U.S. v. Actavis Mid Atlantic LLC, MDL No. 1456.

Page 262

659 F.Supp.2d 262

UNITED STATES of America, ex rel. VEN-A-CARE of the Florida Keys, Inc., a Florida corporation, by and through its principal officers and directors, Zachary T. Bentley and T. Mark Jones, Plaintiff, v. ACTAVIS MID ATLANTIC LLC, et al., Defendants.

MDL No. 1456.

Civil Action No. 08-CV-10852-PBS.

United States District Court, D. Massachusetts.

October 2, 2009.

COPYRIGHT MATERIAL OMITTED

Glenn W. MacTaggart, Prichard, Hawkins, McFarland & Young, LLP, San Antonio, TX, John E. Clark, Goode Casseb Jones Riklin Choate & Watson, San Antonio, TX, Jonathan Shapiro, Stern, Shapiro, Weissberg & Garin, Boston, MA, Susan Schneider Thomas, Berger & Montague PC, Philadelphia, PA, for Plaintiff.

Peter E. Ball, Sally & Fitch LLP, Michael T. Sullivan, Conn, Kavanaugh, Rosenthal, Peisch & Ford, LLP, Courtney Amber Clark, James W. Matthews, Katy Ellen Koski, Sherin and Lodgen LLP, Brian C. Carroll, Martin F. Murphy, Foley Hoag LLP, Boston, MA, James P. Ellison, John R. Fleder, Hyman, Phelps & McNamara, P.C., Edwin John U, Judson D. Brown, Karen N. Walker, Jennifer Gardner Levy, John K. Crisham, Michael C. Occhuizzo, Kirkland & Ellis LLP, Washington, DC, Alexander L. Berg, Kirkland & Ellis LLP, Chicago, IL, Jay P. Lefkowitz, Kirkland & Ellis LLP, Brendan Cyr, Christopher C. Palermo, Michael J. Maloney, Neil Merkl, Philip D. Robben, Sung W. Kim, William A. Escobar, Kelley Drye & Warren LLP, Alison Hanstead, Heather K. McDevitt, Michael J. Gallagher, Paul B. Carberry, Stefan M. Mentzer, Wayne A. Cross, White & Case LLP, New York, NY, for Defendants.

MEMORANDUM AND ORDER

SARIS, District Judge.

I. INTRODUCTION

Relator Ven-A-Care of the Florida Keys, Inc., ("VAC") brings this qui tam action under the False Claims Act ("FCA"), 31 U.S.C. §§ 3729-33, to recover penalties and damages for allegedly false claims and statements resulting from fraudulent conduct of the Defendant pharmaceutical companies.¹ Relator alleges that Defendants reported inflated pricing information for certain drugs which caused the Medicaid program to make substantial overpayments. Defendants have moved jointly to dismiss VAC's complaint, asserting that VAC cannot satisfy the FCA's public disclosure/original source rule, VAC has failed to state a claim for relief under 31 U.S.C. §§ 3729(a)(1) or (a)(2), VAC has failed to plead its claims with the specificity required by Fed.R.Civ.P. 9(b), and VAC's claims are barred by the FCA's six-year statute of limitations. Three individual motions to dismiss have also been filed by companies claiming that they are merely parent companies and not appropriate defendants.² After briefing and a hearing, Defendants' joint motion [Docket No. 34] is DENIED and the individual motions [Docket Nos. 29, 31, 37] are DENIED.

II. BACKGROUND

This case comes as part of the massive AWP litigation currently in front of this Court. The Court assumes familiarity with the drug pricing schemes discussed in its previous AWP-related decisions. See In re Pharm. Indus. Average Wholesale Price Litig., 263 F.Supp.2d 172 (D.Mass. 2003); In re Pharm. Indus. Average Wholesale Price Litig., 307 F.Supp.2d 196 (D.Mass.2004); In re Pharm. Indus. Average Wholesale Price Litig., 321 F.Supp.2d 187 (D.Mass.2004); In re Pharm. Indus. Average Wholesale Price Litig., 339 F.Supp.2d 165 (D.Mass.2004); In re Pharm. Indus. Average Wholesale Price Litig., 230 F.R.D. 61 (D.Mass.2005); In re Pharm. Indus. Average Wholesale Price Litig., 460 F.Supp.2d 277 (D.Mass.2006); In re Pharm. Indus. Average Wholesale Price Litig., 478 F.Supp.2d 164 (D.Mass. 2007); In re Pharm. Indus. Average Wholesale Price Litig., 491 F.Supp.2d 12 (D.Mass.2007); In re Pharm. Indus. Average Wholesale Price Litig., 491 F.Supp.2d 20 (D.Mass.2007); In re Pharm. Indus. Average Wholesale Price Litig., 2007 WL 1051642 (D.Mass. Apr. 2, 2007); In re Pharm. Indus. Average Wholesale Price Litig., 538 F.Supp.2d 367 (D.Mass.2008); In re Pharm. Indus. Average Wholesale Price Litig., 252 F.R.D. 83 (D.Mass.2008); see also Massachusetts v. Mylan Labs., Inc., 357 F.Supp.2d. 314 (D.Mass.2005); Massachusetts v. Mylan Labs., 608 F.Supp.2d 127 (D.Mass.2008).

The false claims at issue here arise from tens of millions of Medicaid transactions for almost 1400 generic drugs (the "Subject Drugs") manufactured by the Defendants over a period of 16 years, which were offered to VAC at prices substantially below the Average Wholesale Price ("AWP") and Wholesale Acquisition Cost ("WAC") reported by the Defendants.

Under the Medicaid program, the funding process begins forty-five days before the relevant quarter, when each state submits to the Centers for Medicare and Medicaid Services ("CMS") a projected budget for the quarter. 42 C.F.R. § 430.30(