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Jerry Beeman and Pharmacy v. Anthem Prescription

July 19, 2011

JERRY BEEMAN AND PHARMACY SERVICES, INC., DOING BUSINESS AS BEEMANS PHARMACY; ANTHONY HUTCHINSON AND ROCIDA INC, DOING BUSINESS AS FINLEYS REXALL DRUG; CHARLES MILLER, DOING BUSINESS AS YUCAIPAI VALLEY PHARMACY; JIM
MORISOLI AND AMERICAN SURGICAL PHARMACY INC, DOING BUSINESS AS AMERICAN SURGICAL PHARMACY; BILL PEARSON AND PEARSON AND HOUSE, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED AND ON BEHALF OF THE GENERAL PUBLIC; DOING BUSINESS AS PEARSON MEDICAL GROUP PHARMACY, PLAINTIFFS-APPELLEES,
v.
ANTHEM PRESCRIPTION MANAGEMENT, LLC; ARGUS MHEALTH SYSTEMS, INC.; BENESCRIPT SERVICES, INC.; FFI RX MANAGED CARE; FIRST HEALTH SERVICES CORPORATION; MANAGED PHARMACY BENEFITS, INC., FORMERLY KNOWN AS CARDINAL HEALTH MPB INC.; NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.; PHARMACARE MANAGEMENT SERVICES, INC.; PRIME THERAPEUTICS; RESTAT CORPORATION; RX SOLUTIONS, INC.; TMESYS, INC.; WHP HEALTH INITIATIVES, INC.; MEDE AMERICA CORP., DEFENDANTS-APPELLANTS. JERRY BEEMAN AND PHARMACY SERVICES, INC., DOING BUSINESS AS BEEMANS PHARMACY; ANTHONY HUTCHINSON AND ROCIDA INC, DOING BUSINESS AS FINLEYS REXALL DRUG; CHARLES MILLER, DOING BUSINESS AS YUCAIPAI VALLEY PHARMACY; JIM MORISOLI AND AMERICAN SURGICAL PHARMACY INC, DOING BUSINESS AS AMERICAN SURGICAL PHARMACY; BILL PEARSON AND PEARSON AND HOUSE, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED AND ON BEHALF OF THE GENERAL PUBLIC; DOING BUSINESS AS PEARSON MEDICAL OPINION GROUP PHARMACY, PLAINTIFFS-APPELLEES,
v.
TDI MANAGED CARE SERVICES, INC., DOING BUSINESS AS ECKERD HEALTH SERVICES; MEDCO HEALTH SOLUTIONS, INC.; EXPRESS SCRIPTS, INC.; ADVANCE PCS, ADVANCE PCS HEALTH, L.P.; RX SOLUTIONS, INC., DEFENDANTS-APPELLANTS.



D.C. No. CV-04-00407-VAP D.C. No.CV-02-01327-VAP Appeal from the United States District Court for the Central District of California Virginia A. Phillips, District Judge, Presiding

The opinion of the court was delivered by: B. Fletcher, Circuit Judge:

FOR PUBLICATION

Argued and Submitted

March 8, 2011-Pasadena, California

Before: Betty B. Fletcher, Stephen Reinhardt, and Kim McLane Wardlaw, Circuit Judges.

Opinion by Judge B. Fletcher;

Dissent by Judge Wardlaw

COUNSEL

OPINION

In this consolidated appeal, defendants-appellants (collectively "Defendants") appeal the denial by the district court of their motions for judgment on the pleadings. Plaintiffs-appellees (collectively "Plaintiffs") brought this diversity suit against Defendants to enforce California Civil Code §§ 2527 and 2528. These statutes require Defendants to supply the results of bi-annual studies of California pharmacies' retail drug pricing for private uninsured customers to their clients, who are third-party payors such as insurance companies and self-insured employer groups. In their motions for judgment, Defendants argued that California Civil Code § 2527 (hereinafter "§ 2527") compels speech in violation of the United States and California Constitutions. The district court denied the motions, first reasoning that it was not bound by the state appellate court decisions striking down the statute under the California Constitution, and then holding that § 2527 does not unconstitutionally compel speech. Defendants obtained permission to file an interlocutory appeal. We accordingly have jurisdiction under 28 U.S.C. § 1292(b).

In this appeal, we must decide (1) whether we are bound by the Erie doctrine to follow the state appellate court decisions striking down § 2527, and, if not, (2) whether § 2527 violates the First Amendment or the California Constitution's free speech provision. We conclude that Erie does not require us to follow the state appellate court decisions, and that § 2527 does not unconstitutionally compel speech under either the United States or California Constitution. We therefore affirm.

I.

