National Ass'n of Chain Drug Stores v. New England Carpenters Health Benefits Fund

United States Court of Appeals
For the First Circuit

No. 09-1577

NATIONAL ASSOCIATION OF CHAIN DRUG STORES,

Amicus Curiae-Appellant,

FOOD MARKETING INSTITUTE,

Interested Party-Appellant,

v.

NEW ENGLAND CARPENTERS HEALTH BENEFITS FUND, PIRELLI ARMSTRONG
RETIREE MEDICAL BENEFITS TRUST, TEAMSTERS HEALTH & WELFARE FUND
OF PHILADELPHIA AND VICINITY, PHILADELPHIA FEDERATION OF TEACHERS
HEALTH & WELFARE FUND, DISTRICT COUNCIL 37 AFSCME HEALTH &
SECURITY PLAN, JUNE SWAN, BERNARD GORTER, SHELLY CAMPBELL,
CONSTANCE JORDAN,

Plaintiffs, Appellees.
__________

FIRST DATABANK, INC., a Missouri Corporation,
MEDI-SPAN, a division of Wolters Kluwer Health, Inc.,

Defendants, Appellees.
____________________

No. 09-1578

DEVILLE PHARMACIES, INC.; LONG TERM CARE PHARMACY ALLIANCE;
AMERICAN SOCIETY OF CONSULTANT PHARMACISTS,

Interested Parties-Appellants,

v.

NEW ENGLAND CARPENTERS HEALTH BENEFITS FUND, PIRELLI ARMSTRONG
RETIREE MEDICAL BENEFITS TRUST, TEAMSTERS HEALTH & WELFARE FUND
OF PHILADELPHIA AND VICINITY, PHILADELPHIA FEDERATION OF TEACHERS
HEALTH & WELFARE FUND, DISTRICT COUNCIL 37 AFSCME HEALTH &
SECURITY PLAN, JUNE SWAN, BERNARD GORTER, SHELLY CAMPBELL,
CONSTANCE JORDAN,
 Plaintiffs, Appellees.
__________

FIRST DATABANK, INC., a Missouri Corporation,
MEDI-SPAN, a division of Wolters Kluwer Health, Inc.,

Defendants, Appellees.
____________________

No. 09-1579

NATIONAL COMMUNITY PHARMACISTS ASSOCIATION,

Interested Party-Appellant,

v.

NEW ENGLAND CARPENTERS HEALTH BENEFITS FUND, PIRELLI ARMSTRONG
RETIREE MEDICAL BENEFITS TRUST, TEAMSTERS HEALTH & WELFARE FUND
OF PHILADELPHIA AND VICINITY, PHILADELPHIA FEDERATION OF TEACHERS
HEALTH & WELFARE FUND, DISTRICT COUNCIL 37 AFSCME HEALTH &
SECURITY PLAN, JUNE SWAN, BERNARD GORTER, SHELLY CAMPBELL,
CONSTANCE JORDAN,

Plaintiffs, Appellees.
__________

FIRST DATABANK, INC., a Missouri Corporation,
MEDI-SPAN, a division of Wolters Kluwer Health, Inc.,

Defendants, Appellees.
____________________

No. 09-1580

PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION,

Putative Intervenor-Amicus Curiae-Appellant,

v.

NEW ENGLAND CARPENTERS HEALTH BENEFITS FUND, PIRELLI ARMSTRONG
RETIREE MEDICAL BENEFITS TRUST, TEAMSTERS HEALTH & WELFARE FUND OF
PHILADELPHIA AND VICINITY, PHILADELPHIA FEDERATION OF TEACHERS
HEALTH & WELFARE FUND, DISTRICT COUNCIL 37 AFSCME HEALTH & SECURITY
PLAN, JUNE SWAN, BERNARD GORTER, SHELLY CAMPBELL, CONSTANCE JORDAN,

Plaintiffs, Appellees.
__________
 FIRST DATABANK, INC., a Missouri Corporation,
MEDI-SPAN, a division of Wolters Kluwer Health, Inc.,

Defendants, Appellees.
____________________

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Patti B. Saris, U.S. District Judge]

Before
Boudin, Selya & Dyk,*
Circuit Judges.

Daniel S. Savrin with whom Francesca Lucia Miceli, Angela J.
Neal and Bingham McCutchen LLP were on brief for amicus curiae-
appellant National Association of Chain Drug Stores, interested
party-appellant Food Marketing Institute, and provisional
intervenors Eaton Apothecary, Louis and Clark Drug, Inc. and
Thrifty White Drug.
Daniel S. Savrin with whom Francesca Lucia Miceli, Angela J.
Neal, Bingham McCutchen LLP, David J. Farber, Edward D. Gehres, III
and Patton Boggs LLP were on brief for interested party-appellant
DeVille Pharmacies and appellants-provisional intervenors Long Term
Care Pharmacy Alliance and American Society of Consultant
Pharmacists.
David S. Savrin for interested party-appellant National
Community Pharmacists Association. David A. Balto and Law Offices
of David A. Balto on brief for interested party-appellant National
Community Pharmacists Association.
David S. Savrin for putative intervenor-amicus curiae-
appellant Pharmaceutical Care Management Association. Catherine R.
Connors, John J. Aromando, Katherine I. Rand and Pierce Atwood LLP
on brief for putative intervenor-amicus curiae-appellant
Pharmaceutical Care Management Association.
Sheila L. Birnbaum with whom Thomas E. Fox, Matthew J. Matule,
Nicholas I. Leitzes and Skadden, Arps, Slate, Meagher & Flom LLP
were on brief for appellee First DataBank, Inc.
Thomas M. Sobol with whom Steve W. Berman, Sean R. Matt,
Nicholas Styant-Browne, Barbara A. Mahoney, Hagens Berman Sobol
Shapiro LLP, Kenneth A. Wexler Jennifer Fountain Connolly, Wexler
Wallace LLP, Jeffrey Kodroff, John Macoretta, Spector, Roseman,
Kodroff & Willis, PC, Marc H. Edelson, Edelson & Associates, George
E. Barrett, Edmund L. Carey, Jr. and Barrett, Johnston & Parsley

