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CIMULDER v. PCS HEALTH SYSTEMS

July 17, 2003

E.D. MULDER, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
PCS HEALTH SYSTEMS, INC., DEFENDANT.



The opinion of the court was delivered by: William Bassler, District Judge:

O P I N I O N

This class action litigation concerns alleged breaches of fiduciary duty under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq., by Defendant PCS Health Systems, Inc. ("PCS"). Plaintiff Ed Mulder ("Mulder") moves the Court to certify a plaintiff class consisting of "all PCS beneficiaries covered by ERISA during the period from March 5, 1995 to March 5, 1998 (the `Class Period')." (Pl. Mem. at 2.) For the reasons set forth below, the Court declines to certify a class as broad as that requested by Mulder, but grants certification of a more limited class consisting of all participants, from March 5, 1995 through March 5, 1998, in ERISA-covered employee benefit plans administered by Oxford and for which PCS provided PBM services pursuant to its Commercial Contract with Oxford.

FACTS AND PROCEDURAL HISTORY*fn1

During the class period, PCS provided pharmaceutical benefits management ("PBM") services to benefit providers. These benefit providers included such entities as health insurance companies, health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), Blue Cross and Blue Shield organizations, third-party administrators and self-funded employee benefit plans. During the relevant period, PCS contracted with about 1,250 of these benefit-provider entities, otherwise known as PCS's customers. PCS's customers, in turn, contracted with thousands of employers to administer their employee health benefit plans. According to PCS's own estimate, roughly 56 million individuals received prescription drug benefits during the class period through customers of PCS.

Mulder's personal experiences were as follows. He worked for Scott Printing Company, Inc. ("Scott") in 1997 and 1998 and participated in the employee health plan offered by Scott. Scott contracted with the HMO Oxford Health Plans, Inc. ("Oxford") to provide healthcare coverage to participating Scott employees. Oxford contracted with PCS to provide PBM services. Scott did not contract with PCS directly.

After taking the prescription drug Mevacor, prescribed by his doctor for over a year to lower his cholesterol, Mulder received a notice by mail that PCS was switching his drug to Pravachol. Pravachol was manufactured by a different company and was more expensive than Mevacor. (Compl., ¶ 7.) Mulder alleges that PCS switched his drug to increase its own profits regardless of "cost-saving or medical considerations."*fn2 (Id., ¶ 8.) PCS allegedly profited by receiving rebates and kickbacks from the drug manufacturers of the drugs promoted by PCS. (Id.)

Oxford had two separate contracts with PCS from 1997 to 1998. One was the Medicare/commercial contract ("Commercial Contract") which applied to commercial plans, like the Scott plan, and to Medicare plans. Oxford's Commercial Contract with the various plans was in effect from March 1, 1997 through December 31, 1998.*fn3 Approximately 1.35 million participants received prescription drug benefits through this contract. (Def. Opp. at 5; Abrams Decl., Ex. C.) The second contract between Oxford and PCS applied to Medicaid plans ("Medicaid Contract") and governed the drug benefits of about 200,000 Medicaid participants. The Medicaid Contract offered different services than the Commercial Contract. Unlike the Commercial Contract, for instance, the Medicaid contract provided for a "closed" rather than "open" drug "formulary," no manufacturer rebates to Oxford and different service fees. (Def. Opp. at 25; compare Abrams Decl., Exs. A, B and E with Stein Cert., Exs. A and B.)

The Oxford Commercial Contract itself applied to different types of participants. For instance, 950,000 of the 1.35 million participants were "Point of Sale" members and 150,000 were "Medicare Risk" members. (Def. Opp. at 25-26; Abrams Decl., Ex. C.) PCS asserts that "to the extent that [these members] did not receive their health benefits through [an employee health benefit] plan, ERISA does not apply to them. . . .". (Def. Opp. at 26.) Only 250,000 beneficiaries of the Commercial Contract were, like Mulder, HMO members participating in an employee health benefit plan. (Id.; Abrams Decl., Ex. C.)

Mulder filed his Complaint on March 6, 1998. Mulder brings the action pursuant to the ERISA section empowering a plan beneficiary or participant to bring a civil action to recover benefits due or to enforce rights under an ERISA-govened plan. 29 U.S.C. § 1132. (Compl., ¶ 52.) The Complaint seeks relief for PCS's alleged breach of its fiduciary duties under ERISA, 29 U.S.C. § 1104(a)(1)(A), (B) and (D), and 1106(a) and (b).*fn4 (Compl., ¶¶ 49-52.)

