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Roche Diagnostics Corp. v. Binson's Hospital Supplies, Inc.

United States District Court, S.D. Indiana, Indianapolis Division

September 18, 2017

ROCHE DIAGNOSTICS CORP., and ROCHE DIABETES CARE, INC., Plaintiffs,
v.
BINSON'S HOSPITAL SUPPLIES, INC., NORTHWOOD, INC., OLYMPUS GLOBAL, LLC, DELTA GLOBAL, LLC, ALPHA XE LLC, J&B MEDICAL SUPPLY CO., INC., KENNETH G. FASSE, DONNIE E. DICKSTEIN, JAMES E. BINSON, JAMES E. BINSON II, NICHOLAS B. BINSON, ROBERT A. BINSON, CHRISTOPHER F. SHAYA, FAWZI B. SHAYA, MARY E. SHAYA, DANIEL GLADYS, JEREMIAH MANKOPF, and PHARMACY JOHN DOES 1-50, Defendants.

          ORDER ON MOTIONS TO DISMISS

          Larry J. McKinney, Judge United States District Court Southern District of Indiana

         This matter comes before the Court on four distinct Motions to Dismiss filed by the defendants in this action. In their motions, Defendants Binson's Hospital Supplies, Inc. (“Binson's”), Northwood, Inc. (“Northwood”), Kenneth G. Fasse (“Fasse”), Donnie E. Dickstein (“Dickstein”), James E. Binson, James E. Binson II, Nicholas B. Binson, and Robert Binson (collectively, the “Binson's Defendants”), and Defendant Jeremiah Mankopf (“Mankopf”), seek to dismiss Plaintiffs', Roche Diagnostics Corp. and Roche Diabetes Care, Inc. (collectively, “Roche's”), Amended Complaint, pursuant to Federal Rules of Civil Procedure 12(b)(2) (“Rule 12(b)(2)”) and 12(b)(6) (“Rule 12(b)(6)”). Dkt. No. 61; Dkt. No. 66. Defendants Olympus Global, LLC (“Olympus”), Delta Global, LLC (“Delta”), Alpha XE LLC (“Alpha”), Christopher F. Shaya (“Christopher”), and Daniel Gladys (“Gladys, ” and together with Olympus, Delta, Alpha, and Christopher, the “Olympus-Delta Defendants”), however, move to dismiss Roche's Amended Complaint as it relates to them only under Rule 12(b)(2) by asserting that this Court lacks personal jurisdiction over them. Dkt. No. 57. Furthermore, Defendants', J&B Medical Supply Co. (“J&B”), Fawzi B. Shaya, and Mary E. Shaya (collectively, the “J&B Defendants”), motion to dismiss only seeks to dismiss Roche's Amended Complaint as it relates to them pursuant to Rule 12(b)(6), by arguing that Roche has not pleaded with sufficient particularity to state a claim against them. Dkt. No. 64.

         For the reasons stated herein, the Court GRANTS in part and DENIES in part the Binson's Defendants' and the J&B Defendants' motions to dismiss. The Court also GRANTS the Olympus-Delta Defendants' and Mankopf's motions to dismiss.

         I. BACKGROUND

         Roche is a leading manufacturer of blood glucose test strips used by diabetes patients. Dkt. No. 12 (“Am. Compl.”), ¶ 37. Roche sells its test strips in two ways to provide them to patients with different kinds of insurance plans: (1) for sale at retail pharmacies (“Retail Strips”); and (2) for sale by durable medical equipment (DME) providers (“DME Strips”). Id. at ¶ 38. Whenever patients purchase any of Roche's test strips through their insurance providers, the sellers of those test strips obtain payment from the insurers, rather than the individual patients, and must submit reimbursement claims to the insurers to receive payment. Id. at ¶ 44.

         Roche's Retail Strips may be sold to anyone at retail pharmacies; however, more than 90% of Retail Strips are purchased by patients with insurance plans that reimburse the pharmacies. Id. at ¶ 38. Roche sells its Retail Strips directly to wholesalers for about $71 per 50-strip vial, who then sell the Retail Strips to retail pharmacies for about $75 per 50-strip vial. Id. at ¶ 39. When Retail Strips are purchased by a patient with a Pharmacy Plan insurance policy, the patient's insurer reimburses the retail pharmacy at a rate of about $78 per 50-strip vial. Id. at ¶ 39. After the insurer reimburses the retail pharmacy, Roche then pays the insurer rebates of about $50 per 50-strip vial. Id.; Dkt. No. 83 at 4. As a result, Roche obtains a net revenue of about $21 per 50-strip vial for the sale of its Retail Strips. Am. Compl., ¶ 39.