*
Of the Federal Circuit, sitting by designation
were on brief for appellee New England Carpenters Health Benefits
Fund, et al.
Karl R. Barnickol with whom Katten Muchin Rosenman LLP was on
brief for appellee Medi-Span, a division of Wolters Kluwer Health,
Inc.

September 3, 2009
 BOUDIN, Circuit Judge. On these appeals, certain

pharmacies, several organizations representing pharmacies and an

organization representing pharmacy benefit managers ("PBMs")

challenge settlements in two class actions. The actions were

brought by purchasers of pharmaceutical drugs against publishers of

drug pricing data, as well as a wholesaler not party to these

appeals. At issue are both the validity of the settlements

approved by the district court and the right of the would-be

appellants themselves to contest it on appeal.

In the district court, class actions on behalf of drug

purchasers were brought against the two publishers, First DataBank

and Medi-Span, as well as McKesson--a major drug wholesaler that

also owns pharmacy-related businesses. The class was comprised of

third-party payors ("TPPs")--such as health insurers like Blue

Cross--who pay for all or a portion of the cost of drugs used by

their beneficiaries; also included were consumers whose "co-

payments" were calculated as a percentage of the price of the

drugs, and consumers who were un-insured and paid for drugs out-of-

pocket.

Some PBMs may have been included in the plaintiff class.

TPPs often contract with PBMs to handle contracting with

pharmacies, monitoring and related administrative tasks needed to

have the pharmacies supply TPP beneficiaries; depending on its

agreement, the PBM may act as an agent for the TPP or on its own

-5-
behalf. The class in this case excluded PBMs except where the PBM

was the TPP's fiduciary or bore the insurance risk of the TPP's

drug benefit. However, in this case PBM interests are in many

instances aligned with the pharmacies in opposition to a principal

aspect of the settlements. See note 5, below.

The case is one about drug pricing and some background as

to the setting is required.1 The drugs in question are ordinarily

sold by manufacturers to wholesalers who resell them to pharmacies,

who then dispense them to consumers. Where the consumer is

insured, customarily the TPP or a PBM reimburses the pharmacy for

the drug cost and for a dispensing fee pursuant to a contract with

the pharmacy, less any required co-payment made by the consumer

directly to the pharmacy.

Drug manufacturers typically sell to drug wholesalers at

a list price--called in the industry the "wholesale acquisition

cost" ("WAC")--although discounts may be provided to the wholesaler

(e.g., for volume sales). Wholesalers add a mark-up in selling the

drugs to retail pharmacies and other purchasers like hospitals.

Pharmacies then add a mark-up of their own when they sell the drugs

to consumers, some of whom are insured as to their drug purchases

and others not.

1
For history and detail, see In re Pharmaceutical Industry
Average Wholesale Price Litigation, 491 F. Supp. 2d 20, 32-33 (D.
Mass. 2007); In re Pharmaceutical Industry Average Wholesale Price
Litigation, 230 F.R.D. 61, 67-69 (D. Mass. 2005).

-6-
 For drug purchases that are covered by health insurance,

the insurer pays for the drugs, apart from any co-payment borne by

the consumer; and the consumer is charged only the co-payment. The

insurer or its agent typically contracts with the pharmacy to

reimburse the latter for the drugs it supplies to the beneficiary

based on a discount (which will vary) from a notional benchmark

price called the "average wholesale price" ("AWP"). The AWP figure

is usually derived by applying a multiplier to the WAC for the

drug, and publishers of AWP lists normally obtained their AWP

figures from manufacturers or wholesalers. Historically, AWPs were

derived by applying different mark-ups to different drugs, the most

common multiplier being 1.2 or 1.25--percentage mark-ups of 20 and

25 percent, respectively.2

Contracts between pharmacies and a TPP or PBM typically

incorporate AWP prices by reference. Because the TPP or PBM

normally contracts to reimburse pharmacies at a discount from AWP

figures, the AWP supplied by a publisher for a drug is likely to be

higher than the reimbursement paid by any TPP or PBM; but, given

the pharmacy-TPP (or pharmacy-PBM) contract incorporating the AWP

as the starting point, an increase in the published AWP means that

the TPPs will pay more and the pharmacy will receive more. If the

2
Prices charged to un-insured consumers may also be affected
by AWP figures. This could occur where pharmacies use the AWP
figures in setting prices for cash customers, but there is some
disagreement in the record as to how and when un-insured purchases
are affected by AWP figures.

-7-
consumer co-payment is a percentage of the drug price, the consumer

also pays more. And, to the extent that the pharmacy uses the AWP

to set prices for un-insured consumers (see note 2, above), those

customers too pay a higher price if the AWP is artificially

inflated.

