City o f Brockton R etirem ent, et al. v. CVS C arem ark C orporation, et al. C V-09-554-JL 12/30/13

UNITED STATES DISTRICT COURT DISTRICT OF RHODE ISLAND

City of Brockton Retirement System et a l .

v. Civil No. 09-cv-554-JL Opinion No.

CVS Caremark Corporation et al.

MEMORANDUM ORDER

This is a putative class action by disappointed shareholders

of CVS Caremark Corporation, who allege that the company and

certain of its officers made a number of fraudulent statements

and omissions about the integration of CVS's retail pharmacy

business, and Caremark's "prescription benefit manager," or

"PBM," business, following the companies' merger in November

2007. The plaintiffs claim that, as a result of these

misstatements and omissions, they purchased CVS Caremark stock at

artificially inflated prices, only to see the share price decline

by 20 percent on November 5, 2009, when (during the company's

third-guarter earnings call) "investors learned the truth about

the company's failure to integrate the merged-entity, which

resulted in the loss of billions of dollars of PBM contracts, and

that the CVS Caremark retail-PBM model had failed to gain

acceptance in the marketplace." The plaintiffs seek to recover

for their alleged losses under § 1 0 (b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange

Commission,

.10b-5.

In May 2012, following extensive briefing and oral argument,

this court granted the defendants' motion to dismiss the

complaint by way of a comprehensive written order. City of

Brockton Ret. Sys. v. CVS Caremark Corp.,

. This

court ruled that, aside from an unrealized earnings projection,

which was not actionable due to the "safe harbor" for forward-

looking statements, 15 U.S.C. § 77z-2(c)(1)(2), the plaintiffs

had not plausibly alleged that the claimed misstatements or

omissions caused their loss. Id. at 3. This court reasoned that

the company's "loss of billions of dollars of PBM contracts" had

been disclosed several months prior to the earnings call, which

also did not "disclose" the company's alleged "failure to

integrate the merged-entity" or that the "CVS Caremark retail-PBM

model had failed to gain acceptance in the marketplace"--in fact,

the company had specifically denied the existence of such

problems during the call, andattributed the contract losses to

other factors. Id. at 25-27. This court did not reach the

defendants' alternative arguments for dismissal: that the

plaintiffs had failed to plead any actionable misstatements or

omissions and that the complaint failed to "state with

particularity facts giving rise to a strong inference that the

2 defendant[s] acted with the required state of mind," as required

by the statutory pleadinq standard, 15 U.S.C. § 78u-4(b) (2).

The plaintiffs appealed this court's judqment of dismissal

to the Court of Appeals, challenqinq the rulinq that they had not

plausibly alleqed loss causation, but not the rulinq that the

earninqs projection was inactionable. The Court of Appeals

aqreed with the plaintiffs, in part. Mass. Ret. Sys. v. CVS

Caremark Corp.,

(1st Cir. 2013). First, the court

observed, "the complaint does not alleqe that [CVS Caremark's]

clients rejected the idea of a combined PBM and retail pharmacy.

Therefore, the [plaintiffs] fail to state a claim reqardinq the

business model itself."

. But, the Court of Appeals

ruled, the plaintiffs had plausibly alleqed that the November

2009 earninqs call "revealed to the market that CVS Caremark had

problems with service and the inteqration of its systems," even

thouqh, aqain, the company had specifically denied the existence

of those problems durinq the call.

. While "[p]erhaps

the market did not perceive every detail of CVS Caremark's

struqqles" as a result of the earninqs call, the court explained,

the market "knew enouqh to drive down the price of CVS Caremark

shares by 2 0 % .

(footnote by the court omitted) .

10f course, one "detail of CVS Caremark's struqqles" that the market knew as a result of the call was that the company missed its earninqs forecast by a siqnificant marqin. As this

3 The defendants urged, as an alternative basis for

affirmance, that the plaintiffs had not alleged any actionable

misstatement or omission, but the Court of Appeals declined to

address that argument.

The court explained that "the

parties' briefing on this issue is abbreviated, so we think it

best to allow the district court to consider this argument in the

first instance. The same is true for the scienter element of the

[plaintiffs'] claims, which was briefed before the district court

but not on appeal."

