A.A.M. Health Group v. Argus Health Systems

Filed 2/28/07 A.A.M. Health Group v. Argus Health Systems CA2/8

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION EIGHT

APPEAL from a judgment of the Superior Court of Los Angeles County.

Victoria Chaney, Judge. Affirmed.

The Law Offices of Janet R. Randle, Janet R. Randle; The Law Offices of Armond Marcarian and Armond Marcarian for Plaintiff and Appellant.

Morrison & Foerster, Michael I. Katz, Benjamin J. Fox and Derik T. Fettig for Defendant and Respondent.

Bill Lockyer, Attorney General, Albert Norman Shelden, Senior Assistant Attorney General, and Ronald A. Reiter, Deputy Attorney General, as Amicus Curiae.

The sole issue on appeal is whether Civil Code section 2527 violates the right to free speech of prescription drug claims processors.[1] We follow ARP Pharmacy Services, Inc. v. Gallagher Bassett Services, Inc. (2006) 138 Cal.App.4th 1307 (ARP), which held that the statutes reporting requirement violates Article I, section 2 of the California Constitution. We affirm the trial courts entry of judgment on the pleadings in favor of respondent, an alleged prescription drug claims processor.

FACTUAL AND PROCEDURAL BACKGROUND

Section 2527 requires prescription drug claims processors to conduct or obtain studies of fees for pharmaceutical dispensing services and mail the studies to each client for whom it performs claims processing services at least every two years. A prescription drug claims processor is defined as any nongovernmental entity which has a contractual relationship with purchasers of prepaid or insured prescription drug benefits . . . claims submitted by a licensed California pharmacy or patron thereof. ( 2527, subd. (b).) Section 2528 imposes civil penalties, ranging from $1,000 to $10,000, for the failure to comply with the foregoing requirements.

The purpose of the legislation as described by its sponsor was as follows: AB 2044 addresses a growing problem faced by California pharmacies the tendency of private insurance or prepaid drug plans to pay pharmacies a fixed level of reimbursement that is usually pegged at or near the Medi-Cal fee. The plans often utilize independent claims processors which serve as intermediaries between the underwriters, on the one hand, and pharmacies on the other. (Assemblyman Bill Lancaster letter to Gov. Edmund G. Brown, Jr. re Assem. Bill No. 2044 (1981-1982 Reg. Sess.) June 14, 1982.) The bill was supported by the California Pharmacist Association which hoped that the study approach will generate the data that will help to untangle the reimbursement logjam and lead to more equitable compensation of pharmacies. (Cal. Pharmacist Assoc. letter to Members Assemby Finance, Insurance and Commerce Comm. Re Assem. Bill No. 2044 (1981-1982 Reg. Sess.) January 13, 1982.) However, the statute does not mandate any specific compensation formulas or requirements beyond the compilation and transmission of the studies.

In a class action complaint, A.A.M. Health Group, Inc. (appellant or AAM) sued Argus Health Systems, Inc. (respondent or Argus) alleging violations of section 2527 by failing to conduct fee studies and violations of Business and Professions Code section 17200 and unjust enrichment. The latter two causes of action are derivative of the first and require a violation of section 2527. The trial court granted Arguss motion for judgment on the pleadings, concluding that section 2527 violates Arguss rights to free speech under the federal and California Constitutions. AAM timely appealed. The Attorney General supports appellant as amicus.

DISCUSSION

In the first section, we discuss the reasoning of ARP, supra, 138 Cal.App.4th 1307, with which the Attorney General vigorously disagrees. In the second section, we consider the Attorney Generals contention this Division should reject the ARP analysis.

I.

ARP held that section 2527 violates Article I, section 2 the California Constitution, which provides: (a) Every person may freely speak, write and publish his or her sentiments on all subjects, being responsible for the abuse of this right. A law may not restrain or abridge liberty of speech or press. (ARP, supra, 138 Cal.App.4th at p. 1314) The alleged prescription drug claims processor in ARP challenged the requirement of section 2527 that forced prescription drug claim processors to transmit the studies to third party payors. (Id. at p. 1313, fn. 3.)

ARP found that section 2527 compels speech. (ARP, supra, 138 Cal.App.4th at p 1314.) Quoting Gerawan Farming, Inc. v. Lyons (2000) 24 Cal.4th 468, 491, the ARP court reasoned: Because speech results from what a speaker chooses to say and what he chooses not to say, the right in question comprises both a right to speak freely and also a right to refrain from doing so at all, and is therefore put at risk both by prohibiting a speaker from saying what he otherwise would say and also by compelling him to say what he otherwise would not say. (Ibid.) The prescription drug claims processors are required to transmit studies to each of their clients. Without this mandate, they would not choose to transmit those studies.