The complaints in this case rest on the premise that

McKesson agreed wrongfully with First DataBank to inflate the AWP

on over 1,400 drug products from and after August 2001.3 The

method used was to inflate the AWP published by First DataBank by

using a mark-up of 1.25 over WAC instead of the 1.2 figure that

historically had been used for those products. This, in turn,

generated higher revenues for pharmacies and higher costs for TPPs

and many consumers. This claim, whose merits are not central to

this appeal, is more fully described elsewhere. New England

Carpenters Health Benefits Fund v. First DataBank, Inc., 244 F.R.D.

79 (D. Mass. 2007).

The complaint against First DataBank and McKesson was

filed on June 2, 2005, and charged a violation of the Racketeer

Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962

(2000). Claims were made on behalf of TPPs, possibly some PBMs,

consumers whose co-payments were a percentage of a drug price, and

3
AWP lists provide separate figures for each National Drug
Code ("NDC") product, so the same brand of drug will often have
different AWPs based on the dosing and package size. Thus,
although over 1,400 drug products were involved in the scheme, it
affected only about 400 distinct brands.

-8-
un-insured consumers who were charged prices based on AWP figures.

How long the harm has continued and how much it has varied over

time are less easily determined for reasons that will appear.

In October 2006, a proposed settlement embracing the

class claims against First DataBank--but not McKesson--was agreed

to by the parties.4 The central provision was that First DataBank

agreed to "rollback" its published AWP figures for all drug

products (over 8,000 codes) with a mark-up higher than 1.2 down to

a 1.2 mark-up. Other provisions included an end to First

DataBank's publishing of AWP within two years, payments of some

fees and expenses by the company, and the creation of a data room

containing documents for use in other law suits.

The district court granted preliminary approval on

November 22, 2006; after amendments were made on May 29, 2007, the

court again granted preliminary approval on June 6, 2007. On May

25, 2007, a class action suit was filed against Medi-Span for its

published AWP list, which was based on First DataBank's figures,

and the parties proposed a settlement the same day. Although the

charge was negligence rather than fraud, the settlement was similar

to the First DataBank settlement. The district court preliminarily

approved the Medi-Span settlement on August 20, 2007.

4
McKesson later entered into a settlement for $350 million,
which the district court has now approved, but its approval is not
a subject of the present appeals before us.

-9-
 The proposed settlements prompted objections from most of

the challengers now appealing and a few others. The principal

objections came from the pharmacy interests, concerned that the

rollback would reduce--they said unfairly--the payments to them

made by TPPs and PBMs. Three entities--DeVille Pharmacies and two

associations representing pharmacies (the Long-Term Care Pharmacy

Alliance ("LTCPA") and the American Society of Consultant

Pharmacists ("ASCP"))--moved to intervene; other entities wrote

letters to the court and filed comments in opposition.5

The district court held a fairness hearing on the two

settlements on January 22, 2008. Although the hearing was oral,

evidence including expert reports was now on file from supporters

and opponents of the settlements. After the hearing, the district

court rejected the proposed settlements, citing a series of

problems. It also rejected as untimely the motions of DeVille

Pharmacies, LTCPA and ASCP to intervene, but the objections by the

pharmacy interests were nevertheless considered by the court during

the hearing.

5
Some of the opposition to the rollback, in the district court
and here, comes from PBM interests. Although one might expect
their interests to be aligned with those of TPPs, many PBMs act not
as agents but on their own behalf, contracting with both TPPs and
pharmacies and compensating themselves with a spread between what
they get from the former and a lesser amount they pay to the
latter. Given the terms of the contracts, a reduction in the AWP
can reduce the net revenues of such PBMs and impose renegotiation
costs. Some PBMs also own their own mail-order or retail
pharmacies.

-10-
 The settling parties filed an amended settlement relating

to First DataBank on May 29, 2008, and an amended settlement

relating to Medi-Span on July 15, 2008. The centerpiece of these

settlements remained the same rollback of AWP earlier proposed, but

certain changes were made to address issues raised by the district

court,6 which thereafter preliminarily approved the new

settlements. Many of the objectors renewed their objections.

The district court then held two more hearings, and

issued a decision on March 17, 2009, New England Carpenters Health

Benefits Fund v. First DataBank, Inc., 602 F. Supp. 2d 277 (D.

Mass. 2009), approving the settlements. A final order and judgment

on March 30, 2009, certified the class and approved the

settlements, but delayed implementation of the rollback until

September 26, 2009. Although the judgment did not dispose of the

claims against McKesson, the district court certified the judgment

as final as to First DataBank and Medi-Span, see Fed. R. Civ. P.

54(b), allowing immediate appeal of these settlements.

Various opponents of the settlements--representing

pharmacy interests and PBMs--filed appeals that were consolidated

for argument, and the case was expedited because of the approach of

6
Among other changes, the number of drug products covered was
reduced to the around 1,400 for which fraudulent AWP increases had
been specifically alleged, the requirement to end publishing of AWP
data after two years was dropped, and First DataBank and Medi-Span
agreed to contribute to a settlement fund--ultimately, First
DataBank agree to contribute $2.1 million and Medi-Span $600,000.

-11-
the rollback date. First DataBank filed a motion to dismiss the

appeals, which is pending before us. A number of opponents filed

motions, also still pending before us, to intervene in this court.

The district court denied a stay pending appeal, and motions to

stay in this court were filed but taken under advisement and are

disposed of in this decision.

