Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`No. 20-3425
`
`
`UNITED STATES COURT OF APPEALS
`FOR THE SEVENTH CIRCUIT
`
`
`
`UNITED STATES OF AMERICA, et al.,
`ex rel. THOMAS PROCTOR,
`
`Plaintiffs-Appellants
`
`
`v.
`
`
`SAFEWAY, INC.,
`
`Defendant-Appellee
`
`
`
`
`
`Appeal From The United States District Court
`For the Central District of Illinois,
`Case No. 3:11-CV-03406-RM-TSH
`The Honorable Richard Mills
`
`
`BRIEF AND REQUIRED SHORT APPENDIX OF PLAINTIFF-
`APPELLANT THOMAS PROCTOR
`
`
`
`
`
`
`
`
`
`
`
`

`

`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`John Timothy Keller
` COUNSEL OF RECORD
`Dale J. Aschemann
`ASCHEMANN KELLER LLC
`300 North Monroe Street
`Marion, Illinois 62959-2326
`Telephone: (618) 998-9988
`Facsimile: (618) 993-2565
`E-Mail: tkeller@quitamlaw.org
`dale@aschlaw.org
`
`Paul B. Martins
`Julie Webster Popham
`James A. Tate
`Helmer, Martins, Rice & Popham Co., L.P.A
`600 Vine Street, Suite 2704
`Cincinnati, Ohio 45202
`Telephone: (513) 421-2400
`Facsimile: (513) 421-7902
`E-Mail: pmartins@fcalawfirm.com
`jpopham@fcalawfirm.com
`jtate@fcalawfirm.com
`
`Jason M. Idell
`Idell PLLC
`6800 Westgate Blvd. Ste 132 #301
`Austin, Texas 78745
`Telephone: (512) 689-3081
`E-Mail: jason@idellpllc.com
`
`Rand J. Riklin
`Goode Casseb Jones Riklin Choate & Watson
`2122 North Main Avenue
`P.O. Box 120480
`San Antonio, Texas 78212-9680
`Telephone: (210) 733-6030
`Facsimile: (210) 733-0330
`E-Mail: riklin@goodelaw.com
`
`
`
`ii
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`

