By Lee P. Dunham, J.D.
A developer of information technology systems, which monitor hospital compliance with a federal drug pricing programs, adequately stated an unlawful tying claim against CVS, based on CVS’s requirement that hospitals must use IT systems developed by the plaintiff’s competitor in order to continue to use CVS as a contract pharmacy.
Sentry Data Systems, Inc., a developer of information technology systems—which monitor hospital compliance with a federal drug pricing programs—adequately stated an unlawful tying claim against CVS, a federal district court in Miami has ruled. The court specifically considered the adequacy of Sentry’s allegations of both local and national markets and market power. The court held that Sentry had plausibly alleged the existence of a relevant national market due to CVS’s national contract pharmacy operations, and had also plausibly alleged the existence of multiple "core-based statistical areas" in which CVS had a particularly large share of contract pharmacy locations. The allegations of a national market were not incongruous with allegations regarding local markets, because the alleged competitive advantages that CVS enjoys from its national presence served to knit the alleged local markets together into a relevant national market. However, the court held that the plaintiff had sufficiently alleged market power in only the local markets (Sentry Data Systems, Inc. v. CVS Health, CVS Pharmacy, Inc., April 3, 2019, Bloom, B.).
Sentry is a developer and provider of information technology systems that assist certain hospitals and hospital-like entities ("covered entities") in monitoring compliance with a federal drug pricing program, the 340B Program. The claims in the case arose from Defendant CVS’s acquisition of one of the plaintiff’s competitors, and the subsequent announcement by CVS that all covered entities seeking to maintain CVS as a contract pharmacy generally, whether for retail or specialty drugs, must use the competitor for their 340B tracking and program administration. In an amended complaint, the Plaintiff asserted seven causes of action, including three which were challenged on the defendants’ motion to dismiss: unlawful tying in violation of Section 1 of the Sherman Act, tortious interference with contract, and tortious interference with business relationships. The defendants argued that the Amended Complaint lacked sufficient factual allegations to plausibly show that CVS has market power in a properly defined relevant geographic market as required to allege either a per se unlawful tying arrangement or one that is unlawful under the rule of reason.
National market and local markets. The defendants first argued that the relevant geographic market cannot be both national and local, and that in any event, Plaintiff’s national market theory was contradicted by allegations regarding customer behavior. The court disagreed and found that the allegations were sufficient with respect to a national market.
The plaintiff alleged that there is a relevant national market because CVS operates nationally, competes with other national pharmacy chains, contracts with national and regional health insurers, contracts with covered entities for provision of 340B contract pharmacy services nationally, operates an extensive nationwide retail pharmacy, specialty pharmacy, and pharmacy benefits manager operation. Plaintiff also alleged that covered entities seek to contract with contract pharmacies located both in close geographic proximity to their locations and across the country, and that services of contract pharmacies distant from covered entities’ physical locations are complementary, and not substitutes for, contract pharmacies in closer proximity, but that covered entities need contract pharmacies located in close proximity to their patients’ location and they cannot turn to contract pharmacies located outside the relevant local markets.
The court held that the plaintiff’s allegations of a national market were not incongruous with allegations regarding local markets, because, although some of CVS’s contract pharmacy operations are local and covered entities for practical reasons may prefer to deal with contract pharmacies close to their patient populations, the alleged competitive advantages that CVS enjoys from its national presence and CVS’s contracts for provision of pharmacy services across state lines with generally applicable price and service terms, serve to knit the alleged local markets together into a relevant national market.
As to local markets, the plaintiff identified twenty-two core-based statistical areas or "CBSAs" in which CVS has a 30% or greater share of contract pharmacy locations as the relevant local markets, and alleged that it has existing covered entity customers in more than half of the identified CBSAs, and potential customers in all of the identified CBSAs. The court held that these allegations were sufficient to "suggest the contours of the relevant geographic and product markets" as required to survive a motion to dismiss.
Market power in the local, but not national markets. In all cases involving a tying arrangement, the plaintiff must prove that defendant has market power in the tying product, which, in this case, was alleged to be contract pharmacy services. Defendants argued that the plaintiff had not sufficiently alleged CVS’s market share of the national 340B contract pharmacy market, and that Plaintiff’s allegations regarding retail market share are insufficient to establish market power in the relevant market.
The court rejected the plaintiff’s argument that, because of CVS’s position in the retail pharmacy, specialty pharmacy, and pharmacy benefits manager ("PBM") markets, it necessarily possesses requisite market power in the contract pharmacy services market nationally, as the Amended Complaint failed to allege any plausible barriers to entry in the market given that five other pharmacy chains, along with CVS, dominate a total of two-thirds of the relevant market nationally.
However, the court found that the allegations regarding market power in the local contract pharmacy services markets were sufficient. Specifically, Plaintiff alleged that in the twenty-two CBSAs identified in the Amended Complaint, CVS possesses at least 30% of the 340B contract pharmacies, and that that covered entities draw from local markets that are limited by their patients’ desire to access healthcare in proximity to their homes and workplaces, and therefore contract with contract pharmacies that can serve local patient populations, and more specifically, that covered entities within the CBSAs draw a substantial majority of their patients from within a thirty-mile radius. Additionally, the plaintiff asserted that even though covered entities may also deal with contract pharmacies across the country, these services are not a substitute for the local contract pharmacy services, and therefore covered entities need contract pharmacies in close proximity to their patient populations.
The court denied the defendants’ motion as to the non-antitrust counts, holding that they improperly raised arguments which the Court had already considered and rejected on a prior motion to dismiss the plaintiff’s initial complaint.
The case is No. 0:18-cv-60257-BB.
Attorneys: Carl Edward Goldfarb (Boies Schiller Flexner LLP) for Sentry Data Systems, Inc. Gail Ann McQuilkin (Kozyak Tropin & Throckmorton) and Andrew C. Watts (Williams & Connolly LLP) for CVS Pharmacy, Inc. and Wellpartner, LLC.
Companies: Sentry Data Systems, Inc.; CVS Pharmacy, Inc.; Wellpartner, LLC
MainStory: TopStory Antitrust FloridaNews
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