The appeals pivot around three issues: who among the

parties seeking to do so, if any, can appear as an appellant in

this court; whether the judgment operates against non-party

pharmacies so as to violate their due process rights or offend Rule

19, Fed. R. Civ. P. 19, which governs necessary parties; and

whether the district court permissibly found that the settlements

were "fair, reasonable, and adequate" under Rule 23, Fed. R. Civ.

P. 23(e)(2).

Appellant status. That a proper appellant be present is

a threshold condition of appellate review and we begin with that

issue, sorting the would-be appellants into three groups and

addressing each in turn. First, three entities who objected to the

settlement in the district court assert status as members of the

class: two, the National Association of Chain Drug Stores ("NACDS")

and the Food Marketing Institute ("FMI"), claim that they are

themselves TPPs; the last, DeVille Pharmacies, asserts that it is

a class member because it purchased drugs at AWP-based prices

-12-
during the class period. The appellees do not dispute that these

three are within the plaintiff class definition.

Class members, unless they opt out, are legally bound by

a settlement and so have the easiest claim to status as appellants

even though not named as "representative parties" to conduct the

case on behalf of unnamed class members. Noting the binding effect

of the judgment, Devlin v. Scardelletti, 536 U.S. 1, 10 (2002),

held that "nonnamed class members . . . who have objected in a

timely manner to approval of the settlement at the fairness hearing

have the power to bring an appeal without first intervening." Id.

at 14. Thus, a TPP who thought the settlement provided inadequate

compensation could readily appeal.

Appellees do not challenge Devlin's general rule but

argue that these three objectors primarily attack the rollback not

because compensation for TPPs or other purchasers is inadequate but

because it adversely affects the pharmacies' interest in keeping up

their prices. Put more strongly, the objectors' interests may be

to oppose a settlement that serves the interests of TPPs and

consumers as a whole but harms objectors who could gain from the

settlement as TPPs but lose even more as pharmacies whose prices

would fall. This objection raises an unusual set of issues

involving the concept of party status, the scope of Devlin and the

practical conduct of appellate cases.

-13-
 Some precedent supports denying appellate status to one

who purports to represent another entity or class but whose

interests are not aligned or are in opposition.7 But a class

member other than a named plaintiff is not a representative; that

member is individually bound by a class judgment and is free to

pursue his own interest on appeal. Class members even in the same

business may be unalike in their interests. Thus, a TPP that had

no pharmacy stake might rationally oppose a settlement (e.g., as

not rich enough in damages for the TPP) even though risk-averse TPP

class members supported it, were right to do so, and were more

numerous.

So the real issue is not whether such an atypical member

is entitled to appeal but whether--in order to do so--it must first

separately intervene in the district court (or in the appeals

court). With rare exceptions, a non-party is made to intervene in

order to appeal. But a class member is already entitled to appeal

under Devlin, unless that case is to be restricted to class members

who are also capable of representing class interests. Devlin could

be so read since it noted that the would-be appellant's interests

in that case were "within the zone of interests of the requirement"

that the settlement be fair to all class members. 536 U.S. at 7.

7
Derivative actions brought by shareholders in the
corporation's name are the best example. See, e.g., Zarowitz v.
BankAmerica Corp., 866 F.2d 1164, 1166 (9th Cir. 1989) (per
curiam); Darrow v. Southdown, Inc., 574 F.2d 1333, 1338 (5th Cir.),
cert. denied, 439 U.S. 984 (1978).

-14-
 But Devlin did not decide that an atypical class member

had to intervene in order to pursue an appeal, and the quoted

language was used in discussing not party status but the separate

issue of prudential standing, which is not a concern here. 536

U.S. at 7. Nor is it clear what useful would be added in this case

by requiring intervention when the atypical class member has

already objected to the settlement. At the very least, such a

condition would require a further inquiry for each Devlin appeal

into the class member's mix of interests--an inquiry solely to

decide whether intervention was required to permit an appeal.

Appellees also argue that Devlin does not apply here

because appellants had an opportunity to opt out of the settlement

class; by contrast, Devlin involved a Rule 23(b)(1) mandatory class

action with no opt-out rights. The present class was in fact

certified both as a mandatory class and one permitting opt-out

rights. In any event, the weight of authority holds that Devlin

applies to all class actions.8 Devlin, after all, is about party

status and one who could cease to be a party is still a party until

opting out, which the three entities in question have not done.

Other arguments against appellant status were made but require no

8
See Fidel v. Farley, 534 F.3d 508, 512-13 (6th Cir. 2008);
Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566, 572-73 (9th
Cir.), cert denied, 543 U.S. 818 (2004); In re Integra Realty Res.,
Inc., 354 F.3d 1246, 1257 (10th Cir. 2004). But cf. In re Gen. Am.
Life Ins. Co. Sales Practices Litig., 302 F.3d 799, 800 (8th Cir.
2002) (saying in dicta that Devlin might be limited to mandatory
class actions).

-15-
separate discussion. We conclude that objecting class members have

the right to appeal whether their interests are typical or not.

A second set of would-be appellants--ASCP and LTCPA--are

not class members but moved to intervene in the district court.

They took some months after learning of the proposed settlement in

deciding whether to intervene and the district court denied their

motions to intervene as untimely. Because prejudice from the delay

is not apparent--the same arguments were before the court in the

comments they submitted--the refusal to allow intervention might be

debatable even though district courts enjoy much latitude on

timeliness decisions.

