Syllabus by Reporter of Decisions Corbin R. Davis
This syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader.
STATE OF MICHIGAN ex rel GURGANUS v CVS CAREMARK CORPORATION; CITY OF LANSING v RITE AID OF MICHIGAN, INC; CITY OF LANSING v CVS CAREMARK CORPORATION. Docket Nos. 146791, 146792, and 146793. Argued Jan. 16, 2014 (Calendar No. 4). Decided June 11, 2014.
Marcia Gurganus, as relator, brought a qui tam action on behalf of the state of Michigan in the Kent Circuit Court against CVS Caremark Corporation, CVS Pharmacy, Inc., Caremark, L.L.C., and other Michigan pharmacies, alleging that they had failed to comply with MCL 333.17755(2) when they submitted prescription drug claims to the state for generic drugs dispensed to Medicaid beneficiaries. Under MCL 333.
17755(2), when a pharmacist receives a prescription for a brand-name drug and instead dispenses the generic equivalent, he or she must pass on the savings in cost to the purchaser. Gurganus alleged that defendants had failed to pass on the savings in cost and therefore submitted false claims to the state in violation of the Medicaid False Claim Act (MFCA), MCL 400.601 et seq. The city of Lansing and Dickinson Press Inc. (both third-party payors for prescription medication) brought a class action in the Kent Circuit Court against all but two of the defendants in the qui tam action, and the city, Dickinson, and Scott Murphy (who is a consumer of prescription medication) brought a second class action against those remaining defendants. The class actions alleged violations of MCL 333.17755(2) and the Health Care False Claim Act (HCFCA), MCL 752.1001 et seq., specifically, that the pharmacies systematically violated MCL 333.17755(2) by charging prices for generic drugs that produced a higher profit margin than they achieved by selling the equivalent brand-name drugs and made false statements in contravention of the HCFCA when they submitted claims for private insurance reimbursement that were not in compliance with MCL 333.17755(2). The court, James Robert Redford, J., granted defendants summary disposition, dismissing all three cases without prejudice and holding that the complaints had alleged no acts undertaken in Michigan by any defendant and had therefore failed to plead sufficient facts, relying instead on unsupported inferences. Rather than providing pricing data specific to defendants, the plaintiffs based the allegations in their second amended complaints on specific proprietary information acquired by Gurganus that revealed the wholesale costs and sales prices of brand-name and generic drugs sold in 2008 at a West Virginia Kroger pharmacy where Gurganus had been employed. Plaintiffs alleged that because Kroger Co. (a defendant in this case) operated retail pharmacies nationwide, acquired prescription drugs through central purchasing functions serving all its pharmacy locations, and acquired the majority of its prescription drugs from wholesalers, the wholesale costs of the other defendants were likely not materially different and one could extrapolate from the West Virginia data the wholesale costs of each defendant in Michigan. The court granted summary disposition with prejudice for plaintiffs’ failure to state a claim on which relief could be granted, noting that there was a complete lack of any specificity concerning transactions. The court also ruled that there is no private right of action to enforce MCL 333.17755(2) or the HCFCA. The Court of Appeals, M. J. KELLY, P.J., and HOEKSTRA and STEPHENS, JJ., affirmed in part and reversed in part in an unpublished opinion per curiam, issued January 22, 2013 (Docket Nos. 299997, 299998, and 299999). The panel affirmed the trial court’s holding that there is no implied right of action under MCL 333.17755(2) but held that the HCFCA does allow a private right of action. The panel also held that MCL 333.17755(2) applies to all transactions in which a generic drug is dispensed and not just to transactions in which a generic drug is substituted for its brand-name equivalent. Because the trial court was required to accept as true plaintiffs’ allegations that the wholesale costs for generic and brand-name drugs did not materially differ from those of the West Virginia pharmacy, the Court of Appeals concluded that plaintiffs’ claims under the MFCA and the HCFCA could proceed, reasoning that the facts that plaintiffs’ complaints did not allege transactions based on information specific to defendants and relied on some inferences were not fatal to the complaints because plaintiffs were not required to prove their cases in their pleadings. Defendants sought leave to appeal, and the city, Dickinson, and Murphy sought leave to cross-appeal. The Supreme Court granted the applications for leave to appeal, but limited its grant of leave to cross-appeal to the issue of whether a private cause of action existed under MCL 333.17755(2). 495 Mich 857 (2013).
