Roche Diagnostics Corp. v. Shaya

          Elizabeth A. Stafford Magistrate Judge.

         OPINION AND ORDER (1) DENYING DEFENDANT CHRISTOPHER SHAYA'S MOTION FOR JUDGMENT ON THE PLEADINGS (ECF NO. 24) AS TO PLAINTIFF ROCHE'S COMPLAINT (2) GRANTING THIRD-PARTY DEFENDANTS NORTHWOOD, INC.'S, DONNIE F. DICKSTEIN'S, AND KENNETH G. FASSE'S MOTION TO DISMISS THIRD-PARTY PLAINTIFF CHRISTOPHER SHAYA'S COMPLAINT (ECF NO. 25) AND (3) DISMISSING THIRD-PARTY PLAINTIFF CHRISTOPHER SHAYA'S COMPLAINT AGAINST NORTHWOOD, INC., DONNIE F. DICKSTEIN, AND KENNETH G. FASSE (ECF NO. 13) WITH PREJUDICE

          Paul D. Borman United States District Judge.

         I. Introduction

         This case involves an alleged scheme by Defendant Christopher Shaya to use his companies, Olympus Global, LLC (Olympus) and Delta Global, LLC (Delta), to purchase not-for-retail-sale (NFR) diabetes test strips from Third-Party Defendant Northwood, Inc. (Northwood) and resell them in retail markets at a significant markup. (See generally, ECF No. 1, Complaint.) Northwood was able purchase the strips at a low price from the manufacturers, Plaintiffs Roche Diagnostics Corp. and Roche Diabetes Care, Inc. (together, Roche) by misrepresenting to Roche who was purchasing the strips from Northwood, in breach of Northwood's contract with Roche which banned resale of the strips in retail markets. (See generally, id.) The parties are now looking to the courts to sort out the liabilities of the various players involved in the transactions.

         Roche initially sued everyone involved in this scheme in the Southern District of Indiana for breach of contract, fraudulent inducement, fraud, and similar claims. (Id. at PgID 37-38, ¶ 128); Roche Diagnostics Corp. v. Bison's Hosp. Supplies, No. 1:17-cv-00949, 2017 WL 4123050 (S.D. Ind. Sept. 18, 2017). Roche's claims against Olympus, Delta, and Shaya, and against individual officers of Northwood and Binson's Hospital Supplies, Inc. (Binson's), Northwood's parent company, were dismissed without prejudice by the Indiana Federal District Court for lack of personal jurisdiction. Roche, No. 1:17-cv-00949, 2017 WL 4123050, at *6-7, 10.

         Meanwhile, in late 2017, Northwood filed its own suit against Olympus, Delta, Shaya, and Shaya's business partners Jeremiah Mankopf (Olympus) and Daniel Gladys (Delta) in Michigan state court. Northwood, Inc. v. Olympus Global, LLC, 2017-004622, 2019 WL 856573, at *1 (16th Mich. Cir. Ct. Jan. 18, 2019). In this suit, Northwood blamed Shaya, his partners, and his companies in its claims for negligent misrepresentation, fraudulent misrepresentation, fraud in the inducement, innocent misrepresentation, silent fraud, breach of contract, civil conspiracy to defraud, contractual indemnity, common law indemnity, piercing the corporate veil and tortious interference with a contract. See Id. Shaya and Gladys counterclaimed against Northwood for negligence, fraud/misrepresentation, and silent fraud. Id. By Opinion and Order dated September 17, 2019, the Circuit Court for Macomb County granted Northwood's motion for summary disposition of Shaya's and Gladys' counterclaims. (See ECF No. 33, Third-Party Defendants' Motion, Exhibit A, PgID 483-92.) It found that Shaya and Gladys failed to show that Northwood owed them a duty to tell them not to sell in retail markets, failed to show that Northwood made any misrepresentation to them, and failed to show that Northwood had a legal duty to Shaya and Gladys to disclose the limitations of Northwood's contract with Roche. (Id.) Later, a jury rendered a verdict in favor of Shaya, Olympus, and Delta, finding that Shaya, Olympus, and Delta did not defraud Northwood.