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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`Gary M. Grossenbacher
`Texas Bar No. 24008972
`Attorney at Law
`402 Vale Street
`Rollingwood, Texas 78746
`Telephone: (512) 699-5436
`E-Mail: gmgtex@austin.rr.com
`
`Glenn Grossenbacher
`Texas Bar No. 08541100
`Law Office of Glenn Grossenbacher
`24165 IH-10 W., Ste 217-766
`San Antonio, Texas 78257-1160
`Telephone: (210) 271-3888
`E-Mail: gglaw@satx.rr.com
`
`
`
`
`
`
`
`
` Counsel for Thomas Proctor
`
`
`
`iii
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`CIRCUIT RULE 26.1 DISCLOSURE STATEMENT
`
` Pursuant to Circuit Rule 26.1, Relator Thomas Proctor discloses as
`
`follows:
`
` 1. The full name of every party that the attorney represents in the
`
`case:
`
` Thomas Proctor, Relator
`
` 2. The names of all law firms whose partners or associates have
`
`appeared for the party in the case (including proceedings in the district
`
`court or before an administrative agency) or are expected to appear for
`
`the party in this court:
`
` Dale J. Aschemann, John Timothy Keller (Aschemann Keller LLC);
`
`Paul B. Martins, Julie W. Popham, James A. Tate (Helmer, Martins,
`
`Rice & Popham Co., LPA); Jason M. Idell (Idell PLLC); Rand J. Riklin
`
`(Goode, Casseb, Jones, Riklin, Choate & Watson); Gary M.
`
`Grossenbacher; Glenn Grossenbacher (Law Office of Glenn
`
`Grossenbacher); C. Jarrett Anderson (Anderson LLC); and Gaylon
`
`Hayes (Hayes Legal Group, P.C.).
`
` 3. If the party or amicus is a corporation:
`
` N/A
`
`
`
`
`
`iv
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`TABLE OF CONTENTS
`
`TABLE OF AUTHORITIES ........................................................................ viii
`
`JURISDICTIONAL STATEMENT ................................................................... 1
`
`STATEMENT OF THE ISSUES ...................................................................... 2
`
`STATEMENT OF THE CASE ......................................................................... 3
`
`I. Factual History ............................................................................. 4
`
`A. Walmart’s $4 Generics Program Generated Competition
`Over the Cash Price of Prescription Drugs ............................... 4
`
`B. Safeway’s Price Matching and Membership
`Discount Programs .................................................................... 6
`
`1. Safeway’s Price Matching ...................................................... 6
`
`2. Safeway’s $4 Generics Program ............................................. 8
`
`3. Safeway’s Membership Programs: Matching Competitor
`Generics Program / Loyalty Membership Program ............... 9
`
`C. Safeway Frequently Charged Lower Cash Prices Through
`Its Price Match and Discount Club Programs .........................14
`
`D. Safeway Knew that if It Lowered Its Cash Prices to
`Compete with Walmart, Third Party Payers Would
`Consider that Lower Price to be Safeway’s U&C Price ...........16
`
`E. Procedural History ....................................................................23
`
`SUMMARY OF THE ARGUMENT................................................................. 28
`
`STANDARD OF REVIEW ............................................................................ 29
`
`
`
`
`
`
`
`v
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`ARGUMENT .............................................................................................. 29
`
`I. The District Court’s Summary Judgment Decision Is Based
`upon a Misinterpretation of U.S. ex rel. Garbe v. Kmart ................ 29
`
`A. The Meaning of “Usual and Customary” Price Was
`Not Disputed in Garbe .............................................................30
`
`B. Garbe Rejected Kmart’s “Flimsy” Attempt to Separate
`Participants in Its Discount Programs from the
`“General Public” .......................................................................32
`
`C. Safeway’s Attempt to Separate Its Cash Discount
`Programs from the “General Public” Was even Flimsier
`than Kmart’s ............................................................................34
`
`II. Misapplication of the Safeco Standard: The District Court Erred
`in Concluding that U&C Price Was Ambiguous, that Safeway
`Held an Objectively Reasonable Interpretation, and that
`there Was No Contrary Authoritative Guidance ............................. 39
`
`A. There is No Ambiguity Concerning What U&C
`Price Means ..............................................................................40
`
`B. Safeway’s Disregard of Approximately 14.2 Million Cash
`Price Match and Club Discounts in Setting Its U&C Price
`Was Not Objectively Reasonable .............................................42
`
`1. Whether Safeway Acted Reasonably Depends on
`what Safeway Knew and Did at the Time It Acted,
`not Its Post Hoc Rationalizations .........................................44
`
`2. A Reasonable Pharmacy, Knowing what Safeway Knew
`at the Time, Would have Realized that It Was
`Submitting False Claims ......................................................46
`
`3. Safeway Failed to Advance any Objectively Reasonable
`Interpretation, Post Hoc or Otherwise, that Justified
`Its Failure to Report Price Match and Club Discount
`Cash Prices as Its U&C Price ...............................................49
`
`
`
`vi
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`

