for the simultaneous audit of four new York pharmacies affiliated with Plaintiffs, in order to send a thinly-veiled threat to Plaintiffs that their continued attempt to join ORX's network and expand their operations would result in harm to the Cedra Owners, in the hope that the financial pressure placed on the Cedra Owners would induce Cedra Houston, Cedra Dallas, and Cedra LA to withdraw their network applications, and thus forego the opportunity to service customers in their respective areas whose pharmacy benefits were administered by ORX". Id. at ¶ 191. Plaintiffs allege that this conduct constitutes extortion under the Hobbs Act, 18 U.S.C. § 1951(b)(2), and that extortion is a form of racketeering under RICO.

         Extortion under the Hobbs Act, which would serve as a predicate act of racketeering for purposes of a civil RICO claim, 18 U.S.C. § 1961(1) (definition of "racketeering activity"), is defined as "the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right." 18 U.S.C. § 1851 (b)(2). Here, the property interest Plaintiffs claim to have lost is their "right and opportunity" to provide pharmacy services to those covered by ORX's network. But assuming that such a right or opportunity exists, and exists as Plaintiffs' "property," extortion does not occur simply when a plaintiff claims to have lost property by virtue of a defendant's wrongful conduct. Instead, the predicate act of extortion requires that the RICO Defendants obtain, or otherwise gain, Plaintiffs' property. InScheidler v. Nat'l Org. for Women, Inc., 537 U.S. 393, 404 (2003), the Supreme Court made it clear that the extortion provisions of the Hobbs Act "require not only the deprivation but also the acquisition of property." See also Block v. Snohomish Cty., 733 Fed.Appx. 884, 888 (9th Cir. 2018) ("extortion as used in the RICO context requires showing that the defendant received something of value which can be 'exercised, transferred or sold.'"). Here, taking Plaintiffs' allegations as true, Defendants did not obtain, or gain, anything of Plaintiffs - nor could they under the facts alleged. The United Defendants are health care companies. ORX is a pharmacy benefit manager. The specialty pharmacy defendants are specialty pharmacies in the ORX pharmacy network, who are affiliated with the United Defendants. None of these Defendants obtained, or sought to obtain, any tangible or intangible property, right or opportunity claimed by Plaintiffs in this case. Moreover, none of the Defendants was in any position to obtain any tangible or intangible property, right or opportunity claimed by Plaintiffs in this case. And, obtaining or seeking to obtain property is key to an extortion claim; conduct which merely interferes with or otherwise deprives someone of property is not sufficient to constitute Hobbs Act extortion. United States v. McFall, 558 F.3d 951, 956 (9th Cir. 2009) ("We have stated that Hobbs Act extortion is a 'larceny-type offense,' which 'does not occur when a victim is merely forced to part with property.' Instead, 'there must be an "obtaining": someone-either the extortioner or a third person-must receive the property of which the victim is deprived.'") (internal citation omitted); see also Sekhar v. United States, 570 U.S. 729, 734 (2013) ("the Hobbs Act defines its crime of 'extortion' as 'the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.' Obtaining property requires 'not only the deprivation but also the acquisition of property.' That is, it requires that the victim 'part with' his property, and that the extortionist 'gain possession' of it. The property extorted must therefore be transferable-that is, capable of passing from one person to another.") (internal citations omitted).

