Carl Thulin v. Shopko Stores Operating Co., L , 771 F.3d 994 ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
________________________
No. 13-3638
CARL E. THULIN,
Plaintiff-Appellant,
v.
SHOPKO STORES OPERATING CO., LLC,
Defendant-Appellee.
__________________________
Appeal from the United States District Court for the
Western District of Wisconsin
No. 3:10-cv-00196 – William M. Conley, Judge
__________________________
ARGUED APRIL 25, 2014—DECIDED NOVEMBER 12, 2014
__________________________
Before KANNE and ROVNER, Circuit Judges, and DOW,
District Judge. ∗
DOW, District Judge. Relator Carl E. Thulin worked as a
pharmacist at a Shopko retail store in Idaho from 2006 to
2009. During his tenure, Thulin observed what he believed
∗
The Honorable Robert M. Dow, Jr., of the Northern District of Illinois,
sitting by designation.
2 No. 13-3638
to be a fraudulent billing scheme in which Shopko submitted
inflated claims for prescription drugs to the federal
Medicaid program. Thulin filed a qui tam complaint against
his former employer in its home state of Wisconsin, alleging
that Shopko violated the federal False Claims Act by
overbilling Medicaid. Thulin also asserted analogous claims
under the laws of eight different states in which Shopko
does business. Shopko moved to dismiss Thulin’s federal
claim under Federal Rules of Civil Procedure 9(b) and
12(b)(6). The district court granted the motion and declined
to exercise supplemental jurisdiction over Thulin’s state law
claims. Finding no error, we affirm.
I.
Because this appeal comes to us from the grant of a
motion to dismiss, we accept all facts alleged in Thulin’s
complaint as true and draw all reasonable inferences in his
favor. Shopko is a multi-regional retail pharmacy
corporation headquartered in Green Bay, Wisconsin, that
operates nearly 300 stores in 24 states. Thulin is a licensed
pharmacist who at all relevant times worked as a full-time
pharmacist at a Shopko retail store in Idaho.
Some of Shopko’s pharmacy customers have prescription
coverage through both private insurance and Medicaid, a
federal program administered by the states that provides the
poor, disabled, and elderly with medical and pharmaceutical
insurance coverage. We follow the parties’ convention of
referring to these individuals as “dual-eligibles.” For dual-
eligibles, Medicaid acts as a “payer of last resort,” which
means that it picks up any tab remaining after the dual-
No. 13-3638 3
eligible’s private insurer has paid the amount that it has
contracted to pay Shopko for a particular prescription.
According to Thulin, an excess tab almost always exists.
Both Medicaid and private insurers strive to negotiate
pharmaceutical discounts and purchasing agreements for
their members, but Thulin asserts that private insurers are
much better at playing ball than are the government
agencies administering Medicaid. The private insurers’
negotiating prowess “results in better pricing of
prescriptions for the [privately] insured patients.” Thulin
alleges that this disparity exists in all of the states in which
Shopko does business. Thus, when Shopko enters into
provider contracts with private insurers, it typically agrees
to accept payment in full lesser amounts than it agrees to
accept from Medicaid for any given drug. The amount that
Shopko agrees to accept is composed of some payment by
the insurance company and a co-pay or deductible paid by
the patient at the point of sale. The size of the patient’s co-
pay depends on his or her contract with the private
insurance company, to which Shopko is not a party.
Privately insured patients, including dual-eligibles, are not
parties to the contracts that Shopko signs with their private
insurers.
Thulin alleges that when dual-eligibles apply for
Medicaid, they are required by 42 U.S.C. § 1396k(a)(1)(A)
and 42 C.F.R. § 433.145 to assign to the state any rights they
have under their private insurance plans. Thulin alleges that
one of these assignable rights is the right to purchase
prescription drugs at the lower price that their private
insurer negotiated with Shopko. Because dual-eligibles are
not parties to the contracts that Shopko signs with their
private insurers, however, they do “not know the price they
4 No. 13-3638
have legally assigned to the state Medicaid agency.”
Likewise, Thulin alleges, state Medicaid agencies “do not
know the price benefit that the dual-eligible patient assigns
to the government.” In other words, both Medicaid agencies
and dual-eligibles rely on Shopko to accurately calculate and
assign the benefits to the government.
