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A Better Partnership
June 12, 2014

MSC: Pharmacies must pass along savings when substituting generic drugs

In Michigan ex rel. Gurganus v. CVS Caremark Corp., the Michigan Supreme Court ruled that Michigan’s generic drug substitution statute requires pharmacists to pass along the savings from substituting a generic drug for an equivalent brand-name drug.  In other words, pharmacists cannot obtain a greater profit by substituting a generic drug for a brand-name drug.  The plaintiffs alleged that most of the major pharmacy chains were violating the statute, and thus violating Michigan’s Health Care False Claim Act and Medicaid False Claim Act.  The court interpreted the generic-substitution act, then concluded that the plaintiffs’ failure to plead specific instances where the defendant pharmacies purportedly violated the statute warranted dismissal for failing to plead fraud with specificity.
 
The decision arose as a result of two consolidated class actions and a qui tam action brought by a West Virginia resident who used to work for one of the defendant pharmacies in West Virginia.  The plaintiffs alleged that under the generic-substitution statute, MCL 333.17755, the defendant pharmacies are prohibited from profiting more from the sale of generic drugs than they profit from the equivalent brand-name drug.  In support of their allegations, they cited proprietary information filched by the qui tam relator from her former employer. 
 
The trial court granted summary disposition under MCR 2.116(C)(8) because plaintiffs’ claims sounded in fraud, but they failed to plead specific transactions in which any defendant actually failed to pass along the savings from substituting a generic drug for a brand-name drug.  On appeal, the Court of Appeals reversed, concluding that the plaintiffs’ general allegations based upon a single defendants’ pricing from several years ago in another state was sufficient to allow the plaintiffs to proceed to discovery.  The Court of Appeals then addressed several additional issues including the standard for asserting claims under Michigan’s false claims acts.
 
The Michigan Supreme Court reinstated the circuit court’s ruling.  The Court explained that the generic-substitution statute “is clear: when a generic drug is substituted for a brand-name drug (and only then), the pharmacist must pass on the monetary difference between the wholesale cost of the brand-name drug and the wholesale cost of the generic drug.”  Thus, the statute only applies to substitutions, i.e. where the prescriber identifies a brand-name drug and the pharmacist dispenses the generic equivalent, and not situations where the prescription is for the generic drug and the generic drug is dispensed.  Because the plaintiffs failed to plead facts with sufficient particularity to meet the heightened pleading standard applicable to fraud, the court concluded that the plaintiffs had failed to state a claim on which relief could be granted.  The court vacated the unreversed portion of the Court of Appeals decision dealing with the standard for asserting claims under Michigan’s false claims acts.
 
One footnote in the opinion may be of general interest to practitioners.  The court cited the United States Supreme Court’s decision in Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009), with reference to “the federal analogue to our pleading rules.”  In Iqbal, the U.S. Supreme Court emphasized that pleading under the federal rules is not mere notice pleading, but requires the pleading of facts sufficient to create “more than the mere possibility of misconduct.”  Although the Michigan Supreme Court’s footnote does not specifically reject notice pleading, does the citation to Iqbal portend that change in a future case?
 
Disclosure:  Warner Norcross & Judd LLP filed an amicus brief on behalf of the Michigan Chamber Litigation Center in support of the prevailing defendants.  

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