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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`C. Authoritative Guidance Warned Safeway Away from Its
`Decision to Hide Program Prices from GHPs ..........................53
`
`1. A Question of Fact: Whether Authoritative Guidance
`Warned Safeway Away from Its Conduct .............................53
`
`2. The District Court’s Rejection of Authoritative Guidance
`Warning Safeway Away from Its Conduct Was Error .........53
`
`a. Contractually Binding, Authoritative CMS Guidance
`Warned Safeway Away from Its Conduct .........................55
`
`b. Authoritative U&C Definitions Warned Safeway
`Away from Its Conduct ......................................................59
`
`c. Authoritative Guidance from State Medicaid
`Programs Warned Safeway Away from Its Conduct .........61
`
`III. The Decision that Safeway Did Not Act with Reckless Disregard
`Erroneously Ignored Undisputed Evidence of Safeway’s
`Actual Knowledge and Deliberate Ignorance ................................... 63
`
`A. The Record Shows that Safeway Acted with Actual
`Knowledge and Deliberate Ignorance when It
`Submitted False Claims ...........................................................68
`
`IV. Conclusion ........................................................................................... 72
`
`
`
`vii
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
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`TABLE OF AUTHORITIES
`
`Cases
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` Page No.
`
`Arkansas Pharmacists Ass’n v. Harris,
`
` 627 F.2d 867 (8th Cir. 1980) ......................................................... 41
`
`Corcoran v. CVS,
`No. 15-cv-03504-YGR, 2017 U.S. Dist. LEXIS 143327
`(N.D. Cal. Sept. 5, 2017), rev’d, 779 Fed. Appx. 431
`(9th Cir. 2019) ........................................................................... 50-51
`
`Halo Elecs., Inc. v. Pulse Elecs., Inc.,
`136 S. Ct. 1923 (2016) .............................................. 26, 44-45, 65-66
`
`Kungys v. United States,
`485 U.S. 759, 9 L. Ed. 2d 839, 108 S. Ct. 1537 (1998) ................... 66
`
`
`Madison v. Mississippi Medicaid Comm’n,
`86 F.R.D. 178 (N.D. Miss. 1980) .................................................... 49
`
`
`Safeco Ins. Co. of Am. v. Burr,
`551 U.S. 47 (2007) .................................................................. passim
`
`
`Storie v. Randy’s Auto Sales, LLC,
`589 F.3d 873 (7th Cir. 2009) .......................................................... 29
`
`
`United Airlines, Inc. v. Mesa Airlines, Inc.,
`
` 219 F.3d 605 (7th Cir. 2000) .......................................................... 31
`
`U.S. ex rel. Bahnsen v. Bos. Sci. Neuromodulation Corp.,
`No. 11-1210, 2017 U.S. Dist. LEXIS 206512
`(D.N.J. Dec. 15, 2017) ............................................................... 45-46
`
`
`U.S. ex. rel. Colquitt v. Abbott Labs.,
`No. 3:06-cv-1769-M, 2016 U.S. Dist. LEXIS 92450
`(N.D. Tex. Mar. 8, 2016) ................................................................ 67
`
`
`
`
`viii
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`

