Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: Leave denied for welfare plans to amend RICO claims against drug companies over co-payment subsidies, (Dec 11, 2013)

By Linda O’Brien, J.D., LL.M.

In an action by welfare benefit administrators against pharmaceutical companies alleging substantive and conspiracy RICO violations for providing patient co-payment subsidies for their branded drug, leave for the administrators to file an amended complaint denied as futile, the federal district court in New York City has decided (American Federation of State, County and Municipal Employees District Council 37 Health & Security Plan. v. Bristol-Myers Squibb Co., December 9, 2013, Oetken, J.). However, the administrators were allowed to amend their complaint to include a new claim for tortious interference of contract.

American Federation of State, County and Municipal Employees District Council 37 Health & Security Plan administers self-insured health and welfare benefit plans, including prescription drug benefits, to its members. Sergeants Benevolent Association Health and Welfare Fund is an employee welfare benefit plan that provides comprehensive health care benefits to its members. Both administrators have cost-sharing provisions in their plans that charge patients higher co-payments for prescriptions for brand name drugs than for typically lower-cost generic drugs or alternative treatments. The cost-sharing provisions are designed to encourage patients to choose the lower-cost treatments which lower the administrators’ costs. Bristol-Myers Squibb Co. and Otsuka America Pharmaceutical, Inc. jointly market the branded drug, Abilify, for the treatment of schizophrenia. The pharmaceutical companies have provided co-payment subsidies directly to patients that reduce or eliminate the patients’ out-of-pocket costs for Abilify. The subsidies encourage patients to choose the branded drug which increases the administrators’ costs.

The benefit administrators filed suit against the pharmaceutical companies, claiming three types of fraud: (1) the defendants misrepresented Abilify’s price by charging them full price for the drug without indicating when a co-payment subsidy had been applied (misrepresentation theory); (2) the subsidies fraudulently waived patients’ co-payment obligations (waiver theory); and (3) the subsidies fraudulently inflated benchmark prices, which determine how much the administrators pay for Abilify (benchmark theory). The court granted the defendant’s motion to dismiss RICO claims based on the misrepresentation and waiver theories. The plaintiffs were allowed to file an amended complaint as to its benchmark theory of fraud to specify how two critical benchmarks, the average wholesale price (AWP) and wholesale acquisition price (WAP) were calculated. Along with a motion for leave to amend the original complaint, the plaintiffs filed a proposed amended complaint that eliminated the preserved benchmark theory, restated the misrepresentation theory, and added a new claim of tortious interference with contract.

In denying the plaintiffs’ leave to amend the RICO claims, the court found that the administrators’ merely restated the previously dismissed claims based on the misrepresentation theory and failed to allege new facts that may have redressed the original complaint’s noted deficiencies. The original complaint failed to allege any duty to identify the source of funding for patients’ co-payments and the proposed amended complaint replicated the deficiency. The issue with the plaintiffs’ cause of action was substantive and a repleading of the claim would not cure the flaws. Accordingly, the motion to amend the RICO claims was denied as futile.

However, the proposed amended complaint raised a new claim of tortious interference with contract. The new claim was not reviewed in the prior motion to dismiss and the plaintiffs’ were granted leave to file an amended complaint asserting only the tortious interference claim.

The case is No. 12 Civ. 2238.

Attorneys: Lauren Guth Barnes (Hagens Berman Sobol Shapiro LLP) for American Federation of State, County and Municipal Employees District Council 37 Health & Security Plan and Sergeants Benevolent Association Health and Welfare Fund. Andrew David Schau (Covington & Burling LLP) for Bristol-Myers Squibb Co. Jonathan Paul Bach (Cooley Godward Kronish LLP) for Otsuka America Pharmaceutical, Inc.

Companies: American Federation of State, County and Municipal Employees District Council 37 Health & Security Plan; Sergeants Benevolent Association Health and Welfare Fund; Bristol-Myers Squibb Co.; Otsuka America Pharmaceutical, Inc.

Cases: RICO NewYorkNews