         On January 25, 2019, Roche filed this suit against Shaya as well as Kenneth G. Fasse, the President of Northwood and the Executive Vice President and Chief Operating Officer of Binson's, Donnie Dickstein, the Director of Northwood, and James E. Binson I, the Chairman, President and Chief Executive Officer of Binson's, alleging fraud in the inducement, fraud, negligent misrepresentation (against all the defendants except Shaya), unjust enrichment, and tortious interference with a contract (against Shaya alone). (See generally ECF No. 1, Complaint.) The Indiana case has now been settled, and pursuant to that settlement, Roche dismissed its claims against Dickstein, Fasse, and Binson. (See ECF No. 6, Notice of Partial Dismissal, PgID 60.) Thus, the only remaining defendant is Christopher Shaya. His Motion for Judgment on the Pleadings (ECF No. 24) is now before the Court. For the reasons detailed below, the Court denies Defendant Shaya's Motion for Judgment on the Pleadings on all claims.

         Following Roche's Dismissal of Dickstein, Fasse, and Binson, Shaya filed a Third-Party Complaint (ECF No. 12) against Dickstein, Fasse, and Northwood, alleging fraud, silent fraud, and common law indemnification. Their Motion to Dismiss (ECF No. 25) is also before the Court. As described below, the Court grants their motion and dismisses Shaya's Third-Party Complaint with prejudice.

         H. Facts

         A. Facts as alleged in Roche's Complaint

         Roche manufactures blood glucose test strips, which people with diabetes use to monitor their blood sugar. (ECF No. 1, Complaint, PgID 8, ¶ 24.) Roche sells two kinds of strips, not-for-retail sale (NFR) strips and retail strips. (Id. at ¶ 25.) The retail strips are sold to distributors who sell the strips to pharmacies, who then sell the strips to people without insurance and to people whose insurance covers the strips as a pharmacy benefit (like a prescription drug). (Id. at ¶ 26.) Roche sells NFR strips, in different packaging, to mail-order Durable Medical Equipment (DME) providers, who provide the strips directly to patients whose insurance covers the strips as a durable-medical-equipment benefit (like a wheelchair). (Id. at PgID 8-9, ¶¶ 27-28.)

         The list prices for the retail and NFR strips are very different. (Id. at PgID 9, ¶ 30.) In 2014 and 2015 Roche sold its retail strips for $65-71 per 50-strip box and its NFR strips for $13 or less per 50-strip box. (Id. at 9-10, ¶ 30.) One reason why the price for the retail strips was so much higher than the price for the NFR strips is because Roche paid large rebates to pharmacy-benefit insurers for sales of the retail strips, but did not pay rebates on the NFR strips. (Id. at PgID 10, ¶ 32.) However, after the rebates, Roche still made more money on its sales of retail strips than it did on its sales of NFR strips. (Id.)

         In order to maintain profitable sales of both kinds of strips, Roche uses strict clauses in its contracts with NFR strip distributors to prohibit those distributors from re-selling the NFR strips to retail pharmacies at a significantly higher price. (Id. at PgID 10-11, ¶¶ 33-35.) It is also well known in the medical supply industry, according to Roche, that DME products like Roche's NFR strips may only be sold through DME channels, and therefore may not be sold to retail distributors or retail pharmacies. (Id. at PgID 12, ¶ 38.)

         Binson's and its subsidiary, Northwood, were distributors of Roche's NFR strips under a contract signed in 2011. (Id. at ¶ 36.) The contract between Binson's, Northwood, and Roche required Binson's and Northwood to limit their sales of Roche's NFR strips to patients with DME insurance or to one of Roche's pre-approved DME providers, which were specifically enumerated in the contract. (Id. at ¶ 37.) The contract also included a rebate mechanism that allowed Roche to verify that the NFR strips it sold to Binson's and Northwood were being distributed to DME beneficiaries. (Id. at PgID 13, ¶ 41.) Roche would sell Binson's and Northwood the NFR strips at a higher price, then Binson's and Northwood would submit “sales tracings” that included data on each individual sale of the NFR strips and thereby confirmed that all the NFR strips were going to DME beneficiaries. (Id.) Once Roche verified the data in the sales tracings, it would provide a rebate to Binson's and Northwood. (Id.) From February 10, 2011 until July 21, 2014, Roche, Binson's and Northwood operated under this contract, with Roche selling approximately 5, 000-10, 000 boxes of NFR strips to Binson's and Northwood per month and Binson's and Northwood reselling those strips to DME beneficiaries. (Id. at PgID 12-13, 18, ¶¶ 36, 42, 60.)

