Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL BENEFITS TRUST v. WALGREEN COMPANY (January 21, 2011)

Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust uses a Pharmacy Benefit Manager (PBM) to administer its relationships with pharmacies that the Trust's members use to fill prescriptions and that the Trust then reimburses for amounts in excess of the members’ co-pays. The PBM sets the maximum reimbursable price for the most frequently used prescriptions. Reimbursement for less popular medications is the average wholesale price, set by the manufacturers. The average wholesale price is almost always more than if the price had been set by a PBM. In the case of two particular drugs, Ranitidine and Fluoxetine, one form of the drug (i.e., capsule versus tablet) was on the controlled price list and the other was governed by the average wholesale price. It is illegal in Illinois for a pharmacy to dispense a drug in a form other than that which was prescribed. The Trust brought suit against Walgreens, alleging that the pharmacy filled members' prescriptions for those two drugs in the form that provided them the greatest reimbursement, regardless of which form was prescribed. The complaint cited several grounds for the Trust's belief that Walgreens committed this fraud: a) a preliminary review of its own reimbursement data that showed 12 members had prescriptions filled at Walgreens with the more expensive form of one of the drugs, and that three of those 12 members had apparently the same prescriptions filled at other pharmacies with the less expensive form of the drug, b) the allegations of a 2003 whistleblower suit that alleged that Walgreens filled prescriptions for the drugs with the more expensive form, and c) the data collected by a different PBM that compared Walgreens’ choice of drug form with other pharmacies and concluded that Walgreens’ rate of filling prescriptions with the higher priced drugs was overwhelmingly greater. The suit was originally brought as a class action and encompassed prescriptions in 35 states. It scope was narrowed, however to Illinois only and the Illinois Consumer Fraud and Deceptive Business Practices Act. The Trust also included an unjust enrichment claim under Illinois law. Judge Kendall (N.D. Ill.) granted Walgreens' motion to dismiss on the grounds that the Trust failed to adequately plead fraud and that it failed to allege that it had been injured. The Trust appeals.

In their opinion, Judges Flaum, Manion, and Tinder affirmed. The Illinois Act does make it unlawful to use fraud in trade or commerce. But it also is governed by the heightened fraud pleading requirements of the federal rules. The general rule is that a plaintiff cannot satisfy that heightened standard with allegations "on information and belief." Although the plaintiff does not use those words, the allegations fit the concept. There is an exception to that general rule where the plaintiff has no access to the facts constituting the fraud and where he adequately provides the grounds for his suspicions. The Court considered the support cited in the complaint in that light. First, it gave little weight to the allegations of the whistleblower suit. Allegations in other lawsuits are typically given little weight, particularly here, when those allegations themselves, for the most part, are made on information and belief. Second, the Court afforded little weight to the data set collected by the other PBM. Although that data does support a belief that a third party payor was injured, it does little to support the Trust, particularly since it is based on a different set of reimbursement data. The Trust had available its own reimbursement data. Third, the Court turned to that reimbursement data and found it wanting as well. There is not much data to begin with and the Court wondered why the Trust's pre-filing inquiry could not have resulted in a more robust data set. The suspicious examples themselves were few. In a universe of thousands of members and thousands of pharmacies nationwide, 12 erroneous prescriptions is not evidence of fraud. The Trust simply did not provide enough data and context to meet the heightened standard. Although the Trust may be correct that the small subset of members who had their prescriptions filled differently at Walgreens and other pharmacies is "suspiciously consistent" with fraud, it is not enough to satisfy the fraud pleading requirement. The district court was correct in dismissing the statutory count. Finally, the Court concluded that the district court was correct in dismissing the unjust enrichment claim. In Illinois, an unjust enrichment claim is not a separate cause of action but an equitable remedy. The Trust pleads its unjust enrichment claim on the same facts as it pleads its statutory claim. Those allegations of fraud are governed by the same pleading standard and must be dismissed for the same reason.

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SWANSON v. CITIBANK (July 30, 2010)

Gloria Swanson, an African-American, brought suit against Citibank and its appraiser alleging violations of the Fair Housing Act and common law fraud. She alleged the following facts: She applied for a home equity loan at a local Citibank branch. She became suspicious that the bank was trying to discourage African-American applications when a bank representative told her she had to be accompanied by her husband (a joint owner of the property). She was also told that Citibank's loan standards were stricter than those of a competing bank which had already denied her a loan. Nevertheless, she returned the following day and completed the application process. Based in large part on Swanson's statement that the home was worth $270,000, Citibank conditionally approved a $50,000 loan. However, when an independent appraiser retained by Citibank appraised the home at only $170,000, Citibank rejected the application. Swanson later ordered her own appraisal, which came in at $240,000. Judge Zagel (N.D. Ill.) granted defendants' motions to dismiss. Swanson appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner (dissenting in part) and Wood affirmed in part and reversed in part. The dismissal gave the Court the opportunity to review the pleading standards in light of the recent Supreme Court decisions in Twombly, Erickson, and Iqbal. First, the Court noted that none of the decisions questioned the validity of Rule 8's requirement of a "short and plain statement of the claim." Nevertheless, Twombly and Iqbal referred to a "plausibility" requirement. The Court viewed that requirement as one in which a court asks if whether it could happen, not whether it did happen. Applying those principles to Swanson's allegations against Citibank, the Court concluded that her bare-bone allegations of the type of discrimination, the discriminator, and the setting of the discrimination were sufficient to state a Fair Housing Act claim. Her fraud claim, however, implicated the "state with peculiarity" requirement of Rule 9(b) and an actual damages pleading requirement. Since Swanson did not plead any damages, her fraud claim was properly dismissed. Applying the principles to Swanson's claims against the appraiser, the Court again concluded that her bare-bone allegations that the appraiser understated the value of her home because of her race stated a claim under the Fair Housing Act. The Court affirmed the dismissal of the fraud claims for the same reason as it did those against Citibank.