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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
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`Cases
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`
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` Page No.
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`U.S. ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC,
`833 F.3d 874 (8th Cir. 2016) .......................................................... 57
`
`
`U.S. ex rel. Garbe v. Kmart Corp.,
`824 F.3d 632 (7th Cir. 2016), cert. denied,
`137 S. Ct. 627 (2017) .............................................................. passim
`
`U.S. ex rel. Minn. Ass’n of Nurse Anesthetists v. Allina Health
` Sys. Corp.,
`276 F.3d 1032 (8th Cir. 2002) ........................................................ 45
`
`
`U.S. ex rel. Phalp v. Lincare Holdings, Inc.,
`857 F.3d 1148 (11th Cir. 2017) ...................................................... 45
`
`U.S. ex rel. Purcell v. MWI Corp.,
`807 F.3d 281 (D.C. Cir. 2015) ........................... 39, 42, 53, 56-57, 63
`
`
`U.S. ex rel. Streck v. Bristol-Myers Squibb Co.,
`370 F. Supp. 3d 491 (E.D. Pa. 2019) .............................................. 57
`
`
`U.S. ex rel. Suarez v. AbbVie, Inc.,
`No. 15 C 8928, 2020 U.S. Dist. LEXIS 222468
`(N.D. Ill. Nov. 30, 2020) ................................................................. 46
`
`
`U.S. v. Bruno’s Inc.,
`54 F. Supp. 2d 1252 (M.D. Ala. 1999) ............................................ 41
`
`
`U.S. v. King-Vassel,
`728 F.3d 707 (7th Cir. 2013) ............................ 26, 42, 44, 46, 64-66
`
`
`U.S. v. Krizek,
`111 F.3d 934 (D.C. Cir. 1997) .................................................. 65, 67
`
`
`U.S. v. Speqtrum, Inc.,
`
` 113 F. Supp. 3d 238 (D.D.C. 2015) ................................................ 65
`
`
`
`
`ix
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
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`Cases
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` Page No.
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`U.S. v. Wisconsin Power & Light Co.,
`
` 38 F.3d 329 (7th Cir. 1994) ............................................................ 29
`
`van Straaten v. Shell Oil Prods. Co.,
`
` 678 F.3d 486 (7th Cir. 2012) .......................................................... 65
`
`
`Statutes and Regulations
`
`28 U.S.C. § 1291 ........................................................................................ 1
`
`28 U.S.C. § 1292(b) ............................................................................ 31-32
`
`28 U.S.C. § 1331 ........................................................................................ 1
`
`28 U.S.C. § 1345 ........................................................................................ 1
`
`28 U.S.C. § 1367(a) ................................................................................... 1
`
`31 U.S.C. § 3729(b)(1) ............................................................................. 54
`
`31 U.S.C. § 3729(b)(1)(A) ........................................................................ 64
`
`31 U.S.C. § 3729(b)(1)(A)(iii) ................................................................... 66
`
`31 U.S.C. § 3729(b)(3) ............................................................................. 66
`
`31 U.S.C. § 3729(b)(4) ............................................................................. 54
`
`31 U.S.C. § 3730(b) ................................................................................... 1
`
`31 U.S.C. § 3730(b)(4)(B) ........................................................................ 23
`
`31 U.S.C. § 3730(e)(3) ............................................................................. 23
`
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`x
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`Statutes and Regulations
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`31 U.S.C. § 3732(a) ................................................................................... 1
`
`31 U.S.C. § 3732(b) ................................................................................... 1
`
`42 C.F.R. § 423.1(b) ................................................................................. 54
`
`42 C.F.R. § 423.505(i)(4)(iv) ......................................................... 54-56, 58
`
`42 C.F.R. § 447.331(b) ....................................................................... 41, 61
`
`42 C.F.R. § 447.512(b) ....................................................................... 41, 61
`
`
`Legislative History
`
`House Report 99-660............................................................................... 64
`
`
`Other
`
`ACADEMY OF MANAGED CARE PHARMACY (AMCP)
`
` GUIDE at 57 (October 2007) ......................................................... 51
`
`CENTERS FOR MEDICARE & MEDICAID SERVS., Chapter 1, Sec.
`10—Introduction in MEDICARE PRESCRIPTION DRUG
`BENEFIT MANUAL DRUG BENEFIT MANUAL (2006) ............ 58
`
`
`CENTERS FOR MEDICARE & MEDICAID SERVS., Chapter 14—
`Coordination of Benefits, in MEDICARE PRESCRIPTION
`DRUG BENEFIT MANUAL (2006) ....................................... passim
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`
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`xi
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`JURISDICTIONAL STATEMENT
`
`1. The district court had subject matter jurisdiction of this action
`under 28 U.S.C. §§ 1331 and 1345; 31 U.S.C. §§ 3730(b) and
`3732(a); and supplemental jurisdiction over the state law claims
`under 28 U.S.C. § 1367(a) and 31 U.S.C. § 3732(b).
`
`
`
`2. This Court has jurisdiction under 28 U.S.C. § 1291.
`
`3. On June 15, 2020, the district court entered judgment for Safeway,
`dismissing Plaintiffs’ and Relator’s federal False Claims Act (FCA)
`claims and relinquishing jurisdiction over the remaining state law
`claims. Short Appendix (SA)-66.
`
`4. Relator’s Motion to Alter Judgment and for Leave to Supplement
`the Record was filed July 10, 2020 and was denied November 13,
`2020. District Court Record (R)-204, R-211.
`
`5. Relator’s Notice of Appeal from the final judgment disposing of all
`parties’ claims was filed December 11, 2020. R-212.
`
`
`
`

`

`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`STATEMENT OF THE ISSUES
`
`1. Did the district court err when it adopted Safeway’s argument that
`“Before the Seventh Circuit’s decision in Garbe, the law on usual
`and customary pricing was not clearly established,” SA-31, 63-64,
`and based on this, applied the analysis of willful violations of
`ambiguous obligations set out in Safeco Ins. Co. of Am. v. Burr, 551
`U.S. 47 (2007)?
`
`
`2. Did the district court err in its application of Safeco when it
`determined that: usual and customary (U&C) price was ambiguous;
`Safeway articulated an “objectively reasonable interpretation” that
`its free discount program cash prices offered to the general public
`were not its U&C price; and, Safeway was not “warned away” from
`this incorrect interpretation of U&C requirements because the
`warnings it received were not “binding,” and therefore did not
`constitute authoritative guidance?
`
`
`3. Did the district court err when it determined that the term
`“recklessly” as applied in Safeco supplanted the FCA’s scienter
`standard and precluded analysis of evidence of subjective
`knowledge or subjective intent?
`
`
`
`
`
`
`
`2
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`