         On July 21, 2014, Roche executed an amendment to its contract with Binson's and Northwood. (Id. at PgID 18, ¶ 60.) The amendment allowed Northwood to purchase NFR strips at the flat price of $10.67 per box without submitting sales tracings-eliminating the rebate mechanism. (Id. at PgID 19, ¶ 61.) The restrictions on selling the NFR strips to DME beneficiaries and enumerated DME providers remained. (Id.)

         Roche alleges that it agreed to this contract amendment because Fasse and Dickstein, the President and Director of Northwood, respectively, told Roche that Northwood had access to a large customer base of DME beneficiaries to whom Northwood could sell Roche NFR strips if Northwood no longer had to submit sales tracings. (Id. at PgID 6, 15, ¶¶ 16-17, 49.) Fasse and Dickstein first made this claim to Roche in a conference call in June 24, 2014, but they repeated it several times. (Id. at PgID 15-16, ¶¶ 49-50.) They said that Northwood had access to the new customers through commercial DME insurance companies. (Id. at PgID 16, ¶ 50.) When Roche asked Northwood for more information on these contracts and asked what insurance plans the companies work with, Dickstein emailed a list of insurers saying “[b]elow is a list of payers we discussed for the addendum. Please let me know when you think we can have approval to move forward.” (Id. at PgID 16-17, ¶¶ 51, 54.) Two days later, Roche asked Dickstein to confirm that Northwood's new contracts with commercial DME companies required Northwood to ship the NFR strips directly to patients and not to other DMEs, and Dickstein replied, “confirmed.” (Id. at PgID 18, ¶¶ 58-59.) Based on the information provided about Northwood's claimed contracts and Dickstein's confirmation, Roche agreed to amend the contract and eliminate the rebate mechanism. (Id. at PgID 18, ¶ 60.)

         However, Northwood did not have access to a new, large customer base. (Id. at PgID 15, ¶ 15.) It was seeking to amend its contract with Roche because of a “Distributor Agreement” it entered, on May 2, 2014, with Olympus, a company owned by Defendant Shaya and his former business partner, Jeremiah Mankopf. (Id. at PgID 14, ¶ 43.) In the agreement, Northwood agreed to sell Roche strips to Olympus. (Id.) The agreement did not require Olympus to sell the strips to DME beneficiaries, and, Roche contends, Shaya had informed Fasse, Dickstein, and Binson, the Chairman, President and Chief Executive Officer of Binson's, that Shaya intended to resell the strips to Medical Supply Solutions, Inc. (MSSI), which would then resell the strips in the “gray market, ” not to DME beneficiaries. (Id. at PgID 7, 14, ¶¶ 18, 44.) Thus, in order for Northwood to sell NFR strips to Olympus, Northwood needed to escape its contractual obligation to submit sales tracings to Roche. (Id. at PgID 14-15, ¶ 46.) That “need” begat the story Northwood told Roche-that it had access to a new, large customer base through commercial DME insurance providers. (Id. at PgID 15-16, ¶¶ 47-50.)

         In its Complaint, Roche says that Shaya was aware that Northwood was restricted by its contract with Roche and that Shaya actively participated in telling the story that convinced Roche to modify its contract with Binson's and Northwood. (See Id. at PgID 15-19, ¶¶ 47-60.) Specifically, Roche alleges that Dickstein emailed Shaya on May 16, 2014 saying that he was “still trying to figure out how to make this work within the framework of [Northwood's] manufacturing partners [sic] contracts, ” and asking Shaya to provide him with “some language” for the Roche contract that would allow Northwood to sell strips without sales tracings. (Id. at PgID 15, ¶ 14.) Roche further alleges that, when the Roche representative requested information on Northwood's contracts from Dickstein, Dickstein emailed Shaya asking him to send Dickstein a list of “the health plans [Northwood] will be submitting on the tracings reports.” (Id. at PgID 16, ¶¶ 51- 52.) In response, on July 7, 2014, Shaya sent Dickstein a list of health plans with the caveat, “I don't know if they are a provider of diabetes for all of them . . . I would not send the entire list without reviewing as you don't want to send a non diabetes plan.” (Id. at PgID 17, ¶ 53.) Shaya later testified that he knew the list was “something to give to Roche to help in [Northwood's] negotiations with Roche” which he wanted “to go well because [he] wanted to be able to buy test strips at a low price and mark them up and sell them to MSSI.” (Id. at PgID 18, ¶ 57.) Dickstein edited the list Shaya sent and then forwarded it to Roche. (Id. at PgID 17, ¶ 54.) Two weeks later, on July 21, 2014, Roche signed the contract amendment. (Id. at PgID 18, ¶ 60.)

