In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-3476
CHICAGO DISTRICT COUNCIL OF
CARPENTERS WELFARE FUND,
Plaintiff-Appellant,
v.
CAREMARK, INCORPORATED and
CAREMARK RX, INCORPORATED,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 5868—John W. Darrah, Judge.
____________
ARGUED MARCH 31, 2006—DECIDED JANUARY 19, 2007
____________
Before ROVNER, EVANS and SYKES, Circuit Judges.
ROVNER, Circuit Judge. The Chicago District Council of
Carpenters Welfare Fund (“Carpenters”) sued Caremark,
Inc. and its parent company Caremark Rx, Inc. (collec-
tively “Caremark”) for breach of fiduciary duties under
29 U.S.C. § 1106(b) of the Employee Retirement Income
Security Act of 1974 (“ERISA”).1 The district court deter-
1
Carpenters also brought two state law claims against Care-
mark, one for breach of contract and one for violating the Illinois
(continued...)
2 No. 05-3476
mined that Caremark was not an ERISA fiduciary and
therefore granted Caremark’s motion to dismiss. We
affirm.
I.
We take the facts as presented in the Complaint. Car-
penters provides healthcare benefits to the members of a
labor union. One of the benefits provided is prescription
drug coverage which entitles the union members to obtain
brand name or generic prescription drugs for a small co-
payment. Carpenters pays the rest of the cost. In order to
manage this benefit, Carpenters entered into a series of
contracts with Caremark, Inc., one of the nation’s largest
Pharmaceutical Benefit Management (“PBM”) companies.2
There are three such contracts in the record, signed in
1996, 1999, and 2003. Each covers a multi-year period. The
first two contracts are between Caremark and Carpenters
directly; we will refer to these as the “1996 Contract” and
1
(...continued)
Consumer Fraud and Deceptive Practices Act. After dismissing
the ERISA count, the district court dismissed the state law
counts for lack of subject matter jurisdiction. Carpenters does
not appeal from the dismissal of the state law claims.
2
Caremark Rx, Inc. is not a party to any of the three contracts.
Rather, it is the parent corporation of Caremark, Inc. Like the
district court, we do not find it necessary to decide whether
Caremark Rx, Inc. should be dismissed from the case solely on
the basis that it was not a party to any of the relevant con-
tracts. As a factual matter, though, we note that Caremark Rx,
Inc. does not appear in any of the contracts or in any of the
specific allegations of the complaint, except to be identified as
the parent corporation. Because all of our reasoning would
apply equally to the parent corporation, we will refer to the two
companies collectively as Caremark henceforth.
No. 05-3476 3
the “1999 Contract” respectively. The third agreement
was executed in two parts: first is a contract between
Caremark and Midwest Employee Benefit Fund Coalition,
an organization of which Carpenters was a member. In
the second part, Carpenters entered into a Participating
Group Agreement with Caremark that set specific terms
for services covered and prices. Together we will refer to
those last two agreements as the “2003 Contract.”
A.
The parties disagree about the nature of Caremark’s
obligations under the contracts. Carpenters portrays
Caremark as its fiduciary, responsible for, among other
things, negotiating prices with retail pharmacies and drug
manufacturers on behalf of Carpenters. Caremark claims
only to have agreed to provide the stated benefits at prices
determined via arm’s-length negotiations between Care-
mark and Carpenters. Carpenters attached to the Com-
plaint the three contracts at issue, and under the Federal
Rules of Civil Procedure, those contracts are considered
parts of the pleading. Fed. R. Civ. Pro. 10(c); Venture
Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431
(7th Cir. 1993). We may thus turn to the contracts to
determine the nature of the agreement. To the extent
that the contracts contradict the Complaint, the con-
tracts trump the facts or allegations presented in the
Complaint. Flannery v. Recording Indus. Assoc. of Am.,
354 F.3d 632, 638 (7th Cir. 2004); Thompson v. Illinois
Dept. of Prof. Regulation, 300 F.3d 750, 754 (7th Cir.
2002); Perkins v. Silverstein, 939 F.2d 463, 469 n.4 (7th
Cir. 1991) (in determining the sufficiency of the com-
plaint, the court may rely on exhibits to the complaint
whenever the allegations of the complaint are mate-
rially inconsistent with those exhibits). Under each of
these contracts, Caremark was obliged to provide a
4 No. 05-3476
variety of services to the covered union members. For
example, Caremark was obliged to provide a mail ser-
vice pharmacy, access to a network of retail pharmacies,
claims processing, a formulary program, customer service
phone lines, and maintenance of records. Caremark
contracts with 55,000 retail pharmacies and operates
four automated and nineteen mail-order pharmacies in
order to process prescriptions for its clients. Each contract
also provided that Caremark was not a fiduciary as that
term is defined by ERISA, and that Carpenters pos-
sessed the sole authority to control and administer the
plan.