         Because Plaintiffs have not alleged that Defendants obtained, or attempted to obtain, their property, Plaintiffs have not alleged a plausible predicate act for purposes of their § 1962(c) RICO claim, and that claim is subject to dismissal pursuant to Rule 12(b)(6). See e.g., S. Snow Mfg. Co. v. SnoWizardHoldings, Inc., 912 F.Supp.2d 404, 424 (E.D. La. 2012) (finding that Plaintiffs had not alleged viable predicate acts of extortion to support a civil RICO claim where the alleged extortion was based on "the transmission of cease and desist letters, the commencement of litigation on the basis of intellectual property rights, internet postings that' [SnoWizard] will protect [its] legal and trademark right,' and the refusal to provide services or retail products to Plum Street employees"),, affd, 567 Fed.Appx. 945 (Fed. Cir. 2014), cert, denied, __U.S. __, 135 S.Ct. 1416 (2015); Mendez Internet Mgmt. Servs., Inc. v. Banco Santander de Puerto Rico, No. CIV. 08-2140 (JAF), 2009 WL 1392189, at *4 (D.P.R. May 15, 2009) (dismissing plaintiffs civil RICO claim predicated on extortion where the supporting allegations were that defendants interfered with plaintiffs "license to establish a dinar sales outlet in Puerto Rico" but there were no allegations that defendants "actually acquired Mendez' license to distribute dinars in Puerto Rico"), affd, 621 F.3d 10 (1st Cir. 2010); Walker v. Beaumont Indep. Sch. Dist., No. 1:15-CV-379, 2017 WL 928459, at *9 (E.D. Tex. Mar. 6, 2017) (where plaintiff alleged that "when he refused to join the union" he was "threatened that they 'would get him one way or another'" but there was "no indication that the IBEW took or sought to take property from Walker or that he was induced to give consent to the taking of such property" plaintiff had not stated a plausible attempted extortion claim), report and recommendation adopted, No. 1:15-CV-379, 2017 WL 1166779 (E.D. Tex. Mar. 28, 2017), appeal filed, No. 17-40752. In addition, because Plaintiffs have not alleged a plausible § 1962(c) RICO claim, their RICO conspiracy claim under § 1962(d) is also not plausible, and is subject to dismissal as well. N. Cypress Med. Ctr. Operating Co. v. Cigna Healthcare, 7'81 F.3d 182, 203 (5th Cir. 2015) ("Since North Cypress failed to properly plead a claim under §§ 1962(a), (b), or (c), it correspondingly failed to properly plead a claim under § 1962(d)."); Allstate Ins. Co. v. Benhamou, 190 F.Supp.3d 631, 663 (S.D. Tex. 2016) ("when a plaintiff fails properly to allege a violation of § 1962(c), his § 1962(d) claim is without basis").

         B. Anti-Trust Claims - Claims 3, 4, and 5

          Plaintiffs assert anti-trust claims under sections 1 and 2 of the Sherman Act, alleging that Defendants conspired to restrain trade in the specialty drug market, and monopolized and/or sought to monopolize the specialty drug market. Plaintiffs also assert a claim under section 7 of the Clayton Act, alleging that the merger between ORX and the Catamaran Defendants lessened competition and created a monopoly in the relevant market. Plaintiffs allege that:

216. The relevant service market affected by Defendants['] conduct is the specialty pharmacy market that are reimbursed by insurance, including, but not limited to, the dispensing of prescriptions. The relevant product market affected by Defendants['] conduct are prescription drugs reimbursed by insurance, including, but not limited to, specialty drugs such as those used to treat Hepatitis C.
217. The relevant geographic market is the United States, including, but not limited to, the State of Texas and the State of California.
218. Defendants, by administering the drug benefits of 65 million Americans, control a significant portion of the relevant market.
219. Defendants' conspiracy had the unlawful effect of restraining and eliminating competition in the provision of pharmacy services, in particular the dispensing of specialty drugs, in all markets which Plaintiffs and other independent pharmacies did and could operate in interstate commerce.

Complaint (Document No. 1).

         Section 1 of the Sherman Act prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce". 15 U.S.C. § 1. The Supreme Court has construed section 1 to outlaw unreasonable restraints of trade. Ohio v. Am. Express Co., __ U.S.__, 138 S.Ct. 2274, 2283 (2018) ("This Court's precedents have thus understood § 1 'to outlaw only unreasonable restraints.'") (citing State Oil Co. v. Khan,522 U.S. 3, 10 (1997)). To state a claim under section 1 of the Sherman Act, a plaintiff must allege "the defendants '(1) engaged in a conspiracy (2) that restrained trade (3) in a particular market.'" MM Steel, L.P. v. JSW Steel (USA) Inc., 806 F.3d 835, 843 (5th Cir. 2015) (quoting Spectators' Commc'n Network, Inc. v. Colonial Country Club,253 F.3d 215, 220 (5th Cir. 2001)), cert, denied, __U.S.__, 137 S.Ct. 372 (2016). Section 2 of the Sherman Act prohibits the monopolization of, as well as the attempt to monopolize, trade or commerce. 15 U.S.C. § 2. To state a claim under section 2 of the Sherman Act, a plaintiff must either allege that the defendant "1) possesses monopoly power in the relevant market and 2) acquired or maintained that power willfully, as distinguished from the power having arisen and continued by growth produced by the development of a superior product, business acumen or historic accident," Rio Grande Royalty Co. v. Energy Transfer Partners, L.P.,786 F.Supp.2d 1190, 1196 (S.D. Tex. 2009), or "(1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power." Retractable Techs., Inc. v. Becton Dickinson & Co.,842 F.3d 883, 891 (5th Cir. 2016), cert, denied, __U.S.__, 137 S.Ct. 1349(2017). Section 7 of the Clayton Act, 15 U.S.C. § 18, "forbids mergers in any line of commerce where the effect may be 'substantially to lessen competition or tend to create a monopoly.'" SureShot Golf ...

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