         In contrast, Roche sells its DME Strips directly and exclusively to mail-order DME distributors (“DME Distributors”) for less than $20 per 50-strip vial. Id. at 40. Based on their contractual agreements with Roche, the DME Distributors purchasing the DME Strips may only sell the DME Strips to patients benefitting from DME insurance plans, including Medicare and other commercial insurers, or to other DME Distributors. Id. DME Distributors are contractually prohibited from selling their DME Strips to any patients benefitting from Pharmacy Plans or those without insurance, which allows Roche to sell the DME Strips to DME Distributors at a substantially lower price than its Retail Strips. Id. at ¶ 41. If a patient with a commercial DME insurance plan purchases DME Strips from a DME Distributor, the commercial DME insurer reimburses the DME Distributor at a rate of about $30 per 50-strip vial. Id. at ¶ 40. However, Roche does not pay any rebates to any insurers following the sale of DME Strips. Id.

         A. ROCHE'S AGREEMENTS WITH BINSON'S AND NORTHWOOD

         On February 10, 2011, Roche entered into an agreement (the “Agreement”) with Binson's and its subsidiary, Northwood, whereby Roche would sell its DME Strips to Binson's, and Binson's and Northwood would distribute Roche's DME Strips to DME insurance plan beneficiaries. Id. at ¶ 51. Binson's and Northwood are both Michigan corporations with principal places of business in Michigan. Id. at ¶¶ 14-15. In the Agreement, Roche agreed to sell DME Strips to Binson's and Northwood at net rates between $5 and $17 per 50-strip vial, based on Binson's and Northwood's prospective volume commitments and Roche's market share of DME Distributors' total sales. Id. at ¶¶ 52-53. However, the Agreement required that Binson's and Northwood sell the DME Strips exclusively to patients benefitting from DME insurance plans. Id. at ¶ 52. Binson's and Northwood were also required to provide Roche with quarterly or monthly Market Share Reports and Utilization Reports in order to receive their rebates. Id. at ¶ 54. Market Share Reports indicate Roche's market share of the total sales made by Binson's and Northwood over a given period of time. Id. In contrast, Utilization Reports track the prescription numbers and sale dates for each individual sale of DME Strips made by Binson's and Northwood to ensure that sales of DME Strips are made only to DME insurance plan beneficiaries or other appropriate DME Distributors. Id.

         On July 21, 2014, Binson's and Northwood negotiated with Roche to amend the Agreement (the “Amended Agreement”), through which Roche agreed to sell its DME Strips directly to Northwood, rather than Binson's, at a flat, discounted rate of $10.67 per 50-strip vial and without any need to make rebate claims. Id. at ¶¶ 57, 61-62. While negotiating the Amended Agreement, Fasse, the Executive Vice President and Chief Operating Officer for Binson's and Northwood, and Dickstein, the Director of Northwood, told Roche that Northwood had a large number of customers that were covered by commercial DME insurance plans, in addition to its customer base covered by Medicare. Id. at ¶¶ 58-60. Fasse and Dickstein further assured Roche that Northwood would only sell Roche's DME Strips to individual DME insurance plan beneficiaries. Id. at ¶ 98. Dickstein also provided Roche a list of DME insurance plans that would be covered when selling the DME Strips. Id. at ¶ 99.

         After the Amended Agreement went into effect, Northwood saw a dramatic spike in its sales of Roche's DME Strips. Id. at ¶ 63. However, despite this intense sales increase, Northwood stopped providing its Utilization Reports to Roche after the Amended Agreement went into effect. Id. at ¶ 64. Fasse and Dickstein explained Northwood's rapidly growing sales by telling Roche that Northwood was selling Roche's DME Strips to its large base of patients benefitting from commercial DME insurance plans who had previously used different test strip brands. Id. at ¶¶ 65-66.

         In light of Northwood's uncharacteristic and dramatic increase in sales, Roche grew suspicious. Id. at ¶ 68. In the spring of 2015, Roche hired private investigators to go to Binson's brick-and-mortar locations in Michigan and Florida and attempt to purchase Roche's DME Strips with cash, rather than through a DME insurance plan. Id. at ¶ 69. Upon their arrival to Binson's stores, the private investigators easily purchased DME Strips in cash without insurance. Id. at ¶¶ 70-71. Based on the private investigators' findings, Roche repeatedly requested that Binson's and Northwood provide Roche with Utilization Reports between June and September 2015. Id. at ¶ 71. Although Binson's provided its Utilization Report to Roche on September 11, 2015, Northwood failed to provide any such report before September 24, 2015. Id. at ¶ 73. As a result, Roche contacted Northwood on the same day and informed Fasse and Dickstein that Roche was stopping all shipments to Northwood until it provided Roche with its Utilization Reports and told them that Roche knew Binson's had been selling the DME Strips for cash. Id. at ¶ 74. Dickstein claimed that Northwood was selling Roche's DME Strips to several companies in Florida, rather than to individual DME insurance plan beneficiaries as was required by the Amended Agreement. Id. at ¶ 75.