Nonetheless, Carpenters alleges that, under the three
contracts, Caremark has discretionary authority over
the management and administration of Carpenters’ drug
benefit plan and also exercises discretion and control over
Carpenters’ assets. This discretionary authority gives
rise to fiduciary duties under ERISA, Carpenters reasons.
In particular, Carpenters alleges that Caremark has
discretion (and therefore fiduciary duties) in four specific
areas: (1) in negotiations with drug retailers over drug
prices; (2) in negotiations with drug manufacturers over
rebates and other discounts; (3) in the management of
the formulary program; and (4) in the management of the
drug switching program. We turn to the contracts to set
out the terms in each of these areas.
1. Drug Prices
Each contract contains a similar paragraph setting out
the costs associated with retail pharmacy services. The
1996 Contract provided:
Retail Pharmacy. For each prescription, a total net
effective rate of the lesser of (x) the retail pharmacy’s
usual and customary prices or (y) AWP less 13% for
No. 05-3476 5
brand-name drugs or (ii) HCFA MAC, as expanded by
Caremark, for generic substitutes, as appropriate, plus
a dispensing fee of $2.25, less the Covered Member co-
payment as established by [Carpenters]. The above
prices are based on the participation of a full and
complete Caremark pharmacy network. Caremark
will use its best commercially reasonable efforts to
negotiate these rates with existing pharmacies in
[Carpenters’] network. In the event of changes in the
marketplace beyond Caremark’s control resulting in
a reduction in the number of participating pharmacies
or in contract reimbursement rates for this network,
pricing will be adjusted to reflect these changes.
1996 Contract, ¶ 4(a)(ii). The 1999 Contract similarly
provided:
Retail Pharmacy. For each Prescription billed to
[Carpenters], electronically processed and dispensed
to a Covered Member through Caremark’s retail
pharmacy network, [Carpenters] shall pay Caremark
AWP less 13.5% for brand-name drugs or AWP less
55% for MAC generic substitutes, as appropriate, plus
a dispensing fee of $2.50, less the Covered Member
copayment as established by [Carpenters]. [Carpen-
ters] shall also pay any applicable sales or use tax. The
above prices are based on the participation of a full
and complete Caremark retail pharmacy network.
Caremark shall use commercially reasonable efforts
to negotiate these rates with existing pharmacies in
[Carpenters’] retail network. In the event of changes
in the marketplace beyond Caremark’s control result-
ing in a reduction in the number of participating
pharmacies or in contract reimbursement rates for this
retail network, pricing shall be adjusted to reflect
these changes.
1999 Contract, Ex. A, ¶ 2. Finally, the 2003 Contract sets
out a similar set of terms:
6 No. 05-3476
Retail Pharmacy. For each Prescription billed to
[Carpenters], electronically processed and dispensed to
a Covered Member through Caremark’s retail phar-
macy network, [Carpenters] shall pay Caremark: (i)
for Brand Drugs, the lower of Usual and Customary
Price or AWP less 15%, or (ii) for Generic Drugs AWP
less 55%; plus in each case a dispensing fee of $2.05
for Brand Drugs and $2.20 for Generic Drugs, and less
the Covered Member Copayment as established by
[Carpenters]. [Carpenters] shall also pay any applica-
ble sales or use tax. The Covered Member Copayment
for each electronically processed retail Prescription
shall be the lesser of the Covered Member Copayment
as established by [Carpenters] or the pharmacy’s usual
and customary charge. The above prices are based on
the participation of a full and complete Caremark
retail pharmacy network. Caremark shall use com-
mercially reasonable efforts to negotiate these rates
with existing pharmacies in [Carpenters’] retail
network. In the event of changes in the marketplace
beyond Caremark’s control resulting in a reduction in
the number of participating pharmacies or in contract
reimbursement rates for this retail network, pricing
shall be adjusted to reflect these changes. Such pricing
adjustments will take effect only after Caremark
provides at least thirty (30) days written notice of its
intention to adjust pricing and upon Coalition’s written
agreement of such price increases.
2003 Contract, Ex. A, Section 1, ¶ 2.
There are a number of defined terms in these provi-
sions that require explanation. “AWP” refers to the
average wholesale price for a prescription drug as re-
ported in First Data Bank or other nationally available
reporting service of pharmaceutical prices. “Usual and
Customary Price” refers to the retail price charged by a
participating pharmacy for the particular drug in a cash
No. 05-3476 7
transaction on the date the drug is dispensed as re-
ported by the participating pharmacy to Caremark.