Then the court found that the compelled speech was not commercial speech. (ARP, supra, 138 Cal.App.4th at p. 1317.) The speech compelled by section 2527 is a report by drug claims processors to third party insurers on the average fees pharmacies charge for dispensing pharmaceutical drugs to private customers. Nothing about the content of this report proposes a commercial transaction between the speaker (the drug claims processor) and its audience (insurers, health plans, and other drug benefit providers). Nor does it promote the processors business, which involves processing insured or prepaid claims for drug benefit providers. While the report may relate to the economic interests of the pharmacies by highlighting the dispensing fees charged to uninsured individuals, it does not affect the economic interests of the required speakers, who process insured drug claims for drug benefit providers. (Ibid.)

After finding that section 2527 was not content neutral because it required the prescription drug claims processors to transmit specific information, the court applied strict scrutiny in assessing the constitutionality of the statute. (ARP, supra, 138 Cal.App.4th at p. 1317.) The court assumed a compelling state interest in the statutes purpose: to urge third party payors, by the use of statistical information, to compensate pharmacists at a fairer rate for providing pharmaceutical services to their insureds and thereby potentially encourage pharmacists to continue to contract with insured patients. (Id. at p. 1320.) However, the court found no nexus between this goal and the means used to accomplish it. The mere transmission of the information, unaccompanied by any requirement that it be considered, utilized, or even read by the insurers, seems poorly designed to accomplish the states goal. (Ibid.) In addition, the court concluded the statute was not narrowly tailored to achieve the interest as the pharmacies or the government could transmit the information to insurers without requiring the prescription drug claims processors to transmit the information. (Id. at pp. 1321-1322.)

II.

The Attorney General mounts a multiprong challenge to ARP. The Attorney Generals paramount concern in this appeal is the proper constitutional standard to be applied . . . . He analogizes this case to Rumsfeld v. Forum for Acad. and Inst. Rights (2006) 126 S.Ct. 1297 (Rumsfeld), and argues that lower level scrutiny is warranted because of the nature of the speech and because it is an economic regulation.

A.

In Rumsfeld, the United States Supreme Court held that the Solomon Amendment, which required law schools to allow military recruiters on campus and provide assistance to the military recruiters in the same manner provided to other recruiters, did not violate the First Amendment guarantee of freedom of speech. The high court reasoned: In this case, accommodating the militarys message does not affect the law schools speech, because the schools are not speaking when they host interviews and recruiting receptions. Unlike a parade organizers choice of parade contingents, a law schools decision to allow recruiters on campus is not inherently expressive. Law schools facilitate recruiting to assist their students in obtaining jobs. A law schools recruiting services lack the expressive quality of a parade, a newsletter, or the editorial page of a newspaper; its accommodation of a military recruiters message is not compelled speech because the accommodation does not sufficiently interfere with any message of the school. (Rumsfeld, supra, 126 S.Ct. at p. 1309.) The high court further found that military recruiting promotes the substantial Government interest in raising and supporting the Armed Forcesan objective that would be achieved less effectively if the military were forced to recruit on less favorable terms than other employers. (Id. at p. 1311.)

The Attorney General relies heavily on the following passage in Rumsfeld: it has never been deemed an abridgment of freedom of speech or press to make a course of conduct illegal merely because the conduct was in part initiated, evidenced, or carried out by means of language, either spoken, written, or printed. (Rumsfeld, supra, 126 S.Ct. at p. 1308, quoting Giboney v. Empire Storage & Ice Co. (1949) 336 U.S. 490, 502.) For example, Congress can prohibit race discrimination even though that requires removing a sign stating White Applicants Only. (Ibid.) [T]he State does not lose its power to regulate commercial activity deemed harmful to the public whenever speech is a component of that activity. (Ohralik v. Ohio State Bar Assn. (1978) 436 U.S. 447, 456.)

Assuming for purposes of this argument that the freedom of speech in the federal and state constitutions are coextensive, section 2527 is not analogous to a law that governs a course of conduct. Section 2527 requires prescription drug claims processors to transmit the following speech: a statistical sample with a preface and an explanatory summary of the results and findings. The required speech is the mandate of the statute not the method of carrying out some other conduct.

B.

