Schmuckley v. Rite Aid Corporation ( 2021 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 United States of America et al., ex rel. Loyd F. No. 2:12-cv-01699-KJM-EFB Schmuckley, Jr., 12 ORDER Plaintiffs, 13 v. 14 15 Rite Aid Corporation, 16 Defendant. 17 State of California ex rel. Loyd F. Schmuckley, 18 Jr., 19 Plaintiff, 20 v. 21 Rite Aid Corporation, 22 Defendant. 23 24 25 The plaintiffs in this false claims action against Rite Aid move for leave to add new 26 claims and allegations to their complaints. Mot., ECF No. 315. Rite Aid opposes the motion, 27 which is fully briefed. See Opp’n, ECF No. 318, Reply, ECF No. 322. The court held a 28 videoconference hearing on October 16, 2020. Jennifer Bartlett, W. Paul Lawrence, and Brian 1 Barrow appeared for the relator plaintiff; Emmanuel Salazar and Bernice Yew appeared for 2 California, which has intervened as a plaintiff; and Benjamin Smith appeared for Rite Aid. For 3 the reasons explained in this order, the motion is granted. 4 I. BACKGROUND 5 The court has summarized the background of this litigation in its previous orders. See, 6 e.g., ECF No. 319, 2020 WL 3970201. Only a brief summary is necessary here. California 7 pharmacies can request online reimbursements from Medi-Cal when they sell prescription drugs 8 to Medi-Cal patients. See id., slip op. at 2–3. For some drugs, the pharmacy must confirm that 9 the sale follows Medi-Cal’s “Code 1” rules. Id. at 3. These rules limit reimbursements for some 10 drugs to patients with specific diagnoses and enforce quantity limits, among other restrictions. 11 See, e.g., Compl. in Interv. ¶ 37, ECF No. 75. Rite Aid has a system for its pharmacists and 12 pharmacy technicians to follow when it sells Code 1 drugs: they must either confirm the 13 restrictions are satisfied or contact the doctor and decide what to do; usually that means 14 prescribing a different drug or asking Medi-Cal to make an exception. See id. ¶¶ 83–84. 15 Loyd Schmuckley, a former Rite Aid pharmacist, filed a complaint in this case on behalf 16 of the United States and California more than eight years ago. ECF No. 1. He alleged Rite Aid’s 17 Code 1 system was not working as it claimed. See id. ¶ 10. According to his complaint, Rite 18 Aid’s pharmacists and technicians were not actually checking, for example, whether the patients 19 actually had an approved diagnosis. See id. ¶ 10.h. He pinned the problem on the “enormous 20 pressure” Rite Aid exerted on its pharmacists and technicians to fill prescriptions quickly. Id. 21 ¶ 94. Rite Aid makes less money, he alleges, if it takes longer to fill prescriptions, and consulting 22 with doctors takes time. See id. ¶¶ 94–95. 23 For several years after the original complaint was filed, this case remained under seal 24 while California and the United States investigated Schmuckley’s allegations. See Orders, ECF 25 Nos. 7, 14, 17, 28, 31, 42, 44, 48, 50, 65, 68. Rite Aid cooperated. It responded to several 26 interrogatories and produced documents both on its own behalf and on behalf of its subsidiaries. 27 See, e.g., Salazar Decl. Ex. F, ECF No. 265-6. The United States decided not to intervene, but 28 California did intervene about five years after the case was first filed. ECF Nos. 75, 76. 1 Schmuckley also amended his complaint, and the case was made public, in September 2017. 2 ECF No. 79. 3 After another year or so of motion practice on the pleadings, Rite Aid answered the 4 allegations against it and staked out its defenses. ECF Nos. 138, 139. It denied, among other 5 things, that it—“Rite Aid Corporation”—actually manages pharmacies, but admitted its 6 subsidiaries together represent one of the largest drugstore chains in the United States. See, e.g., 7 Answer ¶¶ 48–51, ECF No. 138. After further negotiations with the plaintiffs, Rite Aid amended 8 its answers to make clear it intended to argue it was just a holding company and the wrong 9 defendant. See ECF Nos. 146, 147. The plaintiffs moved to strike that defense, among others. 10 ECF No. 158. The court resolved that motion, but did not address the wrong-entity defense 11 because the parties agreed to negotiate a resolution on their own. See Order Mot. Strike at 2, 13, 12 ECF No. 278. 