“HCFA” is the Health Care Financing Administration, a
federal agency that administers Medicare and Medicaid
services. It is now known as the Centers for Medicare
and Medicaid Services. “MAC” is the maximum allowable
cost that the federal government will pay under Medicare
and Medicaid for a generic drug. HCFA did not list a MAC
price for every available generic drug. Carpenters avers
in its Complaint that the phrase “HCFA MAC, as ex-
panded by Caremark” obligated Caremark to calculate
the price for these unlisted generic drugs using the
formula that HCFA used to generate MAC pricing and
offer Carpenters at least as favorable a price as an HCFA
calculation would yield. According to Carpenters, these
provisions gave Caremark the duty and the discretion to
use commercially reasonable efforts to negotiate the
prices Carpenters would pay retailers for filling union
members’ prescriptions.
2. Rebates
The 1996 Contract provided that Caremark would pay
Carpenters a $1.50 rebate for each mail order prescription
and a $0.75 rebate for each retail prescription filled.
Caremark would be relieved of this obligation if Caremark
was “no longer eligible to receive rebates from pharmaceu-
tical manufacturers’ rebate programs.” Under the 1999
Contract, Caremark was similarly obliged to pay Carpen-
ters a $1.50 rebate for mail order prescriptions and a $1.00
rebate for retail prescriptions filled except that no rebates
were due for generic prescriptions. As in the 1996 Con-
tract, Caremark was not obliged to pay the rebate if the
manufacturers were no longer allowing Caremark to
participate in a rebate program. Additionally, the 1999
Contract provided that Caremark would hold all con-
8 No. 05-3476
tracts relating to rebates with the pharmaceutical manu-
facturers and that Carpenters agreed not to enter into
contracts directly with drug makers relating to the services
provided under the 1999 Contract. The 2003 Con-
tract changed the amount due as rebates for each mail
order and retail prescription filled, removed the exception
for generic drugs mentioned in the 1999 Contract, and
retained the language explaining that Caremark would
hold all contracts with drug makers relating to rebates
and that Carpenters would not enter into contracts directly
with those manufacturers. In the “Formulary Program”
provisions, the 2003 Contract also stated that:
Caremark may hold contracts with the manufacturers
of products covered under this Agreement and in
connection with such contracts, Caremark may have
a financial relationship with such manufacturers and
may receive rebates from such manufacturers.
Nothing in the 2003 Contract relieved Caremark of the
duty to pay rebates to Carpenters, even if the manu-
facturers deemed Caremark ineligible to receive rebates.
Carpenters argues that these various rebate provisions
delegated to Caremark discretionary authority over the
negotiations of drug purchase agreements with drug
manufacturers on Carpenters’ behalf. This discretion
gave rise to fiduciary duties, according to Carpenters.
Moreover, Carpenters contends that the provisions gave
Caremark control over Carpenters’ assets, namely over
the portion of rebates paid by drug makers that “belongs
to Carpenters.” This control over assets, Carpenters
contends, also gave rise to fiduciary duties.
3. Formulary Programs
Carpenters also argues that Caremark is a fiduciary
because it exercises discretion in the management of its
No. 05-3476 9
formulary program, including control over the content of
the formulary and over the drug-switching program. The
1996 Contract specifies that, among other services,
Caremark shall:
Provide a supply of Caremark’s Prescription Formu-
lary brochures which list Caremark’s preferred brand-
name product in each of a number of therapeutic
categories and requests the Covered Member to
provide the formulary to his or her prescriber to
assist the prescriber in making cost-effective pre-
scribing decisions. Caremark shall contact prescribers,
as appropriate, to obtain approval for substitution of
formulary drugs.
The 1999 Contract again required Caremark to provide
a supply of formulary brochures but this time the bro-
chures were to be distributed directly to prescribers.
Caremark also agreed to contact prescribers, “as appropri-
ate, to obtain approval for substitution of formulary
drugs.” The 2003 Contract required Caremark to provide
the same formulary services as the 1999 Contract and
additionally required Caremark to provide the formulary
brochures to the insured union members upon request. The
2003 Contract contained additional provisions in the
formulary program section. We have already quoted
part of this paragraph in relation to the rebates, and we
repeat it here to place it in context:
[Carpenters] acknowledges that [Carpenters] has the
sole discretion and authority to determine the formu-
lary for the Plan. Caremark may hold contracts with
the manufacturers of products covered under this
Agreement and in connection with such contracts,
Caremark may have a financial relationship with such
manufacturers and may receive rebates from such
manufacturers. In addition, Caremark may contact
Covered Members regarding therapeutic compliance,
10 No. 05-3476
therapeutic education or similar programs, at no
additional expense to [Carpenters]. On an aggregate
basis, Caremark’s Therapeutic Interchange Program
(TIP) shall result in net savings to [Carpenters]. A
Covered Member shall not pay a higher Copayment
due to Caremark’s TIP program. Caremark may
receive compensation from pharmaceutical manu-
facturers for certain of these services.