The Attorney General also argues that a lower level of scrutiny is required because section 2527 regulates commercial speech. However, this argument is inconsistent with our high courts explanation of the distinction between commercial and noncommercial speech in Kasky v. Nike, Inc. (2002) 27 Cal.4th 939. In typical commercial speech cases, the speaker is likely to be someone engaged in commerce-that is, generally, the production, distribution, or sale of goods or servicesor someone acting on behalf of a person so engaged, and the intended audience is likely to be actual or potential buyers or customers of the speakers goods or services, or persons acting for actual or potential buyers or customers, or persons (such as reporters or reviewers) likely to repeat the message to or otherwise influence actual or potential buyers or customers. Considering the identity of both the speaker and the target audience is consistent with, and implicit in, the United States Supreme Courts commercial speech decisions, each of which concerned a speaker engaged in the sale or hire of products or services conveying a message to a person or persons likely to want, and be willing to pay for, that product or service. (Id. at p. 960.)

Here, there is no transaction proposed between the prescription drug claim processors (the speakers) and the insurance companies or other clients (their audience). The prescription drug claims processors are not trying to sell products or services. Instead, they are being forced to act as advocates for the pharmacies in the hope that the insurance companies will provide greater remuneration to the pharmacies. In addition, not only are they required to provide statistical information, but a preface and explanatory summary. The distinction between commercial and noncommercial speech rests on three grounds: (1) [t]he truth of commercial speech . . . may be more easily verifiable by its disseminator than . . . news reporting or political commentary, in that ordinarily the advertiser seeks to disseminate information about a specific product or service that he himself provides and presumably knows more about than anyone else. (Kasky v. Nike, Inc., supra, 27 Cal.4th at p. 955.) (2) [C]ommercial speech is hardier than noncommercial speech in the sense that commercial speakers, because they act from a profit motive, are less likely to experience a chilling effect from speech regulation. (Ibid.) (3) [G]overnmental authority to regulate commercial transactions to prevent commercial harms justifies a power to regulate speech that is  linked inextricably to those transactions. (Ibid.) None of these basis for carving out a more lenient standard for review of challenges to regulations of commercial speech is applicable to this case.

C.

Finally, the speech that the prescription drug claims processors are required to transmit is not trivial, devoid of any message and devoid of any expressive content as the Attorney General argues. It demands the dissemination of specific content, i.e. the fees for pharmaceutical dispensing services to private consumers. To the extent the Attorney General is arguing that statistical data does not carry an ideological message, in this context the distinction between compelled statements of fact and compelled statements of opinion is not relevant because each burdens protected speech. Riley v. National Federation of Blind (1988) 487 U.S. 781, 797-798.) If the report were truly devoid of a message or expressive content it would in no manner serve the purpose of influencing payments made by insurance companies or even of collecting data.

A statute may be content neutral if it serves purposes unrelated to the content of the expression, even if it has an incidental effect on some speakers or messages but not others. (Los Angeles Alliance for Survival v. City of Los Angeles (2000) 22 Cal.4th 352, 368, quoting Ward v. Rock Against Racism (1989) 491 U.S 781, 791.) For example a city may place restrictions on solicitations for immediate donations if it is predominately . . . addressed to the inherently intrusive and potentially coercive nature of that kind of speech, and not to the content of the speech. (Los Angeles Alliance for Survival v. City of Los Angeles, supra, 22 Cal.4th at p. 373.) Or an injunction may issue where one company misappropriates another companys property even where the misappropriation concerns a computer code. (DVD Copy Control Assn., Inc. v. Bunner (2003) 31 Cal.4th 864, 878.) Here, section 2527 is not addressed to any purpose other than transmitting a particular message to the clients of prescription drug claims processors. Therefore, the ARP court correctly concluded that it was a content based statute.

The Attorney Generals related argument that a court should not determine the wisdom of purely economic regulations is a well settled principle, and the cases cited by the Attorney General support it. (See e.g. Ferguson v. Skrupa (1963) 372 U.S. 726, 729; Max Factor & Co. v. Kunsman (1936) 5 Cal.2d 446, 454-455.) However, those cases involved challenges that certain laws violated due process, not the right to free speech.  So far as the requirement of due process is concerned, and in the absence of other constitutional restriction, a state is free to adopt whatever economic policy may reasonably be deemed to promote public welfare, and to enforce that policy by legislation adapted to its purpose. (Max Factor & Co. v. Kunsman, supra, 5 Cal.2d at p. 456.) The issue here, however, is not whether section 2527 comports with due process, but instead whether it violates the right to freedom of speech, a specific constitutional requirement.

Because section 2527 compels speech that is content based and not commercial in nature, it is subject to strict scrutiny. The Attorney General does not argue that it can satisfy this test and for the reasons discussed in ARP it cannot. We find ARP to be persuasive and therefore follow its holding that section 2527 violates Article I, section 2 of the California Constitution. We need not decide whether section 2527 also violates the federal Constitution.

DISPOSITION

The judgment is affirmed. Each party to bear its own costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

COOPER, P. J.

We concur:

RUBIN, J.

FLIER, J.

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[1] Undesignated statutory citations are to the Civil Code.