According to Thulin, this reliance was misplaced. Shopko
programmed its computer system, PDX Adjudication
Software System, to systematically exploit the disparity
between the pharmaceutical prices negotiated by private
insurers and those negotiated by Medicaid. The PDX system
(and the apparently identical system, Condor, used by
Shopko’s subsidiary Pamida) submits claims to a dual-
eligible’s private insurer first, at the low negotiated rate.
PDX subsequently but virtually simultaneously adjusts the
initial price upward to the higher one negotiated by
Medicaid and bills Medicaid for any unpaid differential, not
just the co-pay that the dual-eligible owes under his or her
private insurance contract.
An example similar to that provided by Thulin during
oral argument helps illustrate the scheme. Assume for
instance that a dual-eligible has a prescription for Drug A,
which has a list price of $50. Her private insurer has an
agreement with Shopko pursuant to which Shopko has
agreed to accept $25 as payment in full for Drug A: $20 from
the private insurer and a $5 co-pay from the dual-eligible.
Under Medicaid’s less favorable agreement with Shopko,
Medicaid has agreed to pay $30 for Drug A. The dual-
eligible submits her prescription to Shopko and pays
nothing at the point of sale. Shopko fills the prescription and
then bills the private insurer $25 using PDX. The private
No. 13-3638 5
insurer remits payment of $20, the agreed amount of its
payment less the dual eligible’s unpaid copay. Shopko then
bills Medicaid, the “payer of last resort,” but not only for the
$5 that remains unpaid under its contract with the dual-
eligible’s private insurer. Instead, Shopko bills Medicaid $10,
the difference between the $20 that the private insurer
already has paid and the $30 that Medicaid has agreed to
pay for the drug.
Thulin alleges that this “internal program of the two
systems bills more for dual eligible patients than was
allowed under the assignment of rights and benefits
provisions of federal law and contract provisions of private
insurance companies.” That is, Shopko committed fraud by
billing Medicaid an amount in excess of the co-pay that the
dual-eligibles owed under their private insurance contracts.
Shopko compounded this alleged fraud by omitting from its
invoices to Medicaid the amount of dual-eligibles’ co-pays.
By omitting this information, Thulin alleges, “Shopko failed
to report truthfully to Medicaid the nature and extent of [its]
obligation.”
Thulin discovered the alleged fraud by observing “that
there is potential for fraudulent billing involving dual
eligible patients” and “that the PDX pharmacy system used
by Shopko does not present the billing and payment amount
information on the patient bag receipts and it does not make
it available to the pharmacist or technician processing
prescriptions.” Thulin nonetheless managed to obtain and
attach to his complaint 31 printouts from the PDX system
that allegedly demonstrate the two-pronged fraud. All 31
exhibits concern transactions performed in Idaho.
6 No. 13-3638
Yet Thulin filed his suit not in Idaho but in the Western
District of Wisconsin, and did not bring any claims under
Idaho law. Instead, he filed one claim under the federal False
Claims Act (“FCA”), 31 U.S.C. § 3729, et seq., and eight
analogous state law claims under the laws of California,
Illinois, Indiana, Michigan, Minnesota, Montana, Tennessee,
and Wisconsin. The attorneys general of the affected states
and the federal government declined to intervene in Thulin’s
qui tam suit. Thulin then elected to continue the suit on their
behalf, see 31 U.S.C. § 3730(c)(3), and Shopko moved to
dismiss all of his claims.
The district court granted Shopko’s motion to dismiss
Thulin’s federal claim with prejudice. The district court first
concluded that Thulin failed to allege the requisite falsity to
state a claim under the False Claims Act because neither 42
U.S.C. § 1396k(a)(1)(A) nor its related regulations were
applicable to Shopko and Thulin “fail[ed] to explain how the
assignment law applies to Shopko in the first instance or
provide any support for his legal claim.”
The district court also concluded that Thulin’s allegations
pertaining to the knowledge element of the claim failed to
meet the requirements of Federal Rule of Civil Procedure 8,
let alone Rule 9(b). The court concluded that “[t]o the extent
plaintiff is alleging that Shopko knows that the assignment
law applies to it as a provider (rather than pleading that it
knows the prices it negotiates with private health insurers),
the pleading is not at all clear.” Moreover, “[n]either does
plaintiff allege facts to support how Shopko knows of such
an obligation, nor who in the organization has actual
knowledge.” The district court further faulted Thulin for
pointing to a Minnesota regulation in his complaint but not
No. 13-3638 7
“alleg[ing] any individual transactions in Minnesota as
required to meet the pleading requirement of Rule 9(b).”