4. Drug Switching Program
As we noted above in the formulary program discussion,
each contract obliged Caremark to “contact prescribers, as
appropriate, to obtain approval for substitution of formu-
lary drugs.” Carpenters refers to this as the “drug switch-
ing program.” In addition to the sections quoted above,
Carpenters relies on another provision in the 1999 Con-
tract under the mail service pharmacy section to demon-
strate Caremark’s duties under the drug switching pro-
gram. This provision obliges Caremark, “subject to
prescriber approval and applicable law, [to] provide
pharmaceutical cost containment services, including
generic and therapeutic substitutions.” According to
Carpenters, under these provisions, Caremark bears the
sole responsibility of deciding whether to try to persuade
a prescriber to switch a prescription to a different, thera-
peutically similar drug. Because of the discretion granted
to Caremark in determining how to implement this
provision, Carpenters contends that Caremark is its
fiduciary under ERISA.
B.
Caremark moved to dismiss the ERISA claim on the
ground that the company was not an ERISA fiduciary
under any of the three contracts. The district court noted
No. 05-3476 11
that, in order to be considered an ERISA fiduciary,
Caremark must either (1) exercise discretionary author-
ity or discretionary control respecting the management
of the plan; (2) exercise any authority or control respect-
ing management or disposition of its assets; or (3) have
any discretionary authority or discretionary responsi-
bility in the administration of the plan. The court stated
that Caremark was a fiduciary only to the extent that
it exercised discretionary authority and thus it was
possible that Caremark could be a fiduciary for some
purposes and not for others. The court first held that,
because each contract specified that “nothing in this
Agreement shall be deemed to confer upon Caremark the
status of fiduciary as defined” in ERISA, Caremark was
not a fiduciary. The court then explored whether Caremark
could nonetheless be a fiduciary for the four purposes
alleged by Carpenters: (1) in negotiating with retail
pharmacies the prices that the plan pays for drugs; (2) in
negotiating with drug manufacturers the prices that the
plan pays for drugs and the rebates obtained for those
drugs; (3) in determining which drugs will comprise the
formulary; and (4) in determining how to administer the
drug switching program. The complaint alleged that
Caremark breached its fiduciary duties by charging
Carpenters a higher price than Caremark negotiated with
retail pharmacies, and by choosing drugs for the formulary
that were more expensive so that Caremark could pocket
extra rebates it obtained from drug makers.
The district court found that nothing in the contracts
required Caremark to pass through cost savings to Car-
penters. Instead, the court ruled, the retail pharmacy
provisions obligated Caremark to charge Carpenters a
set price for each drug, a price that could only be changed
after further negotiations and agreement. Because the
prices set in the contracts were the result of arm’s-length
negotiations between Carpenters and Caremark, the
12 No. 05-3476
court held that Caremark could not be held liable for a
breach of fiduciary duty related to retail pharmacy
prices. As for Caremark’s dealings with drug manufactur-
ers, the district court found that nothing in the contracts
required Caremark to enter into agreements with drug
manufacturers on behalf of Carpenters or to negotiate
with drug makers for the prices Carpenters would pay
for drugs. The court again pointed out that the contracts
set the prices for drugs based on negotiations between
Caremark and Carpenters, an arm’s-length deal that did
not give rise to fiduciary duties.
Addressing issues related to the formulary and drug
switching programs, the court noted that Carpenters
adopted Caremark’s formulary in each contract. In each
contract, a provision detailing Carpenters’s duties under
the contract expressly stated that Carpenters had the “sole
authority to control and administer the Plan.” In addition
to those general declarations of Carpenters’ authority
in each contract, the 2003 Contract specified that Car-
penters had the “sole discretion and authority to deter-
mine the formulary for the Plan.” Because of these provi-
sions giving Carpenters the sole authority to control the
plan and because of the negotiated drug prices in each
contract, the court concluded that Caremark did not
breach any fiduciary duties with respect to the formulary
program or the drug switching program. Finally, turning
to Carpenters’ arguments about the rebates, the court
noted that each contract specified a set rebate that
Caremark was to pay to Carpenters for each prescription
filled. Nothing in any of the three contracts required
Caremark to pass along to Carpenters any additional
rebates issued by the drug manufacturers. Therefore, the
court held, the rebate provisions did not create any
fiduciary duties for Caremark. Accordingly, the court
dismissed Carpenters’ claim for breach of fiduciary duty.
Carpenters appeals.
No. 05-3476 13
II.
On appeal, Carpenters argues that Caremark is an
ERISA fiduciary because Caremark has discretionary
authority (1) to negotiate with retailers the price that
Carpenters pays for prescription drugs on behalf of its
members and to unilaterally adjust those prices to adapt
to market changes; (2) to negotiate with drug manufactur-
ers the prices that Carpenters pays for drugs and
to determine the amount of financial incentives from
manufacturers that Carpenters would share on its own
purchases; (3) to advise Carpenters on the initial content
of its formulary and then to unilaterally alter the formu-
lary; and (4) to manage the drug switching program.