The Complaint alleges that PCS breached the fiduciary duties that it owed to its beneficiaries under ERISA in three ways: (1) PCS entered into contracts with employee benefit plans, HMOs and insurance companies, which contracts secured illegal windfall profits for PCS; (2) PCS implemented programs to influence pharmacists and physicians to switch the drugs of plan participants; and (3) PCS utilized a method of determining formulary and preferred drugs that did not serve the best interests of plan participants. (Pl. Br. at 2.) All of these actions allegedly violated PCS's fiduciary obligations because the actions enriched PCS at the expense of the "interests" of plan participants and the HMOs and insurance companies "representing" the plan participants. (Compl., ¶ 1(b) and (c).)

The Complaint seeks a judgment declaring certain of PCS's practices to be unlawful; enjoining PCS from continuing those practices; granting equitable relief including an accounting of all illegally-obtained profits and a constructive trust, established on behalf of all affected employee benefit plans, to which PCS must disgorge illegal profits; awarding class members costs and attorneys fees; and creating an appropriate claims resolution facility for the resolution of any remaining individual issues. (Id., ¶ 52.)*fn5

ANALYSIS

As noted above, on a motion for class certification, courts must not inquire into the merits of a suit. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177-78 (1974). Courts may nevertheless "probe behind the pleadings," General Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 160 (1982), in order to "thoroughly examine" the plaintiff's "factual and legal allegations." Barnes v. Am. Tobacco Co., 161 F.3d 127, 140 (3d Cir. 1998).

Mulder bears the burden of showing that he can adequately represent the asserted class. Davis v. Romney, 490 F.2d 1360, 1366 (3d Cir. 1974). In order to do so, Mulder must satisfy the requirements of Federal Rule of Civil Procedure 23.

Federal Rule of Civil Procedure 23

Before obtaining certification, a class must meet the four requirements of Rule 23(a): (1) numerosity, (2) commonality, (3) typicality, and (4) adequacy of representation. Fed.R.Civ.P. 23(a); In re Life USA Holding, Inc., 242 F.3d 136, 143 (3d Cir. 2001). If Mulder satisfies these Rule 23(a) requirements, he must then show that the class is appropriate under Rule 23(b)(1), (2) or (3). Fed.R.Civ.P. 23(b). Mulder seeks certification under 23(b)(2) and/or (b)(3).*fn6

PCS contends that Mulder has not satisfied the Rule 23(a) requirements of numerosity, commonality or typicality, but does not dispute adequacy of representation. PCS also asserts that Mulder has failed to establish the appropriateness of certification under either Rule 23(b)(2) (injunctive relief applicable with respect to class as a whole) or Rule 23(b)(3) (common questions predominate and class action superior for fair adjudication).

Rule 23(a)(1) Numerosity

A class must be "so numerous that joinder of all members is impracticable." Fed.R.Civ.P. 23(a)(1). Mulder seeks to represent a nationwide class of about 56 million "participants and beneficiaries of [PCS's] customer plans." (Pl. Br. at 1.) In the alternative, Mulder asserts:

Even if this Court were to decide that the appropriate class would consist only of members of the Oxford Health Plans (with which plaintiff disagrees), the requirements of Fed.R.Civ.P. 23 would be satisfied. Numerosity would be satisfied because Oxford alone has 1.6 million members.
(Pl. Br. at 15.) The Court interprets Mulder's reference to "Oxford Health Plans" to refer to those employee benefit plans administered or insured by Oxford. According to PCS, Mulder could not assert his claims on behalf of all 1.6 million Oxford participants because only 250,000 individuals received their benefits through employer plans both governed by ERISA and for which Oxford served as administrator (HMO). (See Def. Opp. at 25-26.) Even if the class consisted of only 250,000 individuals, however, numerosity would be satisfied. As discussed in more detail below, PCS offers no argument as to why, under Rule 23, Mulder could not represent a class of the 250,000 Oxford-HMO participants of ERISA-covered plans. The Court therefore finds that the proposed class satisfies numerosity.

Rule 23(a)(2) Commonality

Rule 23(a)(2) requires that "there [be] questions of law or fact common to the class." Fed.R.Civ.P. 23(a)(2). A plaintiff can meet the commonality requirement by showing "the presence of a single common issue." Prudential, 962 F. Supp. at 510 (citing 1 Newberg § 3.10, at 3-50 to 3-52).

Mulder asserts that PCS's alleged "common course of conduct" raises the following ...


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