Rather than reversing this court's

dismissal order, then, the Court of Appeals vacated it and

remanded the case here "to allow the court to consider

alternative grounds for dismissal if it chooses."

court had reasoned, that disclosure "could plausibly have caused that day's precipitous drop in the CVS Caremark share price," but it could not support the plaintiffs' claims, since the earnings forecast was an inactionable forward-looking statement. City of Brockton,

, 17. The Court of Appeals, however, relied on the missed forecast as lending plausibility to the plaintiffs' loss causation theory, declaring that "[t]he only systemic failure likely to produce [the disappointing earnings] numbers was a failure to integrate the PBM systems," which was the very fact that the plaintiffs accused the defendants of withholding until the call. Mass. Ret. Sys.,

. But, in a footnote, the Court of Appeals dispelled any suggestion that the disclosure of the missed earnings projection could itself sustain the plaintiffs' loss causation theory, stating, "[i]f this case proceeds, it will be up to the [plaintiffs] to prove how much of this drop resulted from revelations about CVS Caremark's integration, which are actionable, and how much resulted from disappointment in CVS Caremark's corrected earnings, which is not actionable."

at 242 n.7.

4 This court subsequently granted (over the plaintiffs'

objection) the defendants' motion to submit supplemental briefing

on their motion to dismiss. Order of July 5, 2013, and the

plaintiffs filed a response to the defendants' supplemental

memorandum. After reviewing those materials, this court declines

to dismiss the complaint again, for the reasons explained briefly

below. This ruling, of course, is without prejudice to the

defendants' renewal of their arguments for dismissal--including

their argument that the plaintiffs cannot show loss causation--by

way of a properly supported motion for summary judgment.

Actionable misstatements or omissions. "For a complaint to

state a claim for securities fraud under section 1 0 (b) and Rule

10b-5, it must plead," among other things, "a material

misrepresentation or omission." ACA Fin. Guar. Corp. v. Advest,

Inc.,

, 58 (1st Cir. 2008). To do so, the complaint

must "'specify each statement alleged to have been misleading

[and] the reason or reasons why the statement is misleading.'"

Id. (quoting 15 U.S.C. § 78u-4(b)(1) (bracketing by the court)).

The defendants argue that the plaintiffs have failed to meet

this standard because they "have not alleged that anyone from CVS

Caremark ever said that [it] had no problems with service" or "no

problems at all with integration of any of [its] systems

following the merger." In response, the plaintiffs identify

5 several statements to that effect, which the company made to its

investors during the time that the plaintiffs held its stock,

including, but not limited to:

• a statement by CVS Caremark's president and CEO, defendant Thomas Ryan, in October 2008 that the company's PBM business "will continue to gain share because . . . [w]e have excellent service";

• a statement by CVS Caremark's executive vice president and CFO, David Rickard, in March 2009 that "we have done the things strategically that needed to be done to make this merger successful";

• statements by Ryan in January 2009 denying that the company had lowered prices for some of its PBM customers "because of a lack of service," or that the company had "an issue with [its computer] systems";

• a statement by Ryan in August 2009 that the company's PBM clients "love our integrated proactive pharmacy care offerings"; and

• a statement in the company's Form 10-K for its 2008 fiscal year that " [w]e believe the breadth of capabilities resulting from the Caremark [m]erger are [sic] resonating with our clients and contributed to our success at renewing existing clients."

But the defendants argue that these statements (and others like

them) cannot support the plaintiffs' claims, for two reasons.

First, the defendants protest, the plaintiffs have not

specified "the reason or reasons why [each] statement is

misleading," as reguired by § 78u-4(b)(1). The plaintiffs have

alleged, however, that--contrary to the company's statements that

its post-merger capabilities were "resonating with [its] clients"

and its denial that any perceived "lack of service" had driven it

6 to lower its PBM prices--CVS Caremark had in fact "unilaterally

reduced prices on over 50 percent of its existing PBM contracts

in order to retain customers that were dissatisfied with [its]

inferior service [and] integration-related issues" during the

2009 selling season. The defendants maintain that this

allegation is nevertheless insufficient because the plaintiffs

"do not identify a single contract that was re-priced during the

2009 selling season, let alone one that was re-priced due to

service," and thus fail to "state with particularity all facts on

which [their] belief [in it] is formed," 15 U.S.C. § 78u-4(b)(1).