Carpenters also contends that Caremark’s disavowal of
its fiduciary status in the contracts is ineffective and void
as against public policy pursuant to statute.3
The district court dismissed the claim under Federal
Rule of Civil Procedure 12(b)(6), for failure to state a
claim because Caremark could not be an ERISA fiduciary
under the facts alleged. On appeal, we accept as true
all well-pleaded facts, and drawing all inferences in favor
of Carpenters, we review de novo whether the complaint
states a claim for which relief can be granted. Baker v.
Kingsley, 387 F.3d 649, 660 (7th Cir. 2004); Marshall-
Mosby v. Corporate Receivables, Inc., 205 F.3d 323, 326
(7th Cir. 2000). To make out a claim for breach of fiduciary
duty under ERISA, Carpenters must show that Caremark
was a fiduciary as that term is defined in the statute
and that Caremark was acting in its capacity as a fidu-
ciary at the time it took the actions that are the subject of
the complaint. See 29 U.S.C. §§ 1002(21)(A), 1106(b);
3
We need not address this last point because we find that
Caremark is not an ERISA fiduciary under any of the contracts.
14 No. 05-3476
Pegram v. Herdrich, 530 U.S. 211, 223-226 (2000); Baker,
387 F.3d at 660. A person is a fiduciary for an ERISA
plan “to the extent (i) he exercises any discretionary
authority or discretionary control respecting manage-
ment of such plan or exercises any authority or control
respecting management or disposition of its assets, (ii) he
renders investment advice for a fee or other compensa-
tion, direct or indirect, with respect to any moneys or other
property of such plan, or has any authority or responsibil-
ity to do so, or (iii) he has any discretionary authority
or discretionary responsibility in the administration of
such plan.” 29 U.S.C. § 1002(21)(A); Pegram, 530 U.S. at
223; Baker, 387 F.3d at 660.4 Caremark may be an ERISA
fiduciary for some purposes and not for others. Baker, 387
F.3d at 660.
A.
Carpenters argues first that Caremark has discretionary
authority or discretionary control to negotiate up-front and
adjust on an ongoing basis the price Carpenters pays for
4
Carpenters alleged that Caremark violated section 1106(b)
when it engaged in certain transactions related to the prescrip-
tion drug benefit program. That section provides that a fiduciary
shall not “(1) deal with the assets of the plan in his own interest
or for his own account, (2) in his individual or in any other
capacity act in any transaction involving the plan on behalf of
a party (or represent a party) whose interests are adverse to
the interests of the plan or the interests of its participants or
beneficiaries, or (3) receive any consideration for his own
personal account from any party dealing with such plan in
connection with a transaction involving the assets of the plan.”
29 U.S.C. § 1106(b). Because we find that Caremark was not
a fiduciary when it engaged in any of the relevant transactions,
we need not address this section further.
No. 05-3476 15
drugs that union members obtain from retail pharmacies.
A thorough review of the contract provisions quoted above
in section A.1, however, reveals that, in each of the three
contracts, Carpenters agreed to pay set prices for the
drugs, prices negotiated with Caremark at arm’s length.
See Central States, Se. & Sw. Areas Pension Fund v.
Kroger Co., 226 F.3d 903, 910 (7th Cir. 2000) (when a
contract is unambiguous, the court may declare its mean-
ing as a matter of law). In each contract, that price was
tied to a number fixed by neither Carpenters nor
Caremark. For example, the price depended sometimes on
average wholesale prices (“AWP”) as determined by a
national index. In some instances, the price was based on
a retailer’s “usual and customary charge,” that is, the
retail price charged by a participating pharmacy for the
particular drug in a cash transaction on the date the drug
was dispensed as reported by the participating pharmacy
to Caremark. In the case of generic drugs, the price was
often fixed by a schedule used by Medicare and Medicaid
to determine how much those programs would pay for
participants’ prescriptions (the “HCFA MAC”). There was
no way for Caremark to “negotiate” the AWP reported on
a national index. Nor could Caremark negotiate the usual
and customary price that a pharmacy charged other
customers in cash transactions. And finally, Caremark was
in no position to negotiate the prices the federal govern-
ment was willing to pay for drugs for Medicare and
Medicaid recipients. In each contract, Carpenters agreed
to pay prices based on those fixed numbers, sometimes
with a percentage discount that Carpenters and Caremark
negotiated at arm’s length, and in each instance with a
fixed dispensing fee attached to each prescription. As the
district court noted, nothing in any of the contracts
required Caremark to pass through any additional cost
savings it managed to negotiate with retailers.
Nor could Caremark increase the prices “unilaterally”
due to changes in the marketplace, as Carpenters con-
16 No. 05-3476
tends. Although each contract provided that prices could be
adjusted “[i]n the event of changes in the marketplace
beyond Caremark’s control,” every contract also required
that any changes be made in a writing signed by both
parties. The provision thus gave Caremark the right to
renegotiate prices during the contract term but not the
right to change the prices unilaterally.