However, these would-be appellants, although entitled to

appeal the denials of intervention at once under the collateral

order doctrine, Credit Francais Int'l., S.A. v. Bio-Vita, Ltd., 78

F.3d 698, 703 (1st Cir. 1996), did not do so and appellees say that

it is now too late. Ordinarily, a final judgment brings up all

intermediate rulings, but interlocutory appeals of immediately

appealable orders must be made within 30 days. Fed. R. App. P.

4(a)(1). As a matter of logic, this might not preclude deferring

the appeal until the final judgment but more than one precedent

leans against this option when the would-be appellant is not

otherwise a party, albeit without detailed consideration.9

9
Credit Francais, 78 F.3d at 703-04; B.H. by Pierce v. Murphy,
984 F.2d 196, 199-200 (7th Cir.), cert denied, 508 U.S. 960 (1993);
California v. Block 690 F.2d 753, 776 (9th Cir. 1982). Cf. Bhd. of

-16-
 By contrast, Ruthardt v. United States, 303 F.3d 375 (1st

Cir. 2002), cert. denied, 538 U.S. 1031 (2003), assumed in dicta

that (without regard to a possible interlocutory appeal) an appeal

from a denial of intervention could occur at the end of the case,

id. at 386. Anyway, Ruthardt might have appeared to be First

Circuit law when the would-be intervenors forwent immediate appeal.

So we here exercise the same option that the court exercised in

Ruthardt and, bypassing the question whether intervention was

properly denied in the district court, permit it on appeal to those

who sought intervention below. Id. Future intervenors should note

the yellow warning flag now affixed to the Ruthardt dictum.

A third group of would-be appellants--Eaton Apothecary,

Louis and Clark Drug, Thrifty White Drug, the National Community

Pharmacists Association, and the Pharmaceutical Care Management

Association--neither assert class membership nor attempted to

intervene in the district court but claim a right to appeal or

appear as parties on appeal simply because their interests are

affected by the outcome. The most demonstrable interests are

purely practical: that because the decree will lower AWP figures

published by the defendants, the pharmacies' own contracts will

cause a reduction in their reimbursement by TPPs and PBMs.

R.R. Trainmen v. Baltimore & Ohio R.R. Co., 331 U.S. 519, 524
(1947)(dictum).

-17-
 The "general rule" of Marino v. Ortiz, 484 U.S. 301

(1988) (per curiam), is that "only parties to a lawsuit, or those

that properly become parties, may appeal an adverse judgment." Id.

at 304. Exceptions exist but, as we stressed in Microsystems

Software, Inc. v. Scandinavia Online AB, 226 F.3d 35, 40 (1st Cir.

2000), they are limited. 15A Wright, Miller & Cooper, Federal

Practice and Procedure § 3902.1, at 126-32 (2d ed. 1991). Anyway,

the fact that a decision against a defendant may practically impact

a third party is not ordinarily enough for appellant status absent

intervention or joinder in the trial court. Marino, 484 U.S. at

304.

There is no apparent reason here to allow participation

as an appellant by one who is neither a class member nor sought to

intervene in the district court. The proposed settlements were

widely known in the industry, the pharmacy interests are amply

represented on appeal and it is hard to see what would be added by

further parties. It might be a different matter if the final

judgment had purported to alter the legal rights of non-parties, a

separate issue to which we now turn.

Legal rights. The pharmacy interests likely do stand to

lose revenues, for a limited period, as a result of the rollback

intended by the settlement. To the extent that existing

reimbursement contracts between pharmacies and TPPs or PBMs are

keyed to AWP lists issued by either defendant, a reduction will

-18-
reduce pharmacy revenue, but both the duration and impact of such

reductions are uncertain and almost certainly will vary from one

pharmacy to another. Duration and impact issues are pertinent both

now and later when we discuss the merits, so some elaboration may

be useful.

Duration is uncertain because many pharmacies, TPPs and

PBMs renegotiate contracts at regular intervals, some contracts can

be renegotiated at will or after trigger events specified in the

contracts and possibly (although this is not mentioned) some may be

renegotiated because of contract doctrines that apply to unexpected

events. See 2 Farnsworth, Farnsworth on Contracts §§ 9.5-9.9 (3d

ed. 2004). Where rollbacks push reimbursement below market levels,

the next contract should remedy that deficiency for future drug

purchases--although, where there is a delay in resolution, not

without interim loss for the pharmacy.

The character of the impact is also uncertain. The bulk

of the inflated AWP figures went into effect in 2001, eight years

ago. Seemingly over this period the ordinary processes of

bargaining allowed the TPPs and PBMs--many of whom have strength

and savvy--to increase the discounts from AWP on which they insist-

-a process that to some uncertain extent negates the effect of the

falsely inflated AWP figures to which the discounts apply. This

phenomenon of creeping recapture is the key to the pharmacy claims

that the rollback will drive some of them out of business, because

-19-
a reduction in AWP would only drop pharmacy reimbursements below

market levels if recapture had already dissipated some of the

previous AWP inflation.10

The immediate question is not whether such revenue

reductions make the rollback order unfair under Rule 23 standards

but whether the rollback violates the Due Process Clause of the

Fifth Amendment and Rule 19 of the Federal Rules of Civil

Procedure. This dual claim by appellants rests on the fact that

almost none of the pharmacy interests were formally parties to the

litigation, most of them being not within the class of plaintiffs,

nor intervenors in the district court, nor parties involuntarily

joined, nor (obviously) defendants.