`

`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`STATEMENT OF THE CASE
`
` This is a False Claims Act (FCA) case brought by pharmacist-Relator
`
`Thomas Proctor alleging that Safeway submitted false claims when it
`
`failed to report its true “usual and customary” (U&C) cash prices to
`
`third party payers of pharmacy claims like Medicare Part D, Medicaid,
`
`TRICARE, and the Federal Employee Health Benefits Program (FEP)
`
`(collectively, Government Healthcare Programs or GHPs).1 See
`
`generally R-50, First Amended Complaint. Instead of reporting its lower
`
`cash U&C prices to GHPs, Safeway adopted price matching and a free
`
`membership club to conceal its true cash prices. Safeway knowingly
`
`reported higher U&C prices and obtained higher reimbursements from
`
`third parties (that capped payment at the U&C price) while offering
`
`lower cash prices to customers so it could remain competitive with other
`
`pharmacies. Factual History, infra. This Court considered a similar
`
`scheme and confirmed such conduct violates the FCA. U.S. ex rel. Garbe
`
`v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016), cert. denied, 137 S. Ct.
`
`627 (2017).
`
`
`
`
`1 In Garbe, this Court observed that “[u]nless state regulations provide
`otherwise, the ‘usual and customary’ price is defined as the ‘cash price
`offered to the general public.’” Garbe, 824 F.3d at 643.
`
`
`
`3
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`

`

`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`I.
`
`Factual History
`
`A. Walmart’s $4 Generics Program Generated Competition
`Over the Cash Price of Prescription Drugs
`
` The Medicare Part D drug benefit program began on January 1,
`
`2006. R-73, Safeway’s Answer, ¶65.
`
` Within months of the introduction of Part D, on September 21, 2006,
`
`Walmart, the country’s largest retailer, introduced a $4 generic drug
`
`discount program. SA-7; see also R-195-6, Topf Depo. 28:21-29:25.
`
`Walmart reported these $4 generic sales as its U&C price to GHPs. See,
`
`e.g., R-190-31, 4/9-10/2008 Email at SW-Proctor-TARN-
`
`00019085.1 (noting that Walmart’s $4 price is extended to Medicaid);
`
`SA-8-9.
`
` On the same day that Walmart introduced its program, Safeway
`
`Senior VP of Pharmacy Dave Fong forwarded a news article, Wal-Mart
`
`to sell drugs for $4, to Safeway CFO Robert Edwards, stating: “FYI-
`
`drug store sector stock prices are tanking. . . . this is not good for the
`
`business of Pharmacy[.]” R-190-23, at SW-Proctor-TARN-00074706.1;
`
`SA-7.
`
` Four days later, on September 25, Safeway Executive Michael Topf
`
`(then-Senior Manager Financial Planning and Analysis) emailed
`
`
`
`4
`
`

