Bradley v. First Health Services

Filed 2/28/07 Bradley v. First Health Services 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NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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 Los Angeles Superior Court.

Victoria G. Chaney, Judge. Affirmed.

Browne, Woods & George, Allan Browne, Michael A. Bowse; Rosner, Law & Mansfield, Alan M. Mansfield and John W. Hanson, for Plaintiffs and Appellants.

Morgan, Lewis & Bockius, Richard S. Odom, Thomas M. Peterson and Molly M. Lane, for Defendants and Respondents.

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We hold that the reporting requirement in Civil Code section 2527 violates Article I, section 2 of the California Constitution.[1] We therefore affirm the trial courts entry of judgment of dismissal.

FACTUAL AND PROCEDURAL BACKGROUND

In their class action complaint, appellants alleged that respondents violated Civil Code section 2527, Business and Professions Code section 17200, and sought declaratory relief.[2] It was alleged respondents are prescription drug claims processors, i.e. any nongovernmental entity which has a contractual relationship with purchasers of prepaid or insured prescription drug benefits, and which processes, consults, advises on, or otherwise assists in the processing of prepaid or insured prescription drug benefit claims submitted by a licensed California pharmacy or patron thereof. ( 2527, subd. (b).)

Section 2527 requires that every prescription drug claims processor shall have conducted or obtained the results of a study or studies which identifies the fees, separate from ingredient costs, of all, or of a statistically significant sample, of California pharmacies, for pharmaceutical dispensing services to private consumers. The study or studies shall meet reasonable professional standards of the statistical profession. The determination of the pharmacys fee made for purposes of the study or studies shall be computed by reviewing a sample of the pharmacys usual charges for a random or other representative sample of commonly prescribed drug products, subtracting the average wholesale price of drug ingredients, and averaging the resulting fees by dividing the aggregate of the fees by the number of prescriptions reviewed. A study report shall include a preface, an explanatory summary of the results and findings, including a comparison of the fees of California pharmacies by setting forth the mean fee and standard deviation, the range of fees, and fee percentiles (10th, 20th, 30th, 40th, 50th, 60th, 70th, 80th, 90th). This study or these studies shall be conducted or obtained no less often than every 24 months. ( 2527, subd. (c).)

The statute also requires that the prescription drug claims processors transmit the studies to the chief executive officer or designee, of each client for whom it performs claims processing services . . . no less often than every 24 months. ( 2527, subd. (d).)

As appellants point out, the Senate Democratic Caucus described the rationale for the statute as follows: Proponents state that the information provided in this bill is needed to facilitate more enlightened and equitable reimbursement of pharmacists under private health insurance programs. Proponents point out that currently such reimbursements are arbitrarily determined, being usually based on substandard Medi-Cal fees. (Sen. Democratic Caucus, 3d reading analysis of Assem. Bill No. 2044 (1981-1982 Reg. Sess.) p. 2.)

The trial court found that section 2527 was a content based regulation governing noncommercial speech and was not narrowly tailored to serving a compelling state interest. Therefore, it held the statute was unconstitutional, violating respondents right to free speech. The trial court granted respondents demurrer without leave to amend and then dismissed the complaint, the judgment from which appellants appeal.

DISCUSSION

After appellants filed their opening brief, Division Four of this court held that section 2527 violates the right to free speech protected in the California Constitution. (ARP Pharmacy Services, Inc. v. Gallagher Bassett Services, Inc. (2006) 138 Cal.App.4th 1307 (ARP).) Article I, section 2 the California Constitution 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.  (ARP, supra, at p. 1314.) 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.)

Appellants argue that (1) the speech affected by Civil Code section 2527 is commercial speech requiring a lower level of scrutiny; and (2) Section 2527 is an economic regulation with no impact on speech. Appellants do not argue that section 2725 can survive strict scrutiny, but instead that some lower level of scrutiny should be applied.

We agree with the reasoning and result of ARP. The speech impacted by section 2527 is not commercial speech as commercial speech has been defined by our high court. (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939.) In typical commercial speech cases, the speaker is likely to be someone engaged in commercethat 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. Contrary to appellants argument the statute does not require speech that  relates solely to the economic interests of the speaker and its audience. (Quoting Gerawan Farming, Inc. v. Lyons, supra, 24 Cal.4th at p. 486.) 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.

Appellants argue that section 2527 is solely an economic regulation. In Glickman v. Wileman Brothers & Elliot, Inc. (1997) 521 U.S. 457, the Supreme Court considered whether a regulation requiring growers, handlers, and processors of California tree fruits to pay for generic advertising of California nectarines, plums, and peaches as part of a regulatory scheme violated the First Amendment. The court held that the required funding of advertising did not raise a First Amendment issue but instead was simply a question of economic policy for Congress. (Id. at p. 477.) In that case, the growers, handlers, and processors are not required themselves to speak, but are merely required to make contributions for advertising. With trivial exceptions . . . none of the generic advertising conveys any message with which respondents disagree. The message was not objectionable, antagonistic, hostile, and did not require them to be identified or associated with anothers message. (Ibid.) Appellants rely on Environmental Defense Center, Inc. v. U.S. E.P.A. (9th Cir. 2003) 344 F.3d 832, which citing Glickman, found a requirement to distribute educational materials related to storm water discharges to be legitimate and consistent with the regulatory goals of the overall scheme of the Clean Water Act. (Id. at p. 849.)

The United States Supreme Court later clarified what it meant by economic regulation: In Glickman [t]he opinion and the analysis of the Court proceeded upon the premise that the producers were bound together and required by the statute to market their products according to cooperative rules. To that extent, their mandated participation in an advertising program with a particular message was the logical concomitant of a valid scheme of economic regulation. (United States v. United Foods, Inc. (2001) 533 U.S. 405, 412.) In contrast to Glickman, section 2527 is not simply part of a regulatory scheme justified by a larger regulatory purpose. (See id. at pp. 414-415.) The speech mandated by section 2527 is not germane to a purpose related to an association independent from the speech itself . . . . (Id. at p. 415.)[3]

DISPOSITION

The judgment is affirmed. Parties are to bear their own costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

COOPER, P. J.

We concur:

RUBIN, J.

BOLAND, J.

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

[2] We take judicial notice of the prior appeal in this case which includes a copy of the complaint. (Bradley v. Express Scripts, Inc. (July 6, 2006, B181762) [nonpub. opn.].)

[3] We need not consider appellants additional arguments regarding standing to sue under Business and Professions Code section 17200, misjoinder of the prescription drug claims processors, and the declaratory relief cause of action because each depends on appellants ability to assert a viable claim for violation of section 2527. Appellants also ask that the court reverse the grant of respondents motion to strike. Other than mentioning the motions to strike in their facts and in their prayer for relief, appellants provide no discussion of them and no reason why they were in appellants view incorrectly granted. The issue is therefore forfeited. (Tilbury Constructors, Inc. v. State Comp. Ins. Fund (2006) 137 Cal.App.4th 466, 482.)