The constitutional attack itself has two different

aspects. The first is a claim that because of the direct financial

impact of the rollback, it is unconstitutional to inflict it on one

not a party to the case. The axiom is "that a person cannot be

deprived of his legal rights in a proceeding to which he is not a

party." Martin v. Wilks, 490 U.S. 755, 758 (1989). Yet the

judgment ordering the rollback is not an order that the pharmacies

charge less to TPPs or consumers; it is the pharmacies that have

10
How far recapture has occurred for TPPs or PBMs is hotly
disputed, but lack of knowledge of wrongdoing does not
automatically preclude some recapture through competitive forces.
Pharmacies, knowing their revenues and profit margins had
increased, could offer larger discounts to TPPs and PBMs in order
to be part of their networks. And TPPs and PBMs would know that
AWP figures and so their drug costs had gone up.

-20-
chosen by contract to key their reimbursements to figures published

by the defendants.

Impact and legal rights are not the same thing. A

decision in a contract dispute or antitrust case can have drastic

effects on suppliers, stockholders, employees and customers of the

company that loses the case; no one thinks the Constitution

requires all of them to be parties. Due process "obviously does

not mean . . . that a court may never issue a judgment that, in

practice, affects a nonparty." Provident Tradesmens Bank & Trust

Co. v. Patterson, 390 U.S. 102, 110 (1968); see also James &

Hazard, Civil Procedure § 10.12, at 534 (3d ed. 1985).

Instead, impacted non-parties can seek to intervene or

otherwise express their views in litigation that may affect their

practical interests--the fairness hearing required by Rule 23(e)(2)

provides just such a mechanism. Fed. R. Civ. P. 23(e)(2); In re

Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020,

1031 (2d Cir. 1992). In rare instances, as provided by Rule 19(b),

a court may be empowered not to decide litigation between the

parties because non-party interests cannot be fairly protected.

Fed. R. Civ. P. 19(b). But in general, the opportunity for non-

parties to protect their practical interests is considerable and

sufficient.

The pharmacy interests have a second string to their

constitutional bow: they say that this judgment was accompanied by

-21-
findings or characterizations by the district court that would

control in future litigation against them and create legal

liability for them in that litigation. Principally, they point to

the district court's comments in colloquy and the final decision

that the pharmacies objecting to the rollback were themselves

"unjustly enriched" by the inflated AWP prices or received a

"windfall."

Unjust enrichment, in a legal framework, comprises a

claim or claims on which relief may be granted in a lawsuit by the

person unjustly deprived.11 In this case, the district court did

not decide unjust enrichment claims: it was saying as a matter of

fact, which can hardly be denied, that unexpected inflation in AWP

rates would result in many pharmacies getting unexpected extra

revenues which a later downward adjustment would reverse. This is

a lay use of the terms made in assessing whether the settlements

were reasonable under Rule 23.

Class action counsel in this case are now arguing to at

least one other court that the district court here found that the

pharmacies were "unjustly enriched." Class Action Complaint ¶3,

Skilstaf, Inc. v. CVS Caremark Corp., Case No. 3:09-cv-02514-SI

(N.D. Cal. filed June 5, 2009). Even ignoring limits on res

11
See Restatement (Third) of Restitution & Unjust Enrichment
§ 1 cmts. a & b (Discussion Draft, 2000); 1 Palmer, The Law of
Restitution § 1.7 (1978); see also Mass. Eye & Ear Infirmary v. QLT
Phototherapeutics, Inc., 412 F.3d 215, 234 n.7 (1st Cir. 2005),
cert. denied, 547 U.S. 1147 (2006).

-22-
judicata that might be invoked, this is to confound an epithet with

a legal ruling on a claim not before the district judge, and a

sister court is unlikely to be fooled by the argument.

The other legal-rights argument made to us rests on Rule

19(a)(1)(B)(i), providing that a person who could be made a party

to a case must, under certain circumstances, be joined;

pertinently, if the "person claims an interest relating to the

subject of the action" and resolution without that person may "as

a practical matter impair or impede the person's ability to protect

the interest." Fed. R. Civ. P. 19(a)(1)(B)(i). If the person

cannot feasibly be joined, "the court must determine whether, in

equity and good conscience," the case should proceed without him.

Fed. R. Civ. P. 19(b).

No one in the district court, including the pharmacies

and PBMs who were well represented by their associations, suggested

to the district court that Rule 19 was being thwarted. That a

rollback might be ordered was made known early on in the settlement

approval process, and opposing comments by the pharmacy interests

were extensive. Appellants now say that the unjust enrichment and

windfall comments came only in the final decision and so too late

to protest, but these terms were used in oral hearings well before

this.12 In addition, a Rule 19 issue arising only because of

12
The court used these terms in an oral hearing held in January
2008, more than a year before the March 2009 settlement approval,
and also used similar language in a December 2008 hearing.

-23-
comments in the final decision could easily have been called to the

district court's attention afterwards.

So for themselves the appellants have forfeited the

issue, subject to claims of plain error. Successful plain error

claims are rare in civil cases, Chestnut v. City of Lowell, 305

F.3d 18, 20 (1st Cir. 2002) (en banc), and impossible here, given

the loose phrasing of the Rule 19 criteria. Courts have some

independent duty to protect absent "necessary" parties, Provident,

390 U.S. at 111, from any threat of serious injustice, and we could

invoke Rule 19 sua sponte. But for two different reasons no such

measure is appropriate.

