United States District Court, E.D. Michigan, Southern Division
ROCHE DIAGNOSTICS CORPORATION & ROCHE DIABETES CARE, INC., Plaintiffs,
v.
CHRISTOPHER F. SHAYA, Defendant.
v.
NORTHWOOD, INC., DONNIE F. DICKSTEIN, & KENNETH G. FASSE, Third-Party Defendants.
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. ΒΆΒΆ
10, 24-25.) Shaya further alleges that ...