         Once the modification eliminated the rebate and sales tracings mechanism, Northwood began increasing the volume of NFR strips that it was ordering from Roche and reselling to Olympus. (Id. at PgID 20-21, ¶¶ 65-68.) On July 31, 2014, Fasse emailed Roche and asked if Northwood's credit line could be doubled because Northwood had recently “determined that [its] forecast was understated and [its] actual monthly volume will be in the range of 40, 000 boxes.” (Id. at PgID 20, ¶ 65.) Roche complied. (Id. at PgID 21, ¶ 67.) Northwood steadily increased its orders-by December 9, 2014 Northwood's sales projections had nearly doubled since the July 31 email. (Id. at PgID 21, 23, ¶¶ 68, 75-76.)

         After one of Northwood's requests for increased credit, around December 2014, Roche asked Northwood to identify the source of its increased purchases and to identify the insurers covering the patients to whom Northwood was selling. (Id. at PgID 21, ¶ 68.) Dickstein asked Shaya for help compiling a list of insurers, and Shaya complied, knowing, according to Roche, that Northwood would give the list to Roche “under false pretenses in order to induce Roche to continue selling NFR test strips to Northwood.” (Id. at PgID 21, ¶ 69.) After Shaya provided Dickstein with the list, Dickstein asked Shaya “which of these plans are pharmacy benefits for diabetic supplies” because he did not want “to submit any that are pharmacy benefits because that would open up a whole bunch of questions.” (Id. at PgID 22, ¶ 71.) Shaya did not tell Dickstein or any other Northwood officer that the strips Olympus was purchasing from Northwood were being sold to patients of the insurers on the list he provided because he “knew that this list of insurers had no connection to the test strip business he was doing with the Binson's Defendants [Fasse, Dickstein, Binson, and Northwood].” (Id. at PgID 21-22, ¶ 70.)

         Dickstein sent Roche an edited version of the list provided by Shaya and told Roche that the increased volume was coming from sales to customers who had switched from a competitor's test strips. (Id. at PgID 22-23, ¶ 72-73.) He also sent a purchase forecast created by Fasse that cited an “increase in the payer portfolio” as the reason for the increasing purchases. (Id. at PgID 23, 75-76.) Roche then increased Northwood's credit line and continued selling it NFR strips. (Id. at PgID 23, ¶ 74.) The increased volume was going to Shaya's company, Olympus, which was selling the NFR strips in retail channels. (Id. at PgID 19, ¶ 62.)

         Roche alleges that Dickstein and Shaya “communicated extensively about how to structure their purchases to avoid suspicion” throughout 2014 and 2015. (Id. at PgID 24, 79.) In support of this allegation, Roche cites the following communications: on June 12, 2015, Shaya told Dickstein to “[h]old off on Monday order” and to “split the order in half” to avoid a “huge spike” in orders; on another day Shaya asked Dickstein to hold part of an order to avoid “a huge flag” by failing “to stay within consistent numbers;” and on a third day, Shaya told Dickstein that he had not asked them to purchase 30, 000-40, 000 boxes per week from Roche because he did not “want to raise flags.” (Id. at PgID 24, ¶¶ 80-81.) When asked about these communications, Shaya explained that he did not “want to alert Roche that the sales are not being made directly to patients.” (Id. at ¶ 81.)

         At some point, Shaya dissolved Olympus and created a different company, Delta, with new business partner Daniel Gladys. (Id. at PgID 35, ¶ 120 n. 3.) Delta took over purchasing strips from Northwood. (Id.) Shaya also created another company, Alpha XE LLC, to make the sales of strips to MSSI. (Id.) But, whatever the structure of Shaya's companies, he used them to purchase NFR strips from Northwood and resell them in retail channels. (Id.)