That brings us to the somewhat puzzling provision in
each contract stating that “Caremark will use its best
commercially reasonable efforts to negotiate these rates
with existing pharmacies in [Carpenters’] network.” The
district court did not address what “rates” this provision
covered or what this provision meant. Carpenters cites
this provision as a source of discretionary authority for
Caremark, resulting in fiduciary duties. As we noted
above, Caremark could not negotiate AWP, usual and
customary charges or HCFA MAC. Carpenters argues
that Caremark was to negotiate with the retailers the
rates that Caremark would pay on behalf of the plan, costs
that were then reimbursed by Carpenters. According to
Carpenters, Caremark was to use its best efforts to
negotiate the rates that Carpenters was to reimburse
Caremark. This argument makes little sense given that
Carpenters negotiated to pay Caremark fixed prices for
the drugs based on indexes largely outside the control of
either party to the contract. The only amounts within the
control of Caremark and Carpenters were the percentage
discounts and the dispensing fees, numbers that were
negotiated between Carpenters and Caremark at arm’s
length. The contract contained no mechanism for a pass-
through of any additional savings Caremark managed to
negotiate with retailers. The contracts did not provide, for
example, that Carpenters would pay AWP minus the
highest percent discount that Caremark could negotiate
with retailers using its market power. Without such a
provision, Caremark was free to negotiate with retailers to
No. 05-3476 17
pay less than the amount Carpenters would later reim-
burse it, allowing Caremark to pocket the difference. This,
of course, is the very conduct that Carpenters alleges
was a breach of fiduciary duty. Given that this scheme
was the very deal for which Carpenters bargained at
arms’ length, Caremark owed no fiduciary duty in this
regard. Schulist v. Blue Cross of Iowa, 717 F.2d 1127,
1131-32 (7th Cir. 1983) (parties bargaining at arm’s
length prior to entering into contract owe no fiduciary
duties for pre-contract activities). See also Pharmaceutical
Care Mgmt. Assoc. v. Rowe, 429 F.3d 294, 301 (1st Cir.
2005), cert. denied, 126 S. Ct. 2360 (2006) (holding that
pharmaceutical benefit management companies are
generally not ERISA fiduciaries because they lack discre-
tionary authority or control in the management of the
plan but rather engage in ministerial duties).
This is not to say that the “commercially reasonable
efforts” provisions had no meaning in the contracts. We
note first that the provision required Caremark to negoti-
ate “these rates” with “existing pharmacies in [Carpen-
ters’] network.”5 In other words, the parties had just
agreed on the rates Carpenters would pay for drugs
purchased from retailers in Caremark’s pharmacy
network; that is what is meant by “these rates.” Caremark
was now agreeing to use commercially reasonable efforts
to negotiate with pharmacies in Carpenters’ existing
5
The exact wording of this phrase in the 1996 Contract is
“existing pharmacies in the Client’s network,” where “Client” was
defined as Carpenters. The 1999 Contract also referred to
Carpenters as the “Client” in this provision. In 2003, the termi-
nology changed to “existing pharmacies in the Participating
Group’s retail network, where “Participating Group” was defined
as Carpenters. Thus, in each instance, Caremark was agreeing
to negotiate the rates with Carpenters’ existing pharmacy
network.
18 No. 05-3476
network, i.e., the network of retailers that Carpenters
used before contracting with Caremark, so that Car-
penters could pay these same rates when covered mem-
bers used retailers in Carpenters’ existing network. This
is the most straight-forward reading of the provision.
Carpenters argues that the “commercially reasonable
efforts” provision applied broadly to require Caremark to
negotiate rates with Caremark’s own retail network. If
this is the case, and we think it is not given the express
language of the contracts, we must still make sense of
what was meant by “these rates.” The word “rates” in
these provisions must refer to the one number within the
control of the parties, the percentage discount number.
Reading the contracts this way, Caremark agreed to use
commercially reasonable efforts to negotiate discounts with
its network of retailers, both at the time it entered into the
contracts with Carpenters and later when the marketplace
changed. Carpenters apparently believed that the percent-
age discounts reflected in the contracts were the best rates
that Caremark could negotiate with its own retailers using
its market power. In other words, Carpenters believed that
Caremark was passing along all of the savings that
Caremark could negotiate with retailers. But nothing in
the contracts required Caremark to pass along all of the
savings. At most, this language required Caremark to
come to its negotiations with Carpenters with the lowest
prices it could obtain from retailers using its market
power. Caremark was always free to then negotiate a
higher price with Carpenters than Caremark paid for the
drugs. Except for a modest dispensing fee, that is how
Caremark made its money. It was to Carpenters’ benefit to
deal with Caremark rather than dealing directly with the
retailers. Caremark had many clients and could use this
volume to negotiate better prices with the retailers than a
single client could negotiate. Caremark could then pass
some of those savings on to clients like Carpenters and
No. 05-3476 19
still make money by keeping the difference for itself. By
agreeing to pay a fixed amount to Caremark, Carpenters
forwent its opportunity to garner any additional savings
that Caremark could extract from retailers.
