Chancery Grants Express Scripts Investor's Records Request

Law360, New York (June 1, 2017, 7:09 PM EDT) -- Pharmacy services company Express Scripts Inc. has to turn over documents related to a $15 billion spat with Anthem Inc., its biggest client, the Delaware Chancery Court ruled Wednesday, finding that a concerned shareholder had put forward a legitimate reason for inspecting the records.

Clifford Elow asked for a range of documents last year pertaining to a yearslong dispute between Express Scripts and Anthem over the quality and pricing of the pharmacy benefits manager's services, which has since spilled over into a lawsuit brought by the insurance giant in New York federal court.

Elow says that just as the two companies were about to engage in a contractually mandated pricing review in 2015, Express Scripts was publicly trumpeting a "great relationship with Anthem," concealing from stockholders the dispute that led to the lawsuit.

Following a one-day bench trial, Vice Chancellor Tamika Montgomery-Reeves said in Wednesday's ruling that was enough to compel Express Scripts to turn over most of the documents requested by Elow, pending a mutually agreed upon confidentiality agreement.

"Elow has asked to investigate a serious allegation," Vice Chancellor Montgomery-Reeves wrote. "At the same time this relationship [with Anthem] was deteriorating by ESI's own admissions, Express Scripts allegedly was representing to the market that the relationship was strong, the contract would continue, and the future with the client looked bright."

Per the terms of the order, Elow will be able to inspect roughly all board materials from January 2015 to the present relating to the "Anthem relationship."

Express Scripts entered into a 10-year contract with Anthem in 2009, which accounted for roughly $17 billion of Express Scripts' total $100 billion in annual revenue in 2015, according to court documents.

The contract provided for a pricing review every three years, and the first review, in 2012, apparently went off without a hitch.

But as the second review approached in 2015, Anthem began to accuse Express Scripts of failing to offer "anything remotely close to competitive benchmark pricing as required" and castigated the company for allegedly providing such a poor level of service that Anthem was placed at a "significant risk of enforcement actions by the Centers for Medicare & Medicaid Services," the order said.

Anthem demanded a $15 billion pricing concession to make things right at the time and is asking to tear up the contract early in its New York federal suit, filed last year.

Express Scripts has shot back in the New York suit, calling Anthem's demands out of line and saying it attempted to negotiate in good faith with the insurer on price. The allegations about quality, Express Scripts says, are belied by Anthem's "star rating" with CMS and the total absence of any enforcement actions against the insurer.

Nonetheless, on an earnings call in February 2015, Express Scripts' senior vice president of sales and account management told investors: "The relationship is very, very solid. ... And we look forward to having them as a client through the end of the contract term which is at the end of 2019."

Given the low evidentiary threshold for shareholder requests for documents in Delaware Chancery Court, Vice Chancellor Montgomery-Reeves said that Elow's concerns clearly entitled him to just such an inspection.

Under that threshold, shareholders only need to demonstrate a "credible basis" of mismanagement that bears further investigation. Even hearsay and circumstantial evidence can be successfully used to meet that burden.

But Vice Chancellor Montgomery-Reeves threw out another Express Scripts shareholder's parallel request for roughly the same documents, saying Amitkumar Khandhar hadn't attached any evidence that he actually owns Express Scripts stock, voiding his complaint.

The parties did not immediately respond Thursday to requests for comment.

Elow is represented by Craig J. Springer, Peter B. Andrews and David M. Sborz of Andrews & Springer LLC and Jeffrey Norton and Roger Sachar of Newman Ferrara LLP.

Khandhar is represented by Peter B. Andrews, Craig J. Springer and David M. Sborz of Andrews & Springer LLC and Melinda A. Nicholson and Michael R. Robinson of Kahn Swick & Foti LLC.

Express Scripts is represented by Paul J. Lockwood, Jenness E. Parker, Jay B. Kasner and Scott D. Musoff of Skadden Arps Slate Meagher & Flom LLP.

The cases are Elow v. Express Scripts Holding Co., case number 12721, and Khandhar v. Express Scripts Holding Co., case number 12734, both in the Court of Chancery of the State of Delaware.

--Editing by Catherine Sum.