A. Factual Background

Plaintiffs own five independent retail pharmacies licensed in California. Defendants are current or former pharmacy benefit managers ("PBMs"). They "contract with third-party payors or health plan administrators such as insurers, HMOs, governmental entities, and employer groups to facilitate cost-effective delivery of prescription drugs to health plan members or other persons to whom the third-party payors provide prescription drug benefits." PBMs assist in the "processing of prepaid or insured prescription drug benefit claims submitted by a licensed California pharmacy or patron thereof." In other words, PBMs act as intermediaries between pharmacies and third-party payors such as health insurance companies. Pursuant to this role, PBMs may create networks of retail pharmacies that agree to accept certain reimbursement rates when they fill prescriptions for health plan members. According to Defendants, network reimbursements "generally are lower than what pharmacies would charge uninsured, cash-paying customers."

Section 2527, the challenged statute, requires "prescription drug claims processors"*fn1 to conduct or obtain studies every 24 months identifying the fees California pharmacies charge to private customers for pharmaceutical dispensing services. Cal. Civ. Code § 2527(c).*fn2 The claims processors must send the results of these studies to "each client for whom [they] perform[ ] claims processing services," or, in other words, to third party payors such as insurers. Id. § 2527(d).*fn3 Section 2528 imposes civil penalties ranging from $1,000 to $10,000 for violations of § 2527. Cal. Civ. Code § 2528.

The legislative history of § 2527 reveals that the original bill, introduced by the California Pharmacists Association in 1981, required pharmacies to be reimbursed according to their "customary charges" rather than according to rates "unilater-ally set by PBMs." Beeman v. TDI Managed Care Services, Inc., 449 F.3d 1035, 1038 (9th Cir. 2006) ("TDI Managed Care"). The bill was then amended in committee to substitute the reimbursement requirements with the current PBM reporting requirements. According to legislative staff comments, the "purpose of this [amended] bill is to require claims processors to present objective data on the range and percentiles of usual and customary charges of pharmacists in the hope that at a time in the future this information will become the basis for reimbursement." In recommending that the Governor sign the bill, California's Department of Insurance advised that § 2527 "is fairly innocuous in its impact, since it merely requires a study to be made and distributed to clients, and does not require any action to be taken on the basis of that study." The Department further noted that the statute could "help identify areas for cost-containment in the future."

B. Procedural Background

In 2002, Plaintiffs filed a class action complaint in the Central District of California (Beeman 02) alleging, inter alia, that Defendants failed to conduct the fee studies mandated by § 2527(c). In 2004, Plaintiffs filed a second complaint (Beeman 04) alleging the same violation against a second group of Defendants. Both cases were assigned to Judge Virginia Phillips, but have not been consolidated. The district court has diversity jurisdiction over both cases pursuant to 28 U.S.C. § 1332.*fn4

The district court granted Defendants' motions to dismiss both cases, concluding that Plaintiffs lacked an injury-in-fact sufficient to confer Article III standing. See TDI Managed Care, 449 F.3d at 1038. The district court found it unnecessary to reach Defendants' alternative grounds for seeking dismissal, including that § 2527 violated their right to free speech under the United States and California Constitutions. Plaintiffs appealed.

While the appeal of the district court's standing decision was pending in this court, three of the five Plaintiffs filed suit against some but not all of the Beeman 02 and Beeman 04 Defendants in Los Angeles County Superior Court. Like the federal actions, that suit alleged that Defendants failed to comply with the requirements of § 2527. In Bradley v. First Health Services Corp., No. B185672, 2007 WL 602969 (Cal. Ct. App. Feb. 28, 2007), the California Court of Appeal affirmed the state trial court's dismissal of the suit, declaring § 2527 unconstitutional under article I, section 2 of the California Constitution. The Supreme Court of California denied review on June 13, 2007.

Meanwhile, in TDI Managed Care, 449 F.3d at 1040, we overturned the district court's standing decisions in Beeman 02 and Beeman 04 and remanded the case for further proceedings. We did not reach Defendants' argument that § 2527 is unconstitutional because the issue was not fully argued before the district court. Id.

On remand, the Defendants moved for judgment on the pleadings in Beeman 02 and Beeman 04, arguing that § 2527 unconstitutionally compels speech in violation of both the United States and California Constitutions. The Defendants cited three California state appellate court decisions, including Bradley, all of which held that § 2527 violates the California Constitution's free speech provision. The district court denied the motions for judgment, reasoning that, under the Erie doctrine, it was not bound by the California appellate court decisions because (1) the single published state court decision relied entirely on interpretations of federal, not state, law; and

(2) there was persuasive evidence that the Supreme Court of California would not follow the state appellate courts' holding. The district court accordingly conducted its own constitutional analysis and held that § 2527 does not compel speech in violation of the First Amendment or the California Constitution's free speech provision. The district court then granted Defendants' requests to file a petition for interlocutory appeal. Defendants in Beeman 02 and Beeman 04 successfully petitioned this court for permission to appeal under 28 U.S.C. § 1292(b), and the cases were consolidated into the current appeal.