Each contract also included slight variations of the
following: “In the event of changes in the marketplace
beyond Caremark’s control resulting in a reduction in the
number of participating pharmacies or in contract reim-
bursement rates for this retail network, pricing shall be
adjusted to reflect these changes.” This provision allowed
Caremark to seek a new pricing agreement with Carpen-
ters if market changes increased Caremark’s cost of
dealing with the retailers. This is another way in which
the “commercially reasonable efforts” language possibly
came into play. If there were changes in the marketplace
that caused retailers to increase charges to Caremark,
Caremark agreed to use commercially reasonable efforts
to keep those increases as low as possible. The contracts
then allowed Caremark to seek additional funds from
Carpenters to account for these increased costs from the
retailers, again bringing to the table the lowest price
point that Caremark could negotiate with retailers. But
nothing in any of the contracts obliged Caremark to pass
on to Carpenters all of the savings that resulted from its
ongoing negotiations with retailers. Instead, the con-
tracts provided that Carpenters and Caremark would
adjust the pricing between themselves, another arm’s-
length transaction.
Under any reading of the contracts, Caremark was not
obliged to pass along all of the savings it negotiated with
drug retailers. Failure to pass along all of the savings
is the core of Carpenters’ complaint. Carpenters did not
allege that Caremark breached a duty to negotiate rates
with Carpenters’ existing network or that Caremark
failed to come to the bargaining table with the best rates
it could negotiate with retailers as the starting point in
20 No. 05-3476
the discussion. Although Caremark might have been a
fiduciary for some purposes, it was not a fiduciary for the
purposes named in this count of Carpenters’ complaint.
Plumb v. Fluid Pump Service, Inc., 124 F.3d 849, 854 (7th
Cir. 1997) (in assessing whether a person can be held
liable for a breach of fiduciary duty, a court must ask
whether that person is a fiduciary with respect to the
particular activity at issue). The district court correctly
concluded that Caremark was not a fiduciary for the
purpose of negotiating prices with drug retailers.
B.
Carpenters next argues that Caremark possessed
discretion to negotiate with drug manufacturers (as
opposed to retailers) the prices that Carpenters pays for
drugs and to determine the amount of financial incentives
from manufacturers that Carpenters would share on its
own purchases. Because of this discretion and because
Caremark controlled Carpenters’ portion of the rebates
paid by drug manufacturers, Carpenters contends that
Caremark is an ERISA fiduciary under 29 U.S.C.
§ 1002(21)(A). As detailed above, each contract required
Caremark to pay to Carpenters rebates in a certain
amount for prescriptions filled. The 1996 and 1999 Con-
tracts relieved Caremark of the obligation to pay rebates
to Carpenters if Caremark was ineligible to receive re-
bates from the drug manufacturers’ rebate programs. The
1999 and 2003 Contracts acknowledged that Caremark
would hold all contracts with the drug manufacturers
relating to rebates. The 2003 Contract went one step
further and asserted that Caremark “may have a finan-
cial relationship” with the manufacturers. Common to all
three contracts was the requirement that Caremark pay
Carpenters a fixed amount of rebates on certain prescrip-
tions filled. Carpenters complains that Caremark negoti-
No. 05-3476 21
ated other types of financial incentives with the manufac-
turers, allowing Caremark to “unilaterally manipulate
the amount of rebates paid to Carpenters . . . or even
avoid paying them altogether.”
No provision in any of the contracts requires or autho-
rizes Caremark to enter into agreements on behalf of
Carpenters with the drug manufacturers. To the contrary,
each contract required Caremark to hold any rebate
contracts with the drug makers and to pay a fixed rebate
to Carpenters for certain prescriptions filled. There is no
discretion related to this payment. Nor is there any
provision in the contracts requiring Caremark to pass
through to Carpenters 100% of the rebates Caremark
might receive from drug manufacturers. As with the
provisions relating to retail pharmacies, Carpenters
agreed to receive a fixed amount for rebates, allowing
Caremark to retain any rebates above and beyond those
fixed amounts for itself. Caremark was in no position to
unilaterally change the amount of the rebates because the
amount was fixed in the contract. Moreover, the 1996
and 1999 Contracts provided that Caremark would be
relieved of this payment obligation if “for any reason”
Caremark was no longer eligible to participate in the drug
makers’ rebate programs. Carpenters’ complaint that
Caremark could negotiate other incentive payments and
work to eliminate its own eligibility for rebates (thereby
relieving Caremark of its duty to pay rebates to Carpen-
ters) is a possibility that is contemplated under the
contracts. This was the deal for which Carpenters bar-
gained with Caremark at arms’ length and thus Caremark
owed no fiduciary duties to Carpenters related to rebates.6
6
We also reject Carpenters’ argument that Caremark con-
trolled “plan assets” in the form of “the portion of rebates paid
by drug manufacturers that belongs to Carpenters.” Caremark
(continued...)
