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 2012 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the period ended June 30, 2012, 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.

I. Average Wholesale Price Litigation and Claims

The following matters involve a benchmark referred to as Average Wholesale Price (“AWP”), which is utilized by some public and private payers to calculate a portion of the amount that pharmacies and other providers are reimbursed for dispensing certain covered prescription drugs.

State AWP Medicaid Settlements

On July 30, 2012, the Company paid approximately $155 million to various states pursuant to the previously announced settlement agreements sponsored by a coalition of State Attorneys General. On August 13, 2012, the State of Indiana, pursuant to its settlement agreement with the Company, filed a notice dismissing with prejudice the claims asserted against the Company in the previously reported action filed in Indiana state court by the State of Indiana, State of Indiana v. McKesson Corp. et al., (No. 49D11-1106-PL-021595). On August 27, 2012, the State of Michigan, pursuant to its settlement agreement with the Company, filed a notice dismissing with prejudice the claims asserted against the Company in the previously reported action filed in Michigan state court by the State of Michigan, Bill Schuette ex rel. State of Michigan v. McKesson Corporation, et al., (No.11-629-CZ). On September 17, 2012, the settling states on whose behalf claims were filed against the Company in the previously reported qui tam action filed in the United States District Court for the District of New Jersey, United States et al. ex rel. Morgan v. Express Scripts et al., (No. 05-1714), filed a notice dismissing those claims to the extent those claims were encompassed by the settlement release in the parties’ agreements.

The Mississippi Action

On August 17, 2012, the court entered an order continuing the March 18, 2013 trial date to September 3, 2013, 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). Discovery is ongoing.

The Utah Action

On August 22, 2012, the Company entered into an agreement with the State of Utah in settlement of the previously reported action filed in the United States District Court for the Northern District of California by the State of Utah against the Company as the sole defendant, State of Utah v. McKesson Corporation, et al., (No. CV 10-4743-SC). On September 7, 2012, pursuant to the parties’ settlement agreement, the parties filed a stipulation dismissing the Utah Action with prejudice.

The Virginia Action

On August 29, 2012, the court entered an order moving the March 11, 2013 trial date to July 8, 2013 in the previously reported action filed in the United States District Court for the Northern District of California by the Commonwealth of Virginia against the Company and two of its employees, Commonwealth of Virginia v. McKesson Corporation, et al., (C11-02782-SI). Discovery is ongoing.

The Arizona Administrative Proceeding

On September 6, 2012, the Arizona court of appeals issued an order affirming the trial court’s order enjoining the Arizona Health Care Cost Containment System (“AHCCCS”) from prosecuting or reinitiating any penalty proceeding against the Company in the previously reported action filed in Arizona state court by the Company against AHCCCS and its Director, McKesson Corporation v. AHCCCS, (No. CV-2011-004446). The time for the filing of a petition for review has expired and no such petition was filed.

Shareholder Derivative Action

On September 10, 2012, a derivative action was filed in California Superior Court, San Francisco County, by a shareholder purportedly on behalf of the Company against certain past and present officers and directors of the Company, alleging that they breached their fiduciary duties and wasted Company assets by failing to prevent the underlying conduct that resulted in the Company’s AWP litigation, and seeking damages, corporate governance and procedural reforms, equitable and injunctive relief, restitution, disgorgement of profits, as well as attorneys’ fees and costs of suit, all in unspecified amounts, Daniel Himmel v. John Hammergren et al., (12-524074). To date, no response to the complaint has been filed.

The Arizona Action

On September 14, 2012, an action was filed in Arizona state court, Maricopa County, by the State of Arizona against the Company asserting claims under the Arizona Consumer Fraud Act, and seeking injunctive relief, restitution, civil penalties, as well as attorneys’ fees and costs of suit, all in unspecified amounts, State of Arizona ex rel. Thomas Horne v. McKesson Corporation, (No. CV2012-013707). The Company has not yet responded to the complaint.

The Kansas Action

On September 28, 2012, the court granted defendant First Databank’s motion to continue the May 28, 2013 trial date to December 2, 2013, in the previously reported action filed in Kansas state court by the State of Kansas against the Company, State of Kansas ex rel. Steve Six v. McKesson Corporation, et al., (No. 10CV1491).

The Wisconsin Action

On October 2, 2012, an action was filed in Wisconsin state court, Dane County, by the State of Wisconsin against the Company, First Databank, the Hearst Corporation, and Hearst Business Media asserting claims under Wisconsin consumer protection and false claims statutes, and for civil conspiracy, and seeking damages, treble damages, civil penalties, forfeitures, injunctive relief, as well as attorneys’ fees and costs of suit, all in unspecified amounts, State of Wisconsin v. McKesson Corporation, et al., (12CV3948). The Company has not yet responded to the complaint.

The Oregon Action

On October 9, 2012, the Company entered into an agreement with the State of Oregon in settlement of the previously reported action filed in the United States District Court for the Northern District of California by the State of Oregon against the Company as the sole defendant, State of Oregon v. McKesson Corporation, et al., (No. C11-05384-SI). On October 18, 2012, pursuant to the settlement agreement, the parties filed a stipulation dismissing the Oregon Action with prejudice.

The Company has a reserve relating to AWP public entity claims, which is reviewed at least quarterly and whenever events or circumstances indicate changes, including consideration of the pace and progress of discussions relating to potentially resolving other public entity claims. Following our most recent review of the reserve for estimated probable losses from current and possible future public entity AWP claims, the Company recorded pre-tax charges of $16 million and $44 million (total of $60 million) during the first and second quarters of 2013. The Company recorded a pre-tax charge of $118 million during the second quarter and first six months of 2012. Pre-tax charges relating to changes in the Company’s AWP litigation reserve, including accrued interest, are recorded in our Distribution Solutions segment. The Company’s AWP litigation reserve is included in other current liabilities in the consolidated balance sheets. 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.

The following is the activity related to the AWP litigation reserve for the first six months of 2013 and 2012:



	Six Months Ended September 30,
(In millions)	2012			2011
AWP litigation reserve at beginning of period	$	453		$	330
Charges incurred	60			118
Payments made	(438		)	(6		)
AWP litigation reserve at end of period	$	75		$	442

II. Other Litigation

On September 28, 2012, the Court entered judgment after trial in favor of the Company and its former indirect subsidiary, McKesson Medical-Surgical MediNet Inc., now merged into and doing business as McKesson Medical-Surgical MediMart Inc., finding no liability under the False Claims Act in the previously reported action, United States ex rel. Jamison v. McKesson Corporation, et al., (No. 2:08-CV-00214-SA). To date, no appeal by the United States has been filed.