Commitments And Contingent Liabilities

6 Months Ended

Sep. 30, 2011

Commitments And Contingent Liabilities

Commitments And Contingent Liabilities

12.   Commitments and Contingent Liabilities

In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, other pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. As described below, many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages.

When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.

Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.

Significant developments in previously reported proceedings and in other litigation and claims since the filing of our 2011 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the period ended June 30, 2011, are set out below. Unless otherwise stated, we are currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our financial position or results of operations.

A.Average Wholesale Price Litigation

In the previously reported coordinated public payer Average Wholesale Price ("AWP") actions, collectively In re McKesson Governmental Entities Average Wholesale Price Litigation, filed against the Company in the United States District Court for Massachusetts and relating to alleged misstatements and manipulations of a benchmark for drug reimbursement known as AWP, the Company filed a motion for partial summary judgment, on July 29, 2011, in San Francisco Health Plan v. McKesson Corporation (No. 1:08-CV-10843-PBS) ("San Francisco Action"). The court has not yet ruled on the Company's motion for summary judgment. On September 6, 2011, the court set a trial date of January 17, 2012 for the claims asserted by the Oklahoma State and Education Employees Group Insurance Board in the Board of County Commissioners of Douglas County, Kansas et al. v. McKesson Corporation, (No. 1:08-CV-11349-PBS) ("Douglas County, Kansas Action").

On July 15, 2011, the Company was named as a co-defendant to First DataBank, Inc., in an action filed in Kentucky state court, Franklin County, by the Commonwealth of Kentucky based on essentially the same factual allegations as alleged in In re McKesson Governmental Entities Average Wholesale Price Litigation, asserting claims under the Kentucky consumer protection act, the Kentucky Medicaid fraud statute, the Kentucky theft by deception statute, the Kentucky false advertising statute, and for fraud, negligent misrepresentation, and civil conspiracy, and seeking damages and punitive damages, civil penalties, disgorgement of profits, interest, injunctive and declaratory relief, attorneys' fees and costs of suit, all in unspecified amounts, Commonwealth of Kentucky v. McKesson Corp. et al., (No. 11-CI-00935). The court has not yet ruled on the Company's motion to dismiss.

On August 15, 2011, the Company filed a motion to dismiss in the previously reported action filed against the Company and two of its employees in the United States District Court, Northern District of California, by the Commonwealth of Virginia, Commonwealth of Virginia v. McKesson Corporation, et al., (C11-02782-SI). On October 13, 2011, the court denied the Company's motion to dismiss. On October 18, 2011, the court set a trial date of March 11, 2013.

On August 19, 2011, the Company filed a motion to dismiss in the previously reported action filed in Michigan state court by the State of Michigan against the Company, First DataBank, Inc., and the Hearst Corporation, Bill Schuette ex rel. State of Michigan v. McKesson Corporation, et al., (11-629-CZ). The court has not yet ruled on the Company's motion to dismiss.

On August 25, 2011, the Company filed a motion to dismiss the Second Amended Complaint in the previously reported action filed in Mississippi state court by the State of Mississippi against the Company, State of Mississippi v. McKesson Corporation, et al., (No. 251-10-862CIV). The court has not yet ruled on the Company's motion to dismiss.

On August 30, 2011, the court set the trial date in the previously reported action filed in the United States District Court, Northern District of California, by the State of Utah against the Company, State of Utah v. McKesson Corporation, (No. CV 10-4743-SI), for October 22, 2012.

On September 8, 2011, the court entered an order granting the State of Louisiana's motion to voluntarily dismiss its antitrust claims in the previously reported action filed in Louisiana state court by the State against the Company, State of Louisiana v. McKesson Corporation, (No. C597634 Sec. 23). The State's dismissal of its antitrust claims rendered moot the Company's previously reported appeal, which was formally dismissed by the Company on September 14, 2011. The Louisiana court of appeals, on September 20, 2011, denied the Company's application for a writ to review the trial court's order consolidating, for all purposes, the State's action against the Company with the State's action against numerous drug manufacturers, State of Louisiana v. Abbott Laboratories, Inc., et al., (No. C596164). The trial court has not yet ruled on the Company's motion to dismiss and no trial date has been set.

On September 26, 2011, the court set the trial date in the previously reported action filed in Hawaii state court by the State of Hawaii against the Company and First DataBank, Inc., State of Hawaii v. McKesson Corporation, et al., (No. 10-1-2411-11-GWBC), for April 2013.  