In an opinion by Chief Justice YOUNG, joined by Justices MARKMAN, KELLY, ZAHRA, MCCORMACK, and VIVIANO, the Supreme Court held:
MCL 333.17755(2) requires that when a generic drug is substituted for a brand-name drug (and only then), the pharmacist must pass on the difference between the wholesale cost of the brand-name drug and the wholesale cost of the generic drug.
1. MCL 333.17755(1) states that when a pharmacist receives a prescription for a brand-name drug product, the pharmacist may, or upon request must, dispense a lower cost generic drug. MCL 333.17755(2) specifies that if a pharmacist dispenses a generically equivalent drug product, he or she must pass on the savings in cost to the purchaser or to the third-party payment source if the prescription purchase is covered by a third-party pay contract, with the savings in cost defined as the difference between the wholesale cost to the pharmacist of the two drug products. The introductory phrase of Subsection (2), immediately following as it does Subsection (1) governing transactions in which generic drugs are dispensed in lieu of brand-name drugs, indicates that Subsection (2) only applies when the pharmacist is engaged in a substitution transaction described in Subsection (1), and the Court of Appeals erred by holding otherwise.
2. Defendants argued that MCL 333.17755(2) only requires pharmacists to sell the substituted generic drug at the same price that a purchaser would pay had the generic been prescribed in the first instance. Under the statute, however, the amount a pharmacist must pass on to a purchaser or third-party payer is the difference between the wholesale cost of the two drugs. In other words, the savings in cost equals the brand-name wholesale cost minus the generic wholesale cost. Nonetheless, as a practical matter Subsection (2) provides a maximum allowable profit in a substitution transaction regardless of whether the pharmacist dispenses a generic drug or a brand-name drug; the pharmacist cannot make more dispensing a generic drug than he or she could dispensing a brand-name drug.
3. A motion for summary disposition under MCR 2.116(C)(8) tests the legal sufficiency of a complaint. MCR 2.112(B)(1) provides a heightened pleading standard for fraud claims, requiring that for allegations of fraud or mistake, the circumstances constituting fraud or mistake must be stated with particularity. Plaintiffs’ complaints relied on wholesale drug cost data from a single Kroger pharmacy in West Virginia, extrapolating from that proprietary data thousands of allegedly fraudulent transactions by defendants in violation of MCL 333.17755(2). In doing so, plaintiffs relied on the assumptions that (1) each defendant acquired its prescription drugs from just a few wholesalers, (2) the prescription drug purchasing power of each defendant was substantially the same, (3) the wholesale prices each defendant paid were materially the same, and (4) the wholesale prices did not change over time. In light of the heightened pleading standard for fraud claims, plaintiffs’ claims of MCL 333.17755(2) violations could not survive because they provided no information regarding defendants’ actual wholesale costs. The connection drawn between the West Virginia data and pharmaceutical sales in Michigan was too tenuous and conclusory to state a claim for relief, and the Court of Appeals erred by holding that plaintiffs’ allegations were sufficient to survive summary disposition.
4. Plaintiffs’ complaints were also deficient because they failed to allege with particularity a single improper substitution transaction of the type to which MCL 333.17755(2) applies. Instead, plaintiffs only alleged the occurrence of generic drug transactions, regardless of whether they were transactions involving the substitution of generic drugs for brand-name drugs.
5. In addition to violations of MCL 333.17755(2), the class action plaintiffs alleged violations of the HCFCA, and Gurganus alleged violations of the MFCA, both premised on defendants’ alleged violations of MCL 333.
17755(2). The failure of plaintiffs’ complaints to adequately establish violations of MCL 333.17755(2) disposed of the appeals in their entirety, and it was not necessary to evaluate the remainder of plaintiffs’ arguments. Court of Appeals’ con-
struction of MCL 333.17755(2) and its holding that plaintiffs’ pleadings were sufficient to survive summary disposition reversed, remainder of Court of Appeals’ judgment vacated, and trial court’s grant of summary disposition to defendants reinstated.
Justice CAVANAGH, concurring in the result only, agreed that a pharmacy’s obligation under MCL 333.17755(2) to pass on the savings in cost applies only to a transaction in which the pharmacy substitutes, i.e., replaces, a prescribed brand-name drug with a generic drug and that plaintiffs did not meet the heightened pleading standard under MCR 2.112(B)(1). In so holding, however, Justice CAVANAGH would have limited his consideration to the fact that plaintiffs did not specifically allege a single occurrence in which defendants dispensed a generic drug to replace a prescribed brand-name drug. Accordingly, he
concurred only in the majority’s result of reinstating the trial court’s grant of summary disposition to defendants.
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