`

`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`“Walmart data” to Senior VP of Pharmacy Fong and Group Director of
`
`Pharmacy Services Phil Cadero, stating: “Although we are still making
`
`money on the majority of these drugs at $4, we have such a high mark
`
`up presently, that the $4/script would force us to take a huge margin
`
`hit.” R-190-24; SA-7-8. Mr. Topf estimated a loss of $8.7 million
`
`annually if Safeway adopted Walmart’s program, and noted that this
`
`preliminary analysis of “cash” prescriptions “does not take into account
`
`any issues we may have with U&C.” Id.; SA-8.
`
` Other retail pharmacies like Target, Kroger, HEB, and Kmart
`
`responded with competing versions of Walmart’s $4 discount generic
`
`drug program. R-190-26, 10-23-2006 Email; R-195-6 Topf Depo. 32:17-
`
`33:1; SA-8. Safeway monitored and evaluated the impact of its
`
`competitors’ $4 discount programs, including the number of Safeway
`
`prescriptions that were being transferred to its competitors. R-190-26;
`
`SA-16. Safeway eventually settled on the Kmart approach of using price
`
`matching and a membership program to separate its discount cash
`
`prices from the U&C price it reported to third parties.
`
`
`
`5
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`B.
`
`Safeway’s Price Matching and Membership Discount
`Programs
`
` Safeway implemented its discount programs at different times in
`
`different divisions. These are discussed below, and summarized in
`
`Addendum A, Safeway Programs by Division over Time. See 30(b)
`
`Appendix at 1.
`
`1. Safeway’s Price Matching
`
` Safeway stipulated that from 2006 through July 15, 2015, its
`
`pharmacies price matched lower competitor prices for any customer who
`
`(according to Safeway) requested such a price match. R-195-4,
`
`Stipulations, ¶4(a). Price match transactions were cash sales where
`
`Safeway pharmacists manually overrode the original price and replaced
`
`it with a lower cash price. Id. at ¶¶4(a), 7; SA-30. Safeway ignored these
`
`lower cash matched prices in setting its U&C prices and instead
`
`reported “what third party plans pays us and then try to set the retail
`
`around the highest [Third Party] reimbursement rate.” R-190-8, 2/14-
`
`16/2007 Email at SW-Proctor-261036. Safeway did this because over
`
`90% of its pharmacy business was paid for by third party insurers. Id.;
`
`SA-12.
`
`
`
`6
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`