First, it is far from clear that there is any violation

of Rule 19; if the absent pharmacies and PBMs were deemed

necessary, most could not practically be joined in this or any

other law suit because of their numerosity. And, in addition, Rule

19 dismissals are rarely appropriate when the objection is first

made at the end of the case. See Provident, 390 U.S. at 109-10;

GTE Sylvania, Inc. v. Consumer Prod. Safety Comm'n, 598 F.2d 790,

798 (3d. Cir. 1979), aff'd 447 U.S. 102 (1980). Second, the

interests of the absent pharmacies and PBMs have been vigorously

addressed by arguments and evidence from pharmacy interests who

Pharmacy interests were present at both hearings and so were
presumably aware of these comments well before the final
settlement.

-24-
were and are present and were considered by the district court in

passing on the settlements.

The merits of the settlements. The district judge must

approve the settlement in a class action and, to do so, must allow

a hearing and make a finding that the settlement "is fair,

reasonable, and adequate," Fed. R. Civ. P. 23(e)(2), or (in

shorthand), "reasonable." In this case, there were successive

hearings, numerous submissions by the parties including expert

reports, several decisions on different proposals and a final

decision on March 17, 2009, evaluating and approving the final

settlements. The final judgment contains the formal findings

required by Rule 23.

Rule 23's reasonableness standard has been given

substance by case law offering laundry lists of factors, most of

them intuitively obvious and dependent largely on variables that

are hard to quantify; usually, the ultimate decision by the judge

involves balancing the advantages and disadvantages of the proposed

settlement as against the consequences of going to trial or other

possible but perhaps unattainable variations on the proffered

settlement.13

13
See, e.g., City of Detroit v. Grinnell Corp., 495 F.2d 448,
463 (2d Cir. 1974); In re Tyco Int'l, Ltd. Multidistrict Litig.,
535 F. Supp. 2d 249, 259-60 (D.N.H. 2007); In re Compact Disc
Minimum Advertised Price Antitrust Litig., 216 F.R.D. 197, 206 (D.
Me. 2003).

-25-
 Here, the pharmacy interests' attack is--with one

qualification--not about the articulation of the standard but its

alleged misapplication to the facts of this case. The principal

misapplication claim, to be described shortly in more detail, is

that the rollback of AWP figures by the defendants will seriously

(and unfairly) curtail pharmacy income and may drive a considerable

number of pharmacies out of business. In assessing the attack (and

a few less central objections considered thereafter), three legal

propositions govern our review.

First, the interests of non-parties to the settlement

must be taken into account: "[I]f third parties will be affected,

[the court must find that the settlement] will not be unreasonable

or legally impermissible as to them." Durrett v. Housing Auth. of

City of Providence, 896 F.2d 600, 604 (1st Cir. 1993); see also In

re Masters Mates, 957 F.2d at 1026. In general, affected non-

parties may make submissions or seek to intervene; here, the

principal opposition was in fact from the pharmacy interests and

PBM representatives who are predominantly non-parties. But the

interests of non-parties are just one element in the equation.14

14
To the extent that the pharmacy interests regard an adverse
effect on them to preclude a finding that the settlements were
reasonable as a matter of law, we think neither Rule 23 nor common
sense supports such a result. Further, the district court had some
basis to think that the losses pharmacies may suffer were likely
much less than the windfall gains earlier received.

-26-
 Second, although policy encourages settlements, Durrett,

896 F.2d at 604, the burden remains on the proponents to show that

the settlement is reasonable, Greenspun v. Bogan, 492 F.2d 375, 378

(1st Cir. 1974). Usually, "there is a presumption in favor of the

settlement" if discovery has been adequate and the parties have

bargained at arms length, City P'ship Co. v. Atl. Acquisition Ltd.

P'ship, 100 F.3d 1041, 1043 (1st Cir. 1996), but we think that

presumption is inapposite in judging the impact on non-parties who

were not represented in the bargaining.

Third, the district court enjoys considerable range in

approving or disapproving a class action settlement, given the

generality of the standard and the need to balance benefits and

costs. The usual rubric for appellate review is abuse of

discretion. City P'ship Co., 100 F.3d at 1043-44. This over-

simplifies: embedded legal issues are reviewed de novo, see, e.g.,

Durrett, 896 F.2d at 603; Cent. States Se. & Sw. Areas Health &

Welfare Fund v. Merck-Medco Managed Care, L.L.C., 504 F.3d 229, 247

(2d Cir. 2007), and factual findings for clear error, Fed. R. Civ.

P. 52(a)(6). But the latter is also a deferential standard, and

here the significant legal issues--concerning due process and Rule

19--have already been dispatched.

The arguments on both sides are easily condensed. The

pharmacy interests claim that they will suffer severe financial

harms including business failures for pharmacies and renegotiation

-27-
costs to PBMs; that any benefit the pharmacies got was innocent and

inflation in net prices has been eroded by renegotiation since the

original increase; that some pharmacies will receive unduly low

prices for at least some period; and that the settling defendants

who are parties to these appeals will pay only a modest amount of

money (roughly $2.7 million) while the pharmacies who committed no

fraud will bear the brunt of the burden of the settlement. The

principal evidence in support is contained in expert reports.15

Conversely, the defenders of the rollback say that the

AWP figures were wrongfully inflated and undoing that inflation is

a step toward precluding future harm from continued over-pricing;

that the pharmacies were enriched and the rollback will give only

a portion back to payors; that even if TPP reimbursement levels

have been bargained down to some extent, some lingering inflation

remains to be undone; that if the rollback forces some

reimbursement levels too low, contract changes between TPPs, PBMs

and pharmacies will readjust the figures over time; and that

15
The primary expert reports were filed by Edward Heckman in
December 2007 and November 2008; Dr. Gale Mosteller in December
2007 and November 2008; and Professor Frank Sloan in November 2008.
A variety of other shorter declarations--e.g., one from Laura
Miller of NACDS in March 2009 and a number of declarations from
pharmacy owners or pharmacy corporate officials--were also filed in
opposition to the settlement.

