City of Brockton Ret. Sys. v. CVS Caremark Corp: Court Finds Adequate Pleadings by Brockton Upon Remand
Upon remand from the First Circuit Court of Appeals, the District Court of Rhode Island in City of Brockton Ret. Sys. v. CVS Caremark Corp., 09-cv-554-JL, 2013 WL 6841927 (D.R.I. Dec. 31, 2013), denied CVS Caremark Corporation’s (“CVS”) motions to dismiss the claims submitted by a class of CVS shareholders (“Plaintiffs”). With all of the judges in the District Court of Rhode Island recused, the matter was set before Judge Joseph N. Laplante of the District Court of New Hampshire.
Plaintiffs asserted a claim under Section 10(b) of the Securities Exchange Act of 1934, alleging that they purchased CVS securities after relying on purportedly fraudulent statements made by CVS following its merger with Caremark Rx, Inc. (“Caremark”) in 2007. According to Plaintiffs, the company misrepresented the success of the integration of the two companies. When the market learned of the turth, share prices allegedly declined by 20%.
Defendants sought dismissal alleging that Plaintiffs had not sufficiently asserted actionable misstatements or omissions or adequately plead scienter.
To establish a claim under Section 10(b), the complaint must specify the statement that was misleading, the reasons why it was misleading, and if relied upon, it must state with particularity facts that would support reliance on such statements. However, Plaintiffs were not required to plead evidence, but “only to put ‘a significant amount of meat . . . on the bones of the complaint.’ ” In order to satisfy the scienter requirement, the complaint must show either “conscious intent to defraud or a high degree of recklessness.” Under corresponding Rule 10b-5 “a complaint must ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind’ to sustain the claim.”
The court found that plaintiffs sufficiently alleged misrepresenations. The court focused on allegations that CVS had denied that it "had lowered prices for some of its PBM customers 'because of a lack of service' ." The Plaintiffs, however, asserted that CVS 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.” Reiterating that Plaintiffs did not have to plead evidence but only to put some "meat . . . on the bones of the complaint," the court found that the failure to allege any specific contract that had been re-priced in response to a perceived lack of service was not "fatal" to the claim.
The court also rejected allegations that the statements alleged to be false constituted “inactionable puffery.” The court agreed that defendants were “probably right” that a number of the alleged misstatements qualifed. Nonetheless, for purposes of the motion, dismissal would not be warranted where at least one statement did not meet the definition. The court declined to find as puffery the statement alleging that the repricing of the prescription benefit manager business was not a result of a “lack of service.”
With respect to scienter, the court noted that CVS’s CEO was directly confronted with a question about whether the price cuts had any connection to concerns about service. In response, according to plaintiffs, the CEO denied that it did and instead stated that the repricing was done on "accounts that we kind of wanted to lock down."
The court found the allegations sufficient to allege scienter.
- Asked point-blank, then, whether “a concern about service” among the company's PBM customers had caused it to lower its prices, [the CEO] 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 the CEO was acting either with the intent to deceive or with a high degree of recklessness as to whether he was doing so.
The court found that Plaintiffs “adequately pled at least one actionable misstatement,” and that scienter had been adequately pled for that statement. The Court of Appeals had also initially found loss causation to be adequately pled. Consequently, CVS’s motion to dismiss was denied.