The district court declined to exercise supplemental
jurisdiction over Thulin’s state law claims and dismissed
them without prejudice. Thulin timely appealed.
II.
We review de novo the district court’s grant of a motion to
dismiss. Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732,
736 (7th Cir. 2014). To survive a motion to dismiss under
Rule 12(b)(6), a complaint must provide enough factual
information to “state a claim to relief that is plausible on its
face” and “raise a right to relief above the speculative level.”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570, (2007).
Whether a complaint states a claim upon which relief may be
granted is depends upon the context of the case and
“requires the reviewing court to draw on its judicial
experience and common sense.” Ashcroft v. Iqbal, 556 U.S.
662, 679, (2009). We accept the complaint’s well-pleaded
facts as true and construe the allegations in the light most
favorable to the plaintiff. Camasta, 761 F.3d at 736. However,
“[t]hreadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.”
Iqbal, 556 U.S. at 678.
In a footnote midway through his opening brief, Thulin
requests that we confine our review to the allegations in his
complaint and ignore the numerous exhibits that Shopko
attached to its motion to dismiss. This is of course how both
we and the district court generally analyze motions to
dismiss. See Fed. R. Civ. P. 12(d). However, in this case, the
district court considered and relied upon several of the
8 No. 13-3638
documents that Shopko attached to its motion, as well as
extra-pleading documents submitted by Thulin. The district
court concluded that doing so was appropriate because the
documents were public records of which it could take
judicial notice without converting the motion to dismiss into
one for summary judgment. See Ennenga v. Starns, 677 F.3d
766, 773-74 (7th Cir. 2012). Thulin does not challenge this
conclusion, nor does he clarify which, if any, of Shopko’s
documents improperly were considered on this basis.
Moreover, he called the issue to our attention only by way of
a footnote, see Long v. Teachers’ Ret. Sys. of Ill., 585 F.3d 344,
349 (7th Cir. 2009) (“A party may waive an argument by
disputing a district court’s ruling in a footnote.”), and relies
upon his own extra-pleading submissions. In light of all
these circumstances, we cannot (and do not) conclude that
any procedural error by the district court gave rise to
anything other than a no-harm, no-foul situation.
Thulin correctly concedes that he must satisfy the
heightened pleading standard imposed by Federal Rule of
Civil Procedure 9(b). See United States ex rel. Gross v. AIDS
Research Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005)
(“The FCA is an anti-fraud statute and claims under it are
subject to the heightened pleading requirements of Rule
9(b).”). We need not overly concern ourselves with the
adequacy of Thulin’s pleading, however, as we agree with
the district court that his legal theory is not viable no matter
how detailed his factual allegations.
Thulin brought his claims under the FCA, a statute that
permits private citizens, called relators, to prosecute qui tam
suits “against alleged fraudsters on behalf of the United
States government.” United States ex rel. Watson v. King-
No. 13-3638 9
Vassel, 728 F.3d 707, 711 (7th Cir. 2013); 31 U.S.C. § 3730. The
United States may choose to intervene in these suits. 31
U.S.C. § 3730(b)(2). If the United States declines, as
happened in this case, the relator may pursue the case on his
own (although still technically on behalf of the United
States). King-Vassel, 728 F.3d at 711; 31 U.S.C. § 3730(c)(3).
“Under either option, if the prosecution of the alleged
fraudster is successful, the relator can receive a substantial
award for bringing the false claim to light.” King-Vassel, 728
F.3d at 711; 31 U.S.C. § 3730(d)(1)-(2).
