CZ Services, Inc. v. Express Scripts Holding Company

Background

CZ Services, Inc. and its wholly owned subsidiary, CareZone Pharmacy LLC, operated retail pharmacies and participated in Express Scripts, Inc.’s pharmacy network under a contract. Express Scripts terminated that arrangement in 2018. The pharmacies alleged that Express Scripts created pretextual reasons for the termination because it viewed them as a rising competitor. The alleged reasons included claims that the pharmacies violated state regulatory laws and operated a mail-order prescription service contrary to the contract.

The pharmacies asserted claims involving defamation under the Lanham Act and unspecified state laws, unfair competition under California and Tennessee law, and Tennessee’s Any Willing Provider statute. That statute generally restricts certain health-insurance entities from excluding a licensed pharmacy from a network when the pharmacy agrees to the same terms offered to other pharmacies. Express Scripts asserted counterclaims against the pharmacies, CareZone Inc., and Jonathan Schwartz for breach of contract, promissory fraud or fraudulent inducement, and defamation based on online posts.

This order resolved the pending summary-judgment motions. The court stated that its separate orders on the expert-evidence motions, the related motion to strike, and the sealing motions would follow.

CZ’s Motion Concerning Express Scripts’ Counterclaims

CZ sought summary judgment on all of Express Scripts’ counterclaims, arguing that Express Scripts had not timely provided a calculation or estimate of its damages. The court treated the motion in substance as a request for a discovery sanction that would prevent Express Scripts from presenting damages evidence and potentially terminate its claims.

The court denied CZ’s motion. It found that Express Scripts had not clearly stated the monetary relief it sought until it opposed the motion, after fact discovery had closed. But the court also found insufficient evidence of willfulness, fault, or bad faith to justify terminating the remaining counterclaims. CZ had not asked Express Scripts in an interrogatory to state its contract damages or asked it to supplement its initial disclosures.

The court reopened discovery on Express Scripts’ damages claims. CZ could serve a reasonable number of interrogatories and document requests and take up to two depositions, with discovery to be completed by October 15, 2020. Express Scripts could not supplement or amend its damages expert reports or testimony. The court warned that nonresponsiveness or evasiveness in the additional discovery could support termination of claims or defenses.

Express Scripts agreed that its defamation counterclaim should be dismissed because it had not provided evidence of special damages. The court dismissed that counterclaim.

Express Scripts’ Motion Concerning the Pharmacies’ Claims

Defamation-based claims. The pharmacies challenged statements in an Express Scripts website post and related Twitter post. The statements included assertions that the pharmacies used unlicensed pharmacies, operated an improper mail-order prescription business, violated state pharmacy laws, and failed to comply with their contracts.

The court denied summary judgment on the defamation-based claims. It found that the challenged statements conveyed assertions of objective fact that could be proved true or false, and that the parties had genuine factual disputes about whether the statements were inaccurate. The claims therefore had to go to a jury. The court also declined at that stage to decide whether the pharmacies had to prove negligence or actual malice, stating that a reasonable jury could find actual malice by the required standard.

Tennessee Any Willing Provider claim. The court had previously questioned whether Express Scripts, as a pharmacy benefits manager, was covered by Tennessee’s Any Willing Provider statute. The court again concluded that the pharmacies had not shown that Express Scripts was a health insurer or that it was an agent of a health insurer. The pharmacies had not presented evidence establishing an agency relationship under the assumed application of Tennessee law.

However, the pharmacies also relied on contract provisions stating that Express Scripts would comply with applicable laws concerning creation and maintenance of a pharmacy network, including “any willing provider laws.” The court found that Express Scripts had not adequately answered this contractual argument in its reply brief or at the proper stage. Consequently, the court denied summary judgment on the Any Willing Provider claim to the extent it was based on Express Scripts’ alleged voluntary contractual agreement to follow that law.

Unfair-competition claims. The court allowed the Tennessee unfair-competition claim to proceed because the pharmacies had surviving tort claims that could support an unfair-competition theory under Tennessee law. Express Scripts had also not moved for summary judgment on the claim that the termination intentionally interfered with the pharmacies’ prospective economic relations.

As to California’s Unfair Competition Law, the court denied summary judgment on the unlawful theory to the extent it was based on the surviving defamation-related tort claims and the alleged intentional interference. The court stated that the Tennessee Any Willing Provider statute could not serve as the basis for a California claim based on the allegations presented because the alleged Tennessee events were not alleged to have occurred in California. But the court concluded that CZ California was not barred as a matter of law from pursuing an unlawful theory based on Medicaid Any Willing Provider requirements, given an Express Scripts policy document stating that it must comply with applicable Any Willing Provider laws and contractual requirements.

The court rejected the pharmacies’ California Unfair Competition Law unfairness theory because they had not established an incipient violation of antitrust law. The court stated that the fraud theory remained alive. The court also directed the pharmacies to elect by August 31, 2020 whether to pursue their theory concerning California Business and Professions Code section 16600.

Disposition

The court denied CZ’s motion for summary judgment, while allowing limited additional discovery about Express Scripts’ damages claims. The court dismissed Express Scripts’ defamation counterclaim. The court denied Express Scripts’ motion for summary judgment except as to portions of the California unfair-competition claim, including the unfairness theory. The pharmacies’ defamation-based claims, Tennessee Any Willing Provider claim, and surviving Tennessee and California unfair-competition theories were allowed to continue. The parties were ordered to return to mediation.