         Northwood and Shaya succeeded in avoiding additional suspicion from Northwood until the summer of 2015. (Id. at PgID 25, 35, ¶¶ 82-83, 120 n. 3.) In June and July of 2015, Roche asked for more information about to whom Northwood was selling its NFR strips. (Id. at PgID 25, ¶¶ 83-84.) Dickstein responded to the June inquiry by telling Roche it would have to wait a few weeks. (Id. at ¶ 83.) At that point, Shaya texted Dickstein to ask if he was nervous that Roche would catch them.” (Id.) Northwood responded to the July inquiry with silence. (Id. at PgID 26, ¶ 85.) In August, Roche again asked Northwood to whom it was selling NFR strips and Dickstein responded to by saying that it was a combination of converting existing patients from competitors' brands and adding new patients. (Id.) No. one at Northwood mentioned that the strips were being sold to Olympus or Delta. (Id.)

         On August 31, 2015, a Roche representative asked Northwood for specific sales tracings. (Id. at ¶ 86.) Fasse responded, saying that Northwood did not have systems for “extracting patient details.” (Id.) On the same day, Dickstein set up a meeting with Shaya to discuss responding to Roche's increasing requests for information. (Id. at PgID 27, ¶ 91.) Dickstein asked Shaya if Shaya's business contacts could give them “a massive list of their diabetic patients” so that Northwood could “manipulate the data” and have sales tracings to send to Roche. (Id. at ¶ 92.) Shaya could not provide this data, however, so Northwood stuck with its strategy of delay. (Id. at PgID 27-28, ¶¶ 92-93.)

         On September 11, 2015, after telling a Roche representative that Northwood was working on utilization reports for Roche and that the reports would be complete in a few weeks, Dickstein texted Shaya “let's try and get two more big orders in before next Friday.” (Id. at PgID 28, ¶¶ 93-94.) A week later Dickstein told Shaya that he wanted to maximize orders for September in case Roche decided to “freeze” them. (Id. at ¶ 94.)

         Finally, on September 25, 2015, Roche put a hold on Northwood's orders due to “major issues we [Roche] have become aware of around contract compliance.” (Id. at ¶ 95.) Fasse forwarded the email to Dickstein and said “[w]ell, there it is.” (Id.) Fasse and Dickstein continued to tell Roche that Northwood had been selling to DME providers, not to Olympus and Delta. (Id. at PgID 28-29, ¶¶ 96-97.) In fact, Roche did not learn about Shaya, Olympus, Delta, and MSSI until August 2016. (Id. at PgID 31, ¶ 103.)

         In October of 2015, Northwood tried to get Shaya to sign a backdated contract that restricted Delta to selling the NFR strips to DME providers, but Shaya refused, saying that it “stinks of a cover-up.” (Id. at PgID 29-30, ¶¶ 98-101.) The reason that Northwood wanted Shaya to sign the contract, according to a text from Dickstein to Shaya, was to make Northwood feel that it had “an argument for . . . being compliant to the contract.” (Id. at PgID 30, ¶ 101.) Shaya continued to refuse to sign, but he passed the contract along to MSSI, which returned it to Northwood with an illegible signature. (Id. at PgID 31, ¶ 102.)

         Roche claims to have lost $84 million in profits and millions more in unwarranted rebates on NFR strips sold in retail markets as a result of this scheme. (Id. at PgID 37, ¶¶ 127-28.) Roche also alleges that Shaya made $8 million in personal profits. (Id. at PgID 27, ¶ 90.)

         B. Facts as alleged in Shaya's Third-Party Complaint

         In 2014, Shaya, Fasse, and Dickstein began discussing Northwood purchasing test strips from Roche for resale to Olympus. (ECF No. 13, Third-Party Complaint, PgID 110, ¶ 7.) Dickstein and Fasse told Shaya that Northwood would try to amend the contract between Binson's and Roche to allow Northwood to buy strips directly and then resell them to Olympus. (Id. at PgID 111, ¶ 8.) During these discussions, Fasse and Dickstein were aware that Olympus was not a DME provider. (Id. at PgID 112, ¶ 13.) Based on these negotiations, they executed a contract between Olympus and Northwood on May 2, 2014. (Id. at PgID 111, ¶ 9.)

         On June 30, 2014, Dickstein emailed Shaya and said, in part, “we should be good to go on our end.” (Id. at PgID 114, ¶ 24.) Later, on July 10, 2014, Dickstein texted Shaya, and said, in part, “[w]e got approval and are good to move forward.” (Id. at ¶ 25.) Shaya alleges that these communications from Dickstein to Shaya indicated that Northwood had received approval from Roche to sell strips to Olympus, and had amended its agreement with Roche to reflect that approval. (Id. at PgID 111, 114. ¶¶ 10, 24-25.) Shaya further alleges that ...