The version of the FCA that was in effect at the time of
Shopko’s alleged conduct imposed civil liability on “any
person who knowingly presents, or causes to be presented,
to an officer or employee of the United States Government or
a member of the Armed Forces of the United States a false or
fraudulent claim for payment or approval.” 31 U.S.C. §
3729(a)(1); see United States ex rel. Lusby v. Rolls-Royce Corp.,
570 F.3d 849, 855 n.* (7th Cir. 2009). The current version of
another provision of the FCA – which “applies to cases such
as this, that were pending on or after June 7, 2008,” United
States ex rel. Yannacopoulos v. Gen. Dynamics, 652 F.3d 818, 822
n.2 (7th Cir. 2011) – also imposes liability upon “any person
who knowingly makes, uses, or causes to be made or used, a
false record or statement material to a false or fraudulent
claim.” 31 U.S.C. § 3729(a)(1)(B). Thus, “[t]o establish civil
liability under the False Claims Act, a relator generally must
prove [at this stage of the case, allege] (1) that the defendant
made a statement in order to receive money from the
government; (2) that the statement was false; and (3) that the
defendant knew the statement was false.” Yannacopoulos,
652 F.3d at 822. The penalties imposed upon those who are
liable under the FCA range from $5,000 to $10,000, “plus 3
10 No. 13-3638
times the amount of damages which the Government
sustains.” 31 U.S.C. § 3729(a)(1)(G); King-Vassel, 728 F.3d at
711.
Here, there is no dispute that Thulin adequately pleaded
the first element by alleging with particularity that Shopko
submitted claims to the federal government via the Medicaid
program. King-Vassel, 728 F.3d at 711. The next element is
that the claims were false. A claim may be false for purposes
of the FCA if it is made in contravention of a statute,
regulation, or contract. See United States ex rel. Crews v. NCS
Healthcare of Ill., Inc., 460 F.3d 853, 858 (7th Cir. 2006).
Thulin’s theory of falsity is predicated upon 42 U.S.C. §
1396k(a)(1)(A), which he refers to as the “Federal
Assignment Law.” This provision states:
For the purpose of assisting in the collection of
medical support payments and other payments
for medical care owed to recipients of medical
assistance under the State plan approved under
this subchapter, a State plan for medical
assistance shall – provide that, as a condition of
eligibility for medical assistance under the State
plan to an individual who has the legal
capacity to execute an assignment for himself,
the individual is required – to assign the State
any rights, of the individual or of any other
person who is eligible for medical assistance
under this subchapter and whose behalf the
individual has the legal authority to execute an
assignment of such rights, to support (specified
as support for the purpose of medical care by a
No. 13-3638 11
court or administrative order) and to payment
for medical care from any third party.
Thulin interprets this provision, along with a similarly
worded regulation codified at 42 C.F.R. § 433.145(a), to mean
that “the government obtains the rights and benefits of the
private health insurance for these dual-eligible patients,”
including their right to the lower prescription drug costs that
their private insurers have negotiated with Shopko. Under
this view, Medicaid had a right to pay only the lower
negotiated cost of the drug that Shopko agreed to accept
from the private insurer, and Shopko violated the “Federal
Assignment Law” each time it sought payment for any
amount in excess of the co-pay (which, according to Thulin,
it also had an obligation to notify Medicaid of).
Thulin’s strained interpretation has little if any support
in the plain language of the provision, which by its terms
applies only to a beneficiary’s right to actually receive
payments. And Thulin has not pointed to – and we could
not find – any case law that interprets 42 U.S.C. §
1396k(a)(1)(A) as he does. Instead, the Supreme Court has
determined that this “Federal Assignment Law” ensures that
Medicaid is entitled to reimbursement of its medical
expenditures if a beneficiary receives a settlement or other
recovery from third-party tortfeasors. See Wos v. E.M.A. ex
rel. Johnson, 133 S. Ct. 1391, 1396 (2013) (“Congress has
directed States, in administering their Medicaid programs, to
seek reimbursement for medical expenses incurred on behalf
of beneficiaries who later recover from third-party
tortfeasors. States must require beneficiaries ‘to assign the
State any rights * * * to support (specified as support for the
purpose of medical care by a court or administrative order)
12 No. 13-3638
and to payment for medical care from any third party.’” 42
U.S.C. § 1396k(a)(1)(A)); see also Ark. Dep’t of Health & Human
Servs. v. Ahlborn, 547 U.S. 268 (2006). Perhaps unsurprisingly,
appeals courts that have examined the statute have
interpreted it in the same way. See, e.g., Massachusetts v.
Sebelius, 638 F.3d 24, 33 n.11 (1st Cir. 2011) (“Whereas 42
U.S.C. § 1396a(a)(25)(B) imposes an affirmative obligation on
state Medicaid agencies to seek reimbursement, 42 U.S.C. §
1396k(a)(1)(A) confers rights upon state Medicaid agencies
to pursue certain claims as a subrogee.”). We see no reason
to adopt Thulin’s novel interpretation, and we cannot
conclude that the district court erred in also declining to do
so.