On September 29, 2011, the Company filed a motion to dismiss in the previously reported action filed in Indiana state court by the State of Indiana against the Company and First DataBank, Inc., State of Indiana v. McKesson Corp. et al., (No. 49D11-1106-PL-021595). The court has not yet ruled on the Company's motion to dismiss.

On October 12, 2011, the Arizona Health Care Cost Containment System ("AHCCCS") filed its opening appellate brief in the previously reported action filed by the Company in Arizona Superior Court against AHCCCS, McKesson Corporation v. AHCCCS, (No. CV-2011-004446). AHCCCS's is appealing the trial court's April 28, 2011 ruling that enjoined AHCCCS from prosecuting or reinitiating any administrative proceeding seeking penalties or assessments against the Company, and the judgment entered on May 31, 2011.

In October 2011, the Company reached an agreement with plaintiffs in the Douglas County, Kansas Action to pay $82 million in settlement of all claims on behalf of a nationwide class of cities and counties. The settlement in the Douglas County, Kansas Action provides that the Company will pay $82 million into a settlement escrow in installments following preliminary and final approvals of the settlement by the court, which escrow account shall be used for settlement administration costs, including notice, attorneys' fees as approved by the court and distribution to class members in a manner determined by plaintiffs subject to court approval. The settlement also provides that the settlement class will release all claims against the Company relating to First Databank, Inc.'s published AWPs, whenever such claims were incurred, and includes an express denial of any liability on the part of the Company.

As previously reported, as of March 31, 2010, the Company had a reserve relating to its AWP public entity claims of $143 million. During the second quarter of 2011, the Company recorded an additional pre-tax charge of $24 million for the settlement with the State of Connecticut. During the third quarter of 2011, the Company recorded a pre-tax charge of $189 million following a review of the reserve, including consideration of the pace and progress of discussions relating to state and federal Medicaid claims. In 2011, the Company made a payment of $26 million from the reserve, and as of March 31, 2011, the reserve relating to the Company's AWP litigation was $330 million.

During the second quarter of 2012, the Company recorded a pre-tax charge of $118 million following a review of its AWP reserve, including consideration of the Douglas County, Kansas Action settlement and the pace and progress of discussions relating to potentially resolving other public entity claims. In 2012, total cash payments from the reserve were $6 million, and as of September 30, 2011, the reserve relating to the Company's AWP litigation was $442 million. The Company's AWP litigation reserve is included in other current liabilities in the condensed consolidated balance sheets. Pre-tax charges relating to changes in the Company's AWP litigation reserve are recorded within its Distribution Solutions segment. In view of the number of outstanding cases and expected future claims, and the uncertainties of the timing and outcome of this type of litigation, it is possible that the ultimate costs of these matters may exceed or be less than the reserve.

B.Other Litigation

The Company's subsidiary, McKesson Medical-Surgical Inc. ("MMS"), is a defendant in 47 cases pending in Nevada state court alleging that plaintiffs contracted Hepatitis C after being administered the drug Propofol during medical procedures. The cases generally include claims for strict liability, failure to warn, negligence, and breach of warranty.  Teva, the manufacturer of Propofol, has agreed to indemnify MMS in these matters.   MMS was named as a defendant by one of the five plaintiffs whose cases were recently tried in Las Vegas, Nevada state court. In that case, the jury found MMS liable for $6 million in compensatory damages and $18 million in punitive damages. MMS will move to have the trial court overturn these verdicts, and, should those motions prove unsuccessful, it will appeal them.  Jury selection recently began in another Propofol case in which MMS is a named defendant, and a third case is scheduled to begin trial on December 6, 2011.

C.Government Investigations

From time-to-time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. Such subpoenas and requests also can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the health care industry, as well as to settlements. Examples of such investigations are included in the Company's 2011 Annual Report on Form 10-K. An additional example is an investigation by the Regie de l'assurance maladie Du Quebec ("RAMQ") to which the Company's subsidiary, McKesson Canada Corporation ("MCC"), has responded. RAMQ is a provincial government agency with administrative authority over the conduct of pharmaceutical businesses in Quebec Province. MCC has cooperated fully with the investigation which has been conducted, with substantial interruptions, from 2009 through the present. The Company believes that the investigation is focused on certain discounts and payments offered to pharmacies in the Quebec Province. In September, RAMQ indicated that its investigation is in its final stages.