`

`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
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` Between October 1, 2006 and July 31, 2015, Safeway routinely sold
`
`cash prescriptions at lower matched prices. See R-178-2, Dew Report at
`
`7 & Table 5. During that time, Safeway overrode the higher U&C prices
`
`it reported to third party payers, including GHPs, in at least 5.6 million
`
`cash price match transactions. Id. at Table 5 (identifying 5,626,027
`
`override sales as well as an additional 8,584,801 club sales during this
`
`time period, totaling 14,210,828 total discount cash sales). Safeway did
`
`not report these price match overrides as its U&C price to GHPs. R-195-
`
`4, ¶4(a).
`
` Safeway authorized its pharmacists to override prices to avoid losing
`
`cash customers. R-190-8, 2/14-16/2007 Email at SW-PROCTOR-261036.
`
`In a February 14, 2007 email to a pharmacy manager, Julie Spier
`
`(Safeway’s Division Manager/Director of Pharmacy Operations for
`
`Texas) explained: “The deal is that as long as the [Third Parties] will
`
`pay at this level we want to leave it there so that we can make as much
`
`off of them for as long as possible. You can always price match . . . .” Id.;
`
`SA-12.
`
`
`
`In January 2008, Safeway estimated that adopting a $4 price for the
`
`Walmart list of generic drugs nationwide would result in a $65 million
`
`
`
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`annual margin loss. R-195-6, Topf Depo. 63:16-64:11 & 66:22-67:20;
`
`R-190-29, 1/17-27/2008 Email.
`
` On April 4, 2008, “very top level executives” including the CEO,
`
`CFO, and Vice Presidents met concerning Safeway’s “Pharmacy Generic
`
`Pricing Strategy & Response to Kroger.” R-195-7, Fong Depo. 150:5-
`
`151:22; R-195-30, 4/4/2008 Email with attachment; SA-13. At the time,
`
`Safeway’s average charged price for the generic drugs sold by
`
`competitors like Walmart for $4 was $10.04, while Safeway’s average
`
`cost for those same drugs was $0.90. R-190-30, at SW-PROCTOR-
`
`TARN-00028406.7. Safeway estimated an annual profit margin loss of
`
`$46,879,230 if it sold these generic drugs for $4 and reported $4 as its
`
`U&C price. Id. Safeway also estimated losing an additional $75 million
`
`in annual profits based on associated lost grocery sales by losing
`
`pharmacy customers to competitors’ $4 programs. Id. at SW-PROCTOR-
`
`TARN-00028406.2; SA-13.
`
`2. Safeway’s $4 Generics Program
`
` From March 2008 to July 2010, Safeway offered a $4 Generics
`
`Program in several of its divisions. R-195-4, ¶¶3(b), 4(b); Addendum A;
`
`SA-12-13.
`
`
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
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` Safeway’s Generics Program consisted of a formulary (list) of generic
`
`drugs that Safeway sold at $4 for a 30-day supply, $8 for a 60-day
`
`supply, or $12 for a 90-day supply. R-195-4, ¶4(b); SA-13. The $4
`
`Generics Program did not require membership enrollment. R-73,
`
`Safeway’s Answer, ¶¶116, 121; R-195-4, ¶4(b). Divisions offering the $4
`
`Generics Program properly reported these offered cash prices to GHPs
`
`as Safeway’s U&C price. R-73, ¶¶116, 121; R-195-4, ¶4(b); SA-14-15.
`
`“The $4 pricing became the Safeway U&C for all program formulary
`
`drugs during that period.” R-195-4, ¶4(b); SA-14-15. Executives
`
`characterized Safeway’s $4 Generics Program as a “true” $4 Program.
`
`R-195-10, Scalzo Depo., 123:15-124:9; R-190-40, 4/28-30/2009 Email at
`
`SW-PROCTOR-TARN-00373213.1; SA-13-14.
`
`3. Safeway’s Membership Programs: Matching Competitor
`Generics Program / Loyalty Membership Program
`
` Also starting in early 2008, Safeway introduced its Matching
`
`Competitor Generics Program (MCGP) club in certain divisions that
`
`were not participating in the $4 Generics Program. R-195-4, ¶¶3(b)-(c);
`
`Addendum A. The MCGP was a free pharmacy discount program that
`
`required customers to fill out an enrollment form (with basic
`
`demographic data that Safeway already had in its computer system)
`
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`and pay cash to obtain $4 generic and other discounted drugs. R-195-4
`
`at ¶4(c); R-195-10, Scalzo Depo. 178:10-179:1. All customers, including
`
`GHP beneficiaries, were eligible to join the MCGP. Id. Unlike Safeway
`
`divisions offering the $4 Generics Program, the MCGP discounted
`
`prices for generic drugs were not reported to GHPs and other insurers.
`
`R-195-4, ¶4(c).
`
` Safeway used the same “base” drug list for the MCGP that it used for
`
`the $4 Generics Program. See R-190-37, 3/31/2010 Email at SW-
`
`PROCTOR-143771-72; see also R-195-10, Scalzo Depo. 175:8-177:19.
`
`Safeway “processed” MCGP claims through its wholly-owned
`
`subsidiary, Avia Partners. R-195-4, ¶¶25(a), (d). Safeway set the pricing
`
`rules for its membership program. Id. ¶25(d). Avia did not pay any
`
`portion of membership drug purchases, did not transmit the sales
`
`information to any member’s insurer or Pharmacy Benefit Manager
`
`(PBM), and did not conduct a Drug Utilization Review. Id.
`
` Safeway also implemented an Auto-Refill program for Medicare Part
`
`D patients in November 2008 where the pharmacy would automatically
`
`refill prescriptions without the customer asking. R-190-19, Corporate
`
`