Since this appeal was filed, the district court has granted in part Defendants' motions for summary judgment based on res judicata. The court held that the three Plaintiffs who brought suit in Bradley are precluded by the final judgment in that case from pursuing their overlapping claims in federal court. The district court further held, however, that the Plaintiffs who were not parties in that state court suit are not so precluded, and can continue to pursue their federal action. On February 25, 2008, we stayed the district court proceedings pending our decision in this appeal.

II.

"In an interlocutory appeal, we review de novo the district court's denial of a motion for judgment on the pleadings." Metrophones Telecomm., Inc. v. Global Crossing Telecomm., Inc., 423 F.3d 1056, 1063 (9th Cir. 2005). Here, we must decide whether Defendants' motions for judgment should have been granted on the ground that § 2527 violates either the United States or California Constitution.

A. Erie Doctrine

[1] We first determine whether, in exercising diversity jurisdiction over this case, we are bound by the California state appellate courts' holdings that § 2527 is unconstitutional under the California Constitution's free speech provision. The seminal case of Erie Railway Co. v. Tomkins, 304 U.S. 64, 71-80 (1938), held that federal courts exercising diversity jurisdiction must apply as their rules of decision the substantive law of the states. Generally, state law is determined by statutes or by pronouncements from the state's highest court. See West v. American Telegraph & Telephone Co., 311 U.S. 223, 236-37 (1940); Vestar Dev. II, LLC v. General Dynamics Corp., 249 F.3d 958, 960 (9th Cir. 2001). In cases where a state supreme court has not addressed the presented issue of state law, "a federal court is obligated to follow the decisions of the state's intermediate appellate courts" unless the court finds "convincing evidence that the state's supreme court likely would not follow [them]." Ryman v. Sears, Roebuck and Co., 505 F.3d 993, 994 (9th Cir. 2007) (internal quotation marks and citations omitted). As the inquiry is one purely of law, we determine de novo whether Erie requires us to follow the reasoning of the state appellate courts on the issue of § 2527's constitutionality.

Three California appellate court decisions have concluded that § 2527 violates the free speech clause of the California Constitution. The first of these decisions, ARP Pharmacy Servs. Inc. v. Gallagher Bassett Servs., Inc., 42 Cal. Rptr. 3d 256 (Cal. Ct. App. 2006), is set forth in a published opinion. The two subsequent decisions-A.A.M. Health Group, Inc. v. Argus Health Systems, Inc., No. B183468, 2007 WL 602968 (Cal. Ct. App. Feb. 28, 2007) and Bradley-decided on the same day, relied heavily on ARP and remain unpublished. All three decisions came out of California's second appellate district; none of the state's five other appellate districts has opined on the issue.

The district court, in concluding that it was not bound by the state appellate court holdings, considered only the ARP decision. It declined to consider the two unpublished decisions, citing California Rule of Court 977(a).*fn5 Defendants correctly argue that we are not precluded from considering these unpublished decisions as a possible reflection of California law, although they have no precedential value. See Employers Ins. of Wausau v. Granite State Ins. Co., 330 F.3d 1214, 1220 n.8 (9th Cir. 2003). Therefore, we consider all three California appellate court decisions in our analysis.

1.

[2] First, the district court reasoned that it was not bound by the state appellate court decisions because they "rest entirely on interpretations of federal, not state law." It is true that ARP, the first state appellate court opinion on the issue of § 2527's constitutionality, "applied legal principles derived exclusively from federal constitutional law." The state court decisions to which ARP cites either were similarly decided under the federal Constitution or serve only as duplicate references to analogous federal decisions. Nonetheless, the ultimate conclusion reached in ARP is one of state law, not federal law. See ARP, 42 Cal. Rptr. 3d at 267 ("We conclude that the reporting requirement in section 2527 and the related penalty and enforcement provisions in section 2528 violate the free speech provision of the California Constitution."). We note that the state court did not apparently reach its conclusion under the First Amendment and then simply extend it to California's free speech provision; its opinion purports to analyze the statute only under article I, section 2 of the California Constitution. Accordingly, the current operative law in the State of California's second appellate district is that § 2527 is unconstitutional under the California Constitution.

[3] No authority supports the premise that, when a state court relies primarily on federal cases to reach a conclusion under state law, its decision is exempt from Erie. Thus, the state court's exclusive reliance upon and application of federal case law does not automatically allow federal courts to disregard its holding as the substantive law of the state. Pursuant to Erie, ARP's holding as to ยง 2527's constitutionality under the California Constitution's free speech provision is the rule of ...


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