         On September 28, 2015, Roche's Senior Counsel, Julie Dilts (“Dilts”), sent a letter to Fasse, indicating that Binson's and Northwood were in breach of the Amended Agreement. Id. at ¶ 78. Dilts' letter further demanded that Binson's and Northwood provide to Roche their 2015 Utilization Reports, a list of the individuals and other entities that purchased Roche's DME Strips from Binson's and Northwood in breach of the Amended Agreement, and an explanation for Northwood's dramatic sales growth. Id.

         On October 6, 2015, Fasse responded via email to Dilts' letter by stating that Binson's had sold Roche's DME Strips for cash at its retail locations but that “management was unaware of this problem prior to receiving your letter.” Id. at ¶¶ 79, 101-102. Fasse further indicated that such cash sales at their retail facilities were discontinued. Id. Fasse also attached a “complete list of all retail cash sales of [Roche] Products sold for the period of February 2011-present” with his response. Id. at ¶ 80. On October 7, 2015, Fasse sent another email to Dilts, in which Fasse admitted that Northwood had been selling Roche's DME Strips to third parties since July 2014, and the third parties then sold the DME Strips to various other DME Distributors. Id. at ¶ 82. Fasse also attached Binson's Utilization Reports to this October 7 email but explained that similar Utilization Reports for Northwood were unavailable. Id. at ¶ 81.

         B. THE DIVERSION SCHEME

         In May 2014, Fasse and Dickstein began discussing a plan to divert the sales of Roche's DME Strips with Christopher and Mankopf, who were employees of J&B. Id. at ¶¶ 84-85. J&B is a Michigan corporation that is owned and operated by Fawzi B. Shaya and Mary E. Shaya. Id. at ¶¶ 19, 120. J&B previously contracted with Roche in 2008 to sell Roche's DME Strips exclusively to patients insured by Blue Cross Network of Michigan until the agreement was terminated in 2010. Id. at ¶ 86. Roche believes that J&B has sought ways to purchase Roche's DME Strips ever since the termination of its agreement with Roche. Id. at ¶ 87.

         Christopher, the son of Fawzi B. Shaya and Mary E. Shaya, and Mankopf formed Olympus as a shell company for J&B. Id. at ¶¶ 87, 124. Olympus was established as a Michigan limited liability company on March 12, 2013. Id. at ¶ 124. Christopher and Mankopf explained to Fasse and Dickstein that Northwood could sell Roche's DME Strips to Olympus, and that Olympus could then resell the DME Strips to a Florida company, Medical Supply Solutions, Inc. (“MSSI”). Id. at ¶¶ 88, 90. MSSI would then sell the DME Strips to retail pharmacies. Id. at ¶ 91.

         All of the parties involved recognized that their scheme would work better if Northwood could purchase the DME Strips at a flat, discounted rate. Id. at ¶¶ 89-90. Therefore, based on their discussions with Christopher and Mankopf, Fasse and Dickstein negotiated with Roche to form the Amended Agreement so that Roche would make all of its sales to Northwood. Id. at ¶¶ 89-90, 94. After the Amended Agreement when into effect, Northwood began selling Roche's DME Strips to Olympus, with the intention of Olympus selling the DME Strips to MSSI. Id. at ¶¶ 90, 93-94.

         Olympus was the sole purchaser of Northwood's DME Strips between July 2014, and January 2015. Id. at ¶ 124. On January 16, 2015, Christopher and Gladys, another J&B employee, formed Delta[1] as a Michigan limited liability company to replace Olympus as the sole purchaser of Roche's DME Strips from Northwood. Id. at ¶¶ 119, 125. Roche believes Olympus was later dissolved in order to cut Mankopf out of this scheme to divert the sales of Roche's DME Strips. Id. at ¶126. Between July 21, 2014, and September 24, 2015, Northwood sold approximately 1, 526, 688, 50-strip vials of Roche's DME Strips to Olympus and Delta. Id. at ¶¶ 93-94. After either Olympus or Delta purchased DME Strips from Northwood, Alpha, a Wyoming limited liability company formed by Christopher, would then make the sales of those DME Strips directly to MSSI. Id. at ¶ 94.

         C. ...


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