We further note that the extra-pleading evidence
submitted by the parties—considered by the district court,
and briefed and argued here—also suggests that Shopko
was not obligated to inform Medicaid of dual-eligibles’ co-
pays and was permitted to bill in the fashion that it did. The
parties discuss at length the electronic system that
pharmacies were required to use to submit claims to
Medicaid agencies during the relevant time period, version
5.1 of the National Council for Prescription Drug Programs
(“NCPDP 5.1”). See 42 U.S.C. § 1320d-2(a)(1); 45 C.F.R. §§
162.1102(a)(1), 162.1801-162.1802. NCPDP 5.1 and its
“Implementation Guide” provided standard specifications
for various data inputs relating to Medicaid claims. As is
relevant here, the pertinent fields related to co-pays were
labeled optional; other data fields were labeled mandatory
or “RW,” which means that they were required under
certain circumstances. Like the district court, we find this
compelling evidence that pharmacies like Shopko did not
have an obligation to submit co-pay information to
Medicaid. If they did, one would think that such an
No. 13-3638 13
obligation would have been incorporated into the billing
protocol that they were legally required to use.
Thulin’s proffered excerpt from the “Q&A” portion of
the NCPDP only lends further credence to this conclusion, as
it demonstrates that providers were “looking for
clarification” on this important billing issue rather than
simply concluding that they needed to inform Medicaid of
dual-eligibles’ co-pays. Additionally, the State Medicaid
Manual promulgated by the Centers for Medicare &
Medicaid Services directs state Medicaid agencies to
withhold payment “[w]henever you are billed for the
difference between the payment received from the third
party based on [a preferred provider agreement that it has
with the pharmacy].” Centers for Medicare & Medicaid
Services, STATE MEDICAID MANUAL § 3904.7 (1990). Thulin is
correct that this provision supports his contention that
Medicaid is only liable to the extent that a dual-eligible’s
private insurer has not paid, but he overlooks the language
quoted above, which expressly contemplates that Medicaid
will get billed for amounts beyond what it technically owes
and bears responsibility for not paying when that happens.
Shopko’s alleged actions may “frustrate and derail the ‘cost
avoidance’ mandate,” and result in additional bureaucratic
hassle on both Medicaid’s and Shopko’s end, but they are
not false or fraudulent under the State Medicaid Manual or
any other regulation or law to which Thulin points.
Because Thulin’s FCA claim lacks a legal basis as
pleaded, it is inherently implausible and properly was
dismissed. For the sake of completeness, we briefly address
Thulin’s argument concerning the adequacy of his
allegations that Shopko “knew” it was submitting false
14 No. 13-3638
claims. To be liable under the FCA, Shopko must have acted
with “actual knowledge,” or with “deliberate ignorance” or
“reckless disregard” to the possibility that the claims it
submitted were false. King-Vassel, 728 F.3d at 712; 31 U.S.C. §
3729(a)(1)(A), (b). Thulin contends that his complaint
plausibly suggested that Shopko acted with “reckless
disregard” as we defined the term in King-Vassel, 728 F.3d at
712-13, because he alleged that Shopko is a “sophisticated,”
“multi-regional” business that developed and programmed
the PDX system and should have been aware of federal
statutes and regulations governing the submission of claims
to Medicaid. In reaching a contrary conclusion, Thulin
contends, the district court must have ignored King-Vassel’s
explication of “reckless disregard.” We disagree. Thulin’s
allegations would not be sufficient to satisfy his pleading
requirement even if Shopko’s billing practices were contrary
to the “Federal Assignment Law.” Although “[m]alice,
intent, and other conditions of a person’s mind may be
alleged generally,” Fed. R. Civ. P. 9(b), vague allegations
that a corporation acted with reckless disregard—i.e., grossly
negligently or with reason to know of facts that would lead a
reasonable person to realize that it was submitting false
claims, see King-Vassel, 728 F.3d at 713—simply by virtue of
its size, sophistication, or reach do not clear even this lower
pleading threshold. Such allegations may suggest a
possibility that Shopko acted with reckless disregard, but
they do not “nudg[e]” Thulin’s claims “across the line from
conceivable to plausible.” Iqbal, 556 U.S. at 680.
III.
For all of the reasons stated above, the judgment of the
district court is AFFRIMED.