Judge Posner agreed with the majority's treatment of the fraud claims but dissented from their treatment of the housing discrimination claims. He believed that the complaint set out an "obvious alternative explanation" for the actions of both the bank and the appraiser. With respect to the bank, Judge Posner cited the economic downturn, the fact that Swanson had already been denied a loan by another bank, and the fact that the appraisal suggested any loan would be undersecured. With respect to the appraiser, he noted the inexact nature of the business and the fact that errors are frequently made. Iqbal teaches us that if there is an "obvious alternative" to the invidious discrimination alleged by the plaintiff, the discrimination alternative is not a plausible one.

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REGER DEVELOPMENT v. NATIONAL CITY BANK (January 20, 2010)

Reger Development is an Illinois real estate development company. In 2007, the company opened a $750,000 line of credit with National City Bank. The company signed a promissory note and provided the personal guarantee of its principal, Kevin Reger. In several places, the note makes reference to the fact that it is payable "on demand." The company made its payments in a timely manner for the first year. Nevertheless, the bank asked it to pay down $125,000 of principal. Reger did so. A month later, the bank advised Reger that it was reducing the amount of the line of credit and also wanted to restructure some of the principal and secure it with a mortgage. The bank told Reger that it was possible that they would demand payment of the entire amount if he did not agree to the modifications. Reger brought suit, alleging breach of contract and fraud. The district court dismissed the case for failure to state a claim. Reger appeals.

In their opinion, Judges Flaum, Williams, and Sykes affirmed. The Court noted that Illinois law generally implies a covenant of good faith and fair dealing in a contract. It does not apply, however, to demand notes. Reger argued that general references to due dates and default provisions in the note were inconsistent with a demand instrument. The Court noted the repeated and explicit references in the instrument to National City's right to demand payment at any time. The note is clearly and unambiguously a demand note, concluded the Court. Since it is a demand instrument, the bank's insistence on modifications did not amount to a breach. With respect to the fraud count, the Court focused on the intent element. It stated that Reger must establish that the bank intended to and did induce him. In order to meet that element, Reger asked the court to infer that the bank intentionally drafted ambiguous documents so as to mislead him. The Court had already considered the ambiguity of the document with respect to the breach of contract claim. Not only had it not found it ambiguous, it found it rather straightforward. Reger failed to allege the element of intent with the particularity necessary in a fraud count -- the dismissal of that count is affirmed.

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COONEY v. ROSSITER (September 30, 2009)

Deborah Cooney and her husband were divorced in 1998. The court granted her custody of their two sons. Her ex-husband later petitioned for a transfer of custody. The court appointed a lawyer to act as the children's representative. Cooney alleges that the representative arranged to have a psychiatrist appointed and then suggested to the psychiatrist that she suffered a particular mental illness. The psychiatrist's report did conclude that she suffered from the mental illness. Cooney alleges that her ex-husband received a copy of that report but that she did not. Based on the report, the court granted temporary custody to the ex-husband. She brought suit against the judge, the representative, the psychiatrist, the children's therapist and the ex-husband's lawyer. The court dismissed her complaint. Cooney appeals.

In their opinion, Judges Bauer, Posner and Wood affirmed. The Court first found the state court judge absolutely immune since he was acting in his judicial capacity. Next, the Court found that the psychiatrist and representative were also entitled to absolute immunity, since the acts complained of all occurred within their official duties. Finally, the Court concluded that the factual allegations against the two private persons failed to meet federal pleading standards. Although citing Bell Atlantic and Iqbal and the heightened pleading standard established therein, the Court found that Cooney's allegations were too vague to meet even the pre-existing heightened pleading requirement for conspiracy allegations.

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UNITED STATES v. ROLLS-ROYCE CORPORATION (June 30, 2009)

Curtis Lusby was an engineer at Rolls-Royce Corp. He became suspicious that the company was falsely certifying that one of its aircraft engines met government specifications so he informed his superiors. He claims that the company fired him for doing so. He brought suit under the False Claims Act, alleging that the company punished him for preparing to bring an action under the statute. The parties jointly dismissed the suit in 2003. However, two months earlier, Lusby had filed a qui tam action under seal. The court dismissed the action for failure to plead fraud with particularity and because of the claim preclusion effect of the earlier lawsuit. Lusby appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Wood affirmed in part and reversed in part. The Court first addressed claim preclusion. It noted its 2007 decision in Cole. In Cole, the Court held that a person who did not prevail on a Title VII claim cannot later bring both a personal and qui tam claim under the False Claims Act. Here, however, Lusby disputes one of the elements of claim preclusion -- that the cases involve the same parties (Cole conceded the issue). The Court noted that the United States is not an actual party to a qui tam suit unless it intervenes. It is, however, the real party in interest. In addition, the Court identified several procedural requirements for qui tam litigation that would make it very difficult to bring a personal claim in the same suit. The Court concluded that the resolution of an employee's personal suit does not preclude a later qui tam suit. With respect to the particularity issue, the Court stated that the complaint contained quite specific allegations of fraud. It rejected Rolls-Royce's argument that a specific allegation of the details of the invoices was required. The Court did affirmed the lower court with respect to Lusby's allegations that Rolls-Royce committed fraud during the earlier settlement negotiations.

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