22 No. 05-3476
C.
The formulary and drug-switching features of the plan
are closely related and we will address them together. The
formulary was the list of preferred drugs for the plan.
Carpenters adopted Caremark’s standard formulary with
each contract, in each instance generally retaining the
“sole authority to control and administer the Plan.” In the
2003 Contract, Carpenters specifically acknowledged
that it had the sole discretion and authority to determine
the formulary for the plan. Carpenters alleged in its
complaint that the formulary is not a static list; Caremark
adds and removes drugs from the list as new drugs become
available. Under the drug-switching program, Caremark
was required to contact prescribers “as appropriate” and
obtain approval for substitution of formulary drugs.
The district court noted that, in the 2003 Contract,
Carpenters expressly acknowledged that it had the sole
discretion and authority to determine the formulary for
the plan. Moreover, the court noted, every contract pro-
vided that Carpenters retained the sole authority to
control and administer the plan. As we noted above,
Caremark can be held to be a fiduciary only to the
extent that it possesses or exercises discretionary author-
ity or discretionary responsibility in the administration
of the plan. Given that Carpenters retained sole authority
to control and administer the plan, Carpenters was the
6
(...continued)
was not collecting rebates from drug makers on behalf of
Carpenters. The contracts clearly specify that Caremark had an
independent contractual duty to pay rebates to Carpenters. See
supra Part I.A.2. Caremark was not collecting rebates from drug
makers for Carpenters and then passing through a portion; thus
Caremark was not controlling assets of the plan but rather
was controlling its own assets in making these contractual
rebate payments to Carpenters.
No. 05-3476 23
final arbiter of the content of the formulary and any drug-
switching decisions. Caremark’s decisions relating to the
formualry and drug-switching programs were akin to the
decisions made by a claims administrator. In Klosterman
v. Western Gen. Mgmt., Inc., 32 F.3d 1119 (7th Cir. 1994),
a plan participant sued a company hired to administer
claims for an ERISA plan. The participant was enrolled
in a plan administered by his employer’s human resources
manager, and the plan retained the authority to make
the ultimate decisions in all doubtful or contested claims.
Western General was hired to administer claims accord-
ing to the parameters of the plan. 32 F.3d at 1124. We
found that Western General was not acting as a fiduciary
in making claims decisions because it did not have the
authority to make a final decision. 32 F.3d at 1124. We
noted that Western General did not become an ERISA
fiduciary simply by performing administrative functions
and claims processing within a framework of rules estab-
lished by the plan especially when the ultimate decision
belonged to the plan. 32 F.3d at 1124-25. Similarly,
Carpenters selected the features of the plan and charged
Caremark with the ongoing administration of the formu-
lary and drug-switching programs. But Carpenters re-
tained final authority over the content of the formulary
and the administration of the drug-switching programs.
Caremark lacked the ultimate discretionary authority to
administer these programs and thus was not a fiduciary
for these purposes.
Carpenters seeks to minimize the import of the provi-
sions retaining sole authority for itself by contending
that Caremark exerted considerable influence over the
initial formulary selection and “complete control” over the
ongoing content of the formulary and the drug-switch-
ing program. The express language of the contracts
contradicts this characterization of Caremark’s authority
over these programs. Carpenters adopted Caremark’s pre-
24 No. 05-3476
existing formulary as a feature of its plan. Under Pegram,
the formulary program and drug-switching program were
plan features not subject to fiduciary standards. Pegram,
530 U.S. at 226-27. Caremark was not a fiduciary at the
time it was engaged in arm’s-length negotiations with
Carpenters, prior to entering into any of the agreements.
There is no fiduciary liability for acts that precede fidu-
ciary status. Pegram, 530 U.S. at 227. See also Associates
In Adolescent Psychiatry, S.C. v. Home Life Ins. Co., 941
F.2d 561, 569-70 (7th Cir. 1991) (providers of pro-
fessional services who are advising plans are generally
not ERISA fiduciaries unless their services give them
decision-making authority over the plan or plan assets). As
for any ongoing changes to the formulary or specific
decisions by Caremark in administering the drug-switch-
ing program, Carpenters retained for itself the final
authority to administer these programs on an ongoing
basis. Under Klosterman, Caremark was thus not a
fiduciary for this purpose. Klosterman, 32 F.3d at 1124-25.
III.
For the reasons stated above, Caremark was not acting
as a fiduciary in any of the relevant actions detailed in
the complaint. Accordingly, Carpenters may not sustain
a claim against Caremark for breach of fiduciary duty
under ERISA.
AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—1-19-07