As the Court of Appeals has cautioned, however, § 78u-4(b)

"does not reguire plaintiffs to plead evidence," only to put "a

significant amount of meat . . . on the bones of the complaint."

Hill v. Gozani,

(1st Cir. 2011). So, at least at

this stage, the plaintiffs' failure to specify which PBM

contracts were re-priced on account of the alleged post-merger

service problems is not fatal to their claim that, contrary to

Ryan's statement in January 2009, CVS Caremark had indeed lowered

its prices on half of those contracts for precisely that reason.

Furthermore, in vacating this court's prior dismissal order, the

Court of Appeals noted that--despite Ryan's assurance "that a

worrisome repricing of contracts was unrelated to concerns about

CVS Caremark's service"--"[s]everal facets of the November [2009]

7 call revealed that [these] previous statements were

misrepresentations."2 Mass. Ret. Sys.,

. Based

on this observation, if nothing else, this court rules that the

plaintiffs have sufficiently alleged the falsity of Ryan's

January 2009 statement disassociating the re-pricing from any

post-merger service problems, as well as the defendants' more

general statements that its clients "love[d]" its post-merger PBM

services, which were "resonating" with them.

Second, the defendants maintain that their allegedly false

statements were merely "inactionable puffery": "loosely

optimistic statements that are so vague, so lacking in

specificity, or so clearly constituting the opinions of the

speaker, that no reasonable investor could find them important to

the total mix of information available." Shaw v. Digital Eguip.

Corp.,

(1st Cir. 1996). But that is an inapt

characterization of at least some of the defendants' alleged

misstatements--including Ryan's claim that any "lack of service"

had played no role in the company's re-pricing of half of its PBM

business. Indeed, while the defendants argue that the plaintiffs

21he Court of Appeals identified these "facets" of the November 2009 earnings call as Ryan's acknowledgment that CVS Caremark had lost a contract with one of its PBM clients "in part due to 'service issues,'" as well as his announcement of the "sudden retirement" of the then-president of Caremark Pharmacy Services, defendant Howard McLure, who allegedly "built" the CVS Caremark "integrated model." Mass. Ret. Sys.,

.

8 have failed to allege that this statement was false, as just

discussed, they do not argue that this particular statement was

"inactionable puffery." Instead, they reserve that charge for

some of their other challenged statements (e.g., " [w]e have

excellent service," or "we have done the things strategically

that needed to be done to make this merger successful").

While the defendants are probably right to call those

statements "puffery," the court need not decide that at the

moment since, again, there is at least one allegedly false

statement which does not fit that description. For the moment,

then, this court denies the defendants' motion to dismiss insofar

as it is based on the inactionable character of their allegedly

false statements, leaving, for a later stage of the case, the

task of separating the wheat of those statements from their

chaff. See Serabian v. Amoskeag Bank Shares,

(1st Cir. 1994) (ruling that, while not all of the plaintiffs'

allegations of securities fraud were actionable, the fact that

some were actionable precluded dismissal of the complaint but

otherwise left discretion in the district court as to how to

winnow the allegations further).

Scienter. Under another of the statutory pleading standards

applicable to claims under § 1 0 (b) or Rule 10b-5, a complaint

must "state with particularity facts giving rise to a strong

9 inference that the defendant acted with the required state of

mind" to sustain the claim. 15 U.S.C. § 78u-4(b) (2) . In

deciding whether a complaint meets this standard,

a court must consider plausible, nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff. The inference that the defendant acted with scienter need not be irrefutable, i.e., of the smoking-gun genre, or even the most plausible of competing inferences . . . . Yet the inference of scienter must be more than merely reasonable or permissible--it must be cogent and compelling, thus strong in light of other explanations. A complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one would draw from the facts alleged.