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`Pharmacy Alert re: Auto Refill Program Update; R-195-8, Jarvill Depo.
`
`93:15-23.
`
`
`
`In the Spring of 2009, Safeway discussed converting its “true” $4
`
`Generics Program into a free membership program like the MCGP to
`
`keep its lower cash prices from third parties. R-190-38, at SW-Proctor-
`
`TARN-00000145.2; SA-21. On March 4, 2009, Safeway’s then-Corporate
`
`Pharmacy Category Manager, Jose Alcaine, posed a “Hypothetical” to
`
`other Safeway executives: “We pull the $4 programs in Texas, Eastern,
`
`Genuardi’s and Dominick’s and offer the same program; however, as a
`
`membership (FREE but customers need to sign up) program” and
`
`asked, “What is the potential savings if we make this a membership
`
`program? Thereby not affecting our insurance reimbursements.” Id.
`
` That same day Mr. Alcaine responded to his own email, calculating
`
`that the “Total cost [of the current program] =$10 million” and stating
`
`that “If we change the plan to a membership program, the assumption
`
`is that only 20% of the $4 scripts are cash and these are the individuals
`
`who would sign up for the membership program. Based on this
`
`assumption the membership program would cost us $2 million thereby
`
`potentially saving us $8 million.” Id.; SA-22.
`
`
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
` On May 28, 2009, Safeway’s then-Director of Finance for Pharmacy,
`
`Michael Topf, reported to Steve Scalzo (Division Manager/Director of
`
`Pharmacy Operations for Dominick’s) that: “In Phoenix where they
`
`already have a successful $4 match program, at the most 20% of the
`
`customers eligible for $4 generics actually take us up on it. Thus, we are
`
`able to get the benefit of offering the program while only suffering 20%
`
`of the cost.” R-190-32; SA-25. By keeping the prices and drugs the same
`
`but having cash customers join a free membership program, Mr. Topf
`
`“hope[d] we can minimize the lost customers [due to a transition from a
`
`$4 generic program to more of an ‘opt-in’ program] since anyone who
`
`wants the $4 generic price can still get it along (sic).” Id.
`
`
`
`In June 2009, executives overseeing Safeway’s Illinois (Dominick’s)
`
`stores continued debating moving from a $4 discount program to a “$4
`
`Membership” program. R-195-6, Topf Depo. 183:18-184:5; SA-25. Then-
`
`Vice President of Finance for the Dominick’s Division, Brian Baer, said
`
`about the $4 membership program in a June 17, 2009 email:
`
`it seems like to me this whole thing revolves @ the insurance
`angle - to get the $10 per item from them vs the $4 cash
`price…..am I off? Need to know a lot more about the -sign_up
`program…..is there other parameters?
`
`R-190-33, at SW-Proctor-TARN-00091064.1; SA-25-26.
`
`
`
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
` Mr. Topf responded stating:
`
`Off the record that is exactly the angle is getting the
`maximum we can from the insurance (it may be more like 8-
`10/script). This is the reason why Walgreen’s and CVS never
`launched this program is because the hit on the third party
`insurance would have crushed them (take the impact to us
`and multiply by 10)
`
`R-190-33, at SW-Proctor-TARN-00091064.1; SA-26.
`
`
`
`In July 2010, Safeway replaced the MCGP and $4 Generics programs
`
`(in all divisions other than NorCal) with the Loyalty Membership
`
`Program (LMP). R-195-4, ¶¶3(d), 4(b), 4(d); Addendum A; SA-26. The
`
`MCGP and the LMP programs offered identical features and benefits.
`
`R-195-4, compare ¶4(c) with ¶4(d); SA-26. The new LMP membership
`
`program also offered the same drugs at the same prices as the $4
`
`Generics Program. R-195-10, Scalzo Depo. 176:1-25, 177:15-19. The
`
`discounts provided under the MCGP and its LMP successor were not
`
`reported to insurers, including GHPs. R-195-4, ¶¶4(a), (c)-(d); SA-26.
`
`
`
`In a June 17, 2010 email, Safeway’s Division Manager/Director of
`
`Pharmacy Operations for Texas, Julie Spier, wrote: “The main reason
`
`for going to a membership program is to protect our [U&C] price” in
`
`order to protect insurance reimbursement gains. R-190-10, at SW-
`
`Proctor-TARN-0095518.1; SA-26. Ms. Spier explained the reasoning for
`
`
`
`13
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`Case: 20-3425 Document: 26 Filed: 02/08/2021 Pages: 157
`
`Safeway’s transition from the $4 Generics Program to a membership
`
`program that would become the LMP:
`
`We are going to this membership program to try to protect
`some of our gain dollars. All of our plans reimburse using a
`contracted formula for reimbursement or our usual and
`customary whichever is less. If we have $4 generics, we
`automatically have to give all the insurance companies the $4
`too.
`
`With the implementation – for each of the previous $4
`generics the pharmacy will need to process first on the
`patients regular insurance to see what their copay is and if it
`is more than the $4 generics – the pharmacy will need to
`reverse the claim and then move it over to the membership.
`This is very important so that we are able to put as much as
`we can back to the bottom line.
`
`R-190-11, 7/12/2010 Email at SW-PROCTOR-261108; SA-27. Ms. Spier
`
`later characterized this as “going from $4 generic to stealth
`
`Membership Pro