-28-
significant pharmacy failures, beyond consolidation that is

occurring anyway in the industry, are speculative.16

In principle, the rollback makes some sense: it should--

to the extent that prices remain above some hypothetical market

level--wash out any remaining inflation for the future; and, to the

extent it forces prices temporarily below the market level, it will

take back some of the windfall profits obtained (even if innocently

through another's fraud) and give some compensation for past

overcharges. The market forces that eroded excess gains in the

past should also in the future redress unduly low reimbursement;

and to the extent that those forces operate symmetrically, the

gains and the losses may even tend to balance out.17

But many variables affect the outcome and reliable

figures are hard to come by--inevitably so as to future effects

which depend on how numerous parties react, and how quickly, to any

settlement. As a baseline, a proponent expert estimated that the

inflation of AWP has cost purchasers $7 billion and the rollback

16
The primary expert reports were those filed by Dr. Raymond
S. Hartman in September 2006, January 2008, December 2008, and
January 2009; Dr. Hartman also filed many other declarations in the
underlying litigation that are not specific to the settlement. A
few other declarations and affidavits--e.g., the one from Kimberly
McDonough in December 2008--were also filed in support.
17
The proponents' principal expert says, and this seems
plausible, that asymmetry is likely to benefit the objectors
because the original alleged fraud was secret and the market
counteraction slow and incomplete while the settlement has already
been long advertised, prompting swifter re-adjustments to any
reduction in prices.

-29-
might save as much as $1 billion in the first year in payments

(subject to erosion thereafter), a figure opponents say is high.

But all that seems predictable is a substantial temporary benefit

to the class, eroding over time, and likely to be much less than

the original losses.

The impact on pharmacies will depend on several of these

factors about which the experts argue. One expert for the pharmacy

interests claimed that 40 percent of existing non-chain community

pharmacies will be driven from the market or threatened with this

fate. But the underlying calculation is dubious and the result

intuitively far fetched, and an expert for the proponents of the

settlement estimated a much smaller revenue effect.18 Further, the

TPPs have a substantial interest in not choking off their

distribution channels and enhancing the power of those who remain.

To the extent benefits are overestimated, so too is adverse impact.

One might argue that an inability to be sure as to

consequences ought to doom the rollback. Yet presumptively the

rollback makes sense absent extreme circumstances--say, gains for

18
This calculation was based on the usage of drug products
covered by the settlement at a sample of community pharmacies and
estimated a $50,000 reduction in profits per community pharmacy per
year. But the calculation, strongly disputed by the proponents'
expert, relied on a static model that assumed no contract
renegotiation and ignored other relevant factors (e.g., potential
generic substitution for branded drugs or the ability of pharmacies
to cut costs rather than exit). Proponent expert Dr. Hartman
estimates that the rollback will result in reduced revenue of no
more than $18,000 per community pharmacy over a one year period.

-30-
buyers greatly exceeding the original losses or likely to force

large numbers of pharmacies out of business. Such adverse effects,

one might think, are something that the opponents of the rollback

ought to establish. They certainly have not done so. As the

record stands, the rollback--taken by itself--was within the ambit

of reasonable choices available to the district judge.

Looking at the remedy in relation to what the defendants

are contributing is a separate matter. Arguably, the very best

solution would be to make the settling defendants shoulder the full

cost. But whether or not the publisher defendants could pay a bit

more than $2.7 million, it would not make even a small dent in a

multi-billion dollar loss. McKesson--not a party to these appeals-

-agreed in its settlement (which the district court approved) to

pay $350 million, but this is far short of the total estimated

damage. Opponents of the settlement have not shown that the

defendants collectively could have been made to pay more.

The remaining objections appear to be small beer. Some

challengers claim that certain drug codes covered in the rollback

have been discontinued or were included in the second proposed

settlement but not the first. After receiving expert reports and

holding a hearing on this issue, the district court rejected these

objections for what appear to be good reasons, namely, harm from

inclusion was not apparent, discontinued drug codes might be re-

-31-
introduced, and the other drug codes were properly included in the

settlement.

The challengers also object to the settlements including

the creation of "data rooms" with information and documents from

First DataBank and Medi-Span on the grounds that these rooms will

include proprietary TPP, pharmacy and PBM information, and that the

rooms will not benefit the class. The district court found that

the rooms would not include proprietary information, a finding not

shown to be clearly erroneous. Nor does the provision exceed the

court's authority: the data rooms may well benefit the class by

streamlining discovery in related law suits while protecting the

defendants against duplicative discovery.

The district court's management of the case, insistence

on a revised settlement and multiple hearings have given the

pharmacy interests a lengthy period to prepare for the rollback--a

period extended by the district judge to 180 days after the final

judgment. We affirm the final judgment and deny pending motions

for a stay of the final judgment. Motions to intervene in this

court by ASCP and LTCPA are granted and all other motions to

intervene are denied. We deny the pending motion to dismiss with

respect to the parties that we find can appeal or intervene--

namely, NACDS, FMI, DeVille Pharmacies, ASCP and LTCPA--and grant

the motion to dismiss as to the other parties.

It is so ordered.

-32-