Tellab, Inc. v. Makor Issues & Rights, Ltd.,

(2007) (quotation marks, citation, and footnote omitted).

"In this circuit, a plaintiff may satisfy the scienter

requirement with a showing of either conscious intent to defraud

or a high degree of recklessness." ACA Fin. Guar. Corp., 512

F.3d at 58 (quotation marks omitted). In moving to dismiss the

complaint, the defendants argue that it fails to support the

requisite "cogent and compelling" inference that they acted with

this culpable state of mind.

Like the defendants' "puffery" argument, their scienter

argument has more to recommend it as to certain of the alleged

misstatements than others--in particular, Ryan's statement that

post-merger service problems played no role in the company's

10 re-pricing of 50 percent of its PBM contracts. As set forth in

the complaint, Ryan made that statement in response to a question

from a market analyst during a January 2009 earnings call.

Picking up on Ryan's comment that CVS Caremark had "repriced a

significant amount of business . . . for all the reasons that you

can imagine," the analyst asked, "what are the things that would

cause you to reprice? Is there a concern about service for the

systems and how can you get people past that . . . ?" Ryan said.

No . . . let me be clear on that because I think you are making the assumption that we repriced because we had inferior service. We repriced because we decided that these key accounts were accounts that we could impact . . . these are accounts that we kind of wanted to lock down. No trade-offs because of our service . . . . So there was no hidden agenda here about giving a lower price because [of] lack of service if that's what you're asking.

Asked point-blank, then, whether "a concern about service"

among the company's PBM customers had caused it to lower its

prices, Ryan unequivocally denied that, and proffered an

alternative explanation that cast no aspersions on any aspect of

the CVS-Caremark integration. If, as the plaintiffs allege, that

statement was indeed untrue--and, again, taking a cue from the

Court of Appeals, this court rules that the plaintiffs have

sufficiently alleged as much--then the statement, by its very

nature, supports a "cogent and compelling" inference that Ryan

was acting either with the intent to deceive or with a high

11 degree of recklessness as to whether he was doing so. As the

Court of Appeals observed, "[f]rom the time the merger was

announced, analysts had guestioned CVS's ability to integrate

with Caremark," Mass. Ret. Sys.,

, so Ryan (who

was running CVS before the merger, in addition to running CVS

Caremark afterwards) had every motive to deny any post-merger

service problems. Furthermore, the defendants have not proffered

any other reason that Ryan might have done so, and none is

apparent to the court. Indeed, the defendants' argument that the

plaintiffs have not adeguately pled scienter does not address

Ryan's denial of service-driven price cuts at all.

Instead, the defendants argue--in some cases, guite

persuasively--that the complaint fails to support a strong

inference of scienter as to other allegedly false statements (as

to the claim of "excellent service," for example, the defendants

point to the fact, trumpeted by Ryan during the January 2009

call, that "we just got the JD Power [and] Associates Health Plan

PBM of the Year [award] for our service"). While, to plead a

securities fraud claim, a plaintiff must "with respect to each

act or omission, state with particularity facts giving rise to a

strong inference that the defendant acted with the reguisite

state of mind," 15 U.S.C. § 78u-4(b)(2) (emphasis added), this

court sees little utility in performing a statement-by-statement

12 analysis of the complaint's scienter allegations at this point.

As just discussed, the plaintiffs have adequately pled at least

one actionable misstatement, and they have adequately pled

scienter as to that misstatement. They have also, as the Court

of Appeals determined, adequately pled loss causation.

Accordingly, the defendants' motion to dismiss3 is denied, with

further narrowing of the plaintiffs' claims to await a later

stage of the litigation.

SO ORDERED.

Josfeph N. Laplante Ur£Lted States District Judge

Dated: December 30, 2013

cc: Barry J. Kusinitz, Esq. David A. Rosenfeld, Esq. Deborah R. Gross, Esq. Robert M. Rothman, Esq. William R. Grimm, Esq. Edmund Polubinski, III, Esq. Lawrence Portnoy, Esq. Mitchell R. Edwards, Esq. Joseph A. Fonti, Esq.

3Document no. 34.

13