13 Unfortunately, those negotiations proved unsuccessful. Rite Aid offered to substitute one 14 of its subsidiaries, Thrifty Payless, Inc., in the place of the parent company, see ECF No. 188, but 15 after the plaintiffs conducted further discovery into Rite Aid’s corporate structure, they became 16 convinced that Rite Aid and two of its subsidiaries, Thrifty Payless and “Rite Aid Hdqtrs. Corp.,” 17 were not separate companies in practice. For example, plaintiffs claim the two subsidiaries have 18 the same address as the parent company, do not pick their own board members and hold no board 19 meetings, do not file their own federal tax documents, generate no financial reports of their own, 20 and mix their own funds in with the parent company’s funds. See Proposed Am. Compl. in 21 Intervention ¶ 48, ECF No. 315-1. 22 Schmuckley and California now move for leave to amend their complaints to add the 23 allegations described above, which they contend will allow them to prove (1) Rite Aid and its 24 subsidiaries are jointly and severally liable and (2) Rite Aid is independently liable as an 25 “inadvertent beneficiary” of its subsidiaries’ false claims. See Mot. at 8–11 (citing Cal. Gov’t 26 Code § 12651(a)(8)). Rite Aid opposes the motion. See generally Opp’n, ECF No. 318. 27 ///// 1 II. LEGAL STANDARD 2 Federal Rule of Civil Procedure 15(a)(2) governs amendments to the pleadings. It 3 provides, “The court should freely give [leave to amend] when justice so requires,” and the Ninth 4 Circuit has “stressed Rule 15’s policy of favoring amendments.” Ascon Props., Inc. v. Mobil Oil 5 Co., 866 F.2d 1149, 1160 (9th Cir. 1989). When a court considers a motion to amend, it “must be 6 guided by the underlying purpose of Rule 15―to facilitate decisions on the merits rather than on 7 the pleadings or technicalities.” DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 8 1987) (quoting United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981)). But a district court 9 may deny a request for leave to amend if the amendment would cause the opposing party undue 10 prejudice, is sought in bad faith, constitutes an exercise in futility, or creates undue delay. 11 Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1058 (9th Cir. 2011). Of 12 these factors, prejudice is the focus. Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 13 (9th Cir. 2003). The party opposing a request to amend “bears the burden of showing prejudice.” 14 DCD Programs, 833 F.2d at 187. 15 III. DISCUSSION 16 Rite Aid has not shown the proposed amendments would cause undue prejudice to itself 17 or to the two subsidiaries. Although new claims against new defendants can impose an “acute 18 threat of prejudice,” that threat is minimal when the case “is still at the discovery stage with no 19 trial date pending.” See DCD Programs, 833 F.2d at 187–88. As Rite Aid concedes, “there is 20 still time to complete discovery.” Opp’n at 14; see also Stip. & Order, ECF No. 386 (providing, 21 among other deadlines, that fact discovery will not close until December 2021 and that dispositive 22 motions will not be heard until October 2022). The court can also further adjust the schedule and 23 discovery if necessary to avoid prejudice; no trial date has been set. The threat of prejudice is 24 even lower here because the proposed amended complaints assert the same theory of false claims 25 Rite Aid has long been combatting on behalf of the whole organization. Its subsidiaries would 26 fight no new battles, at least not on any new front. Rite Aid also argues the proposed 27 amendments would subject it to further discovery about organizational structures and 28 relationships, but that discovery appears to have set in long ago; the plaintiffs had been 1 investigating Rite Aid’s corporate structure for at least a year at the time the pending motion was 2 briefed. See Opp’n at 7. If additional discovery becomes unduly burdensome and expensive, 3 Rite Aid and its subsidiaries have other avenues for seeking relief. See, e.g., Fed. R. Civ. P. 4 26(c)(1). 5 Bad faith is not a concern here either. The plaintiffs have not used the sharp practices that 6 have been evidence of bad faith in other actions. They have not, for example, proposed 7 amendments that would deprive the court of jurisdiction. See, e.g., HiRel Connectors, Inc. v. 8 United States, No. 01-11069, 2005 WL 4958488, at *5 (C.D. Cal. July 15, 2005) (finding bad 9 faith in request to amend that seemed likely to deprive court of jurisdiction and rested on dubious 10 claims of newly discovered evidence). 11 Contrary to Rite Aid’s argument, bad faith is not apparent in the plaintiffs’ justifications 12 for their motion. See Opp’n at 9–12. To be sure, the plaintiffs paint a far rosier picture of their 13 diligence than a disinterested observer might perceive. For example, the plaintiffs explain the 14 timing of their proposal by arguing that Rite Aid said nothing about Thrifty Payless and Hdqtrs. 15 during California’s or the federal government’s lengthy investigations, but it is difficult to infer 16 that Rite Aid intended to deceive, as the plaintiffs suggest it did; the government’s requests for 17 information asked Rite Aid to respond on behalf of its subsidiaries and affiliates. See id. The 18 plaintiffs could also have searched public databases for clues about Rite Aid’s corporate structure, 19 and if they had, they may well have discovered that “Thrifty Payless, Inc. operates the Rite Aid 20 drugstore chain.” Noel v. Thrifty Payless, Inc., 7 Cal. 5th 955, 962 n.2 (2019). The plaintiffs’ 21 attempt to portray themselves as hoodwinked victims is not bad faith; at worst it is overambitious 22 advocacy. Good faith is apparent on all sides here: Rite Aid advanced its wrong-entity defense in 23 its first responsive pleading, the parties negotiated in an attempt to find a resolution, they 24 conducted discovery, the plaintiffs sought relief only after negotiations proved unsuccessful, and 25 they moved to amend before discovery was closed or any trial date was set. See SAES Getters 26 S.p.A. v. Aeronex, Inc., 219 F. Supp. 2d 1081, 1094–95 (S.D. Cal. 2002) (finding movant’s 27 supposed delays actually showed good-faith). 28 ///// 1 The same history shows the plaintiffs’ motion was not unduly delayed. But even if the 2 plaintiffs were sluggish in their investigation, “[i]n the Ninth Circuit, delay alone is insufficient to 3 provide grounds for denying leave to amend, though it is a relevant factor.” Abels v. JBC Legal 4 Grp., P.C., 229 F.R.D. 152, 156 (N.D. Cal. 2005). 5 Finally, filing the proposed amendments would not invite an exercise in futility. Rite Aid 6 advances three arguments to the contrary. First, it argues the plaintiffs’ new allegations would 7 not plausibly plead Rite Aid and its subsidiaries are jointly and severally liable under an alter-ego 8 or agency theory of liability. But sparser allegations have proven viable in California federal 9 district courts. See, e.g., In re Out of Network Substance Use Disorder Claims, No. 19-2075, 10 2020 WL 2114934, *12 (C.D. Cal. Feb. 21, 2020). This question is also better addressed by 11 direct motion practice on the pleadings or at summary judgment. SAES Getters, 219 F. Supp. 2d 12 at 1086 (“[S]uch issues are often more appropriately raised in a motion to dismiss rather than in 13 an opposition to a motion for leave to amend.”). 14 Second, Rite Aid argues the plaintiffs could not state a claim under California 15 Government Code section 12651(a)(8), which makes inadvertent beneficiaries of false claims 16 liable if they discover a claim was false but do not disclose the false claim to the state. Rite Aid 17 argues the proposed amended complaints never claim that Rite Aid discovered the allegedly false 18 claims. See Opp’n at 16. But it is reasonable to infer from the plaintiffs’ proposed allegations 19 that Rite Aid turned a blind eye to known problems, see, e.g., Proposed Am. Compl. in Interv. 20 ¶ 112, ECF No. 315-1, and the court is aware of no authority preventing these allegations from 21 permitting an inference of liability under Government Code section 12651(a)(8). Rite Aid also 22 remains free to contest these allegations at a later stage. 23 Third, Rite Aid argues the new claims would be barred by the applicable statutes of 24 limitations. The success of this argument turns on Rule of Civil Procedure 15(c). Under that 25 rule, when an amendment “changes the party . . . against whom a claim is asserted,” the 26 amendment “relates back to the date of the original pleading” if three requirements are satisfied: 27 1. The amendment asserts a claim arising out of the same “conduct, transaction, 28 or occurrence set out—or attempted to be set out—in the original pleading”; 1 2. The new party “received such notice of the action that it will not be 2 prejudiced in defending on the merits” within the time period described by 3 Rule 4(m); 4 3. The new party “knew or should have known that the action would have been 5 brought against it, but for a mistake concerning the proper party’s identity.” 6 See Fed. R. Civ. P. 15(c)(1). 7 Here, the proposed amendment “changes” the party or parties against whom claims are 8 brought: Until now, that party has been Rite Aid; after amendment it would be three entities, 9 Rite Aid, Thrifty, and the “Hdqtrs.” entity. Although some courts have held an addition such as 10 this is not a “change” under Rule 15(c), others have construed Rule 15 more liberally. Compare, 11 e.g., Goodman v. Praxair, Inc., 494 F.3d 458, 469 (4th Cir. 2007) (interpreting “changes” to 12 include “adds”), with, e.g., Telesaurus VPC, LLC v. Power, No. 07-01311, 2011 WL 5024239, at 13 *6 (D. Ariz. Oct. 21, 2011) (reading “changes” to mean one-for-one, defendant-for-defendant 14 substitution). The Ninth Circuit and Supreme Court have not addressed this disagreement. 15 Having considered the persuasive authorities cited in the parties’ briefs, this court 16 concludes the broader interpretation of “changes” is the better one. The Fourth Circuit 17 summarizes the “complex compromise” of Rule 15(c) well: On the one hand, the Federal Rules 18 seek to simplify pleadings and permit amendments in an effort to secure efficient and just 19 resolutions. See Goodman, 494 F.3d at 467. On the other hand, defendants are entitled to repose 20 from aging claims. See id. at 467–68. Rule 15(c) balances these concerns by requiring notice to 21 new defendants and prohibiting amendments that would cause undue prejudice. See id. at 468. 22 Reading a one-for-one exchange requirement into Rule 15 serves neither of these interests. See 23 id. A one-for-one substitution rule would create a restrictive, unnecessarily formalistic policy; 24 would prevent the resolution of claims on their merits; and would not protect mistakenly omitted 25 defendants from old claims any better than a broader reading of “changes” because a new 26 defendant joins the case under both interpretations. 27 The advisory committee’s notes to Rule 15 are consistent with this interpretation. The 28 committee explained that before Rule 15(c) was adopted, plaintiffs had often mistakenly sued the 29 wrong government agency or administrator or even a nonexistent department, only to discover 1 their error after the applicable limitations period had expired. See Rule 15, Advisory Committee 2 Notes to 1966 Amendment. Under these circumstances, the government would not have suffered 3 prejudice if the correct department or agency had been substituted in; it knew about the claim all 4 along. But courts sometimes dismissed claims nonetheless, and claimants lost their day in court. 5 See id. Adapting this reasoning to changes that add parties is not difficult. If a plaintiff 6 mistakenly believes only one defendant is responsible for his injury, but evidence later comes to 7 light that would allow the defendant to point its finger at its subsidiary—and both the parent and 8 the subsidiary knew of this evidence all along, but the plaintiff did not—then it would be unjust to 9 deprive the plaintiff of a chance to pursue claims against both. Releasing one responsible 10 defendant would exonerate a potentially liable party. See 6A Wright & Miller, Fed. Prac. & Proc. 11 Civ. § 1498.2 (Apr. 2020 Update). 12 The three subsidiary requirements of Rule 15(c)(1)(C) are satisfied here as well. First, the 13 proposed amendments are about the same Code 1 restrictions and drugs that underlie the 14 plaintiffs’ original complaints, so they relate to the same “conduct, transaction, or occurrence.” 15 Second, the new defendants are Rite Aid subsidiaries that share interests in their defense with 16 Rite Aid, whose counsel has even offered to make one of them a defendant. This shows they 17 received sufficient notice of this litigation. See, e.g., G.F. Co. v. Pan Ocean Shipping Co., 18 23 F.3d 1498, 1503 (9th Cir. 1994) (holding new party receives “notice” under Rule 15(c)(1) if it 19 shares “community of interest” with existing defendant, such as corporate affiliate with closely 20 related business operations). And if Rite Aid knew it was the wrong defendant, the subsidiaries 21 must have known as well. Third, the history of this action, including the parties’ pleadings, 22 motion practice, and discovery efforts, demonstrates the plaintiffs’ motion to amend is the result 23 of their mistake about who truly operates Rite Aid stores and who actually controlled pharmacy 24 reimbursement requests: Rite Aid, Thrifty, Hdqtrs., or some combination? See Reply at 8–9, ECF 25 No. 322. That is, the plaintiffs’ “wrong action or statement” proceeded from a “faulty judgment, 26 inadequate knowledge, or inattention,” Krupski v. Costa Crociere S.p.A., 560 U.S. 538, 548–49 27 (2010) (citation omitted), not an intentional and strategic decision. 1 IV. CONCLUSION 2 The motion to amend, ECF No. 315, is granted. The proposed amended complaints, ECF 3 Nos. 315-1 and 315-3, are deemed filed. Deadlines for responsive filings and pleadings are 4 governed by the Federal Rules of Civil Procedure and this court’s Local Rules. 5 IT IS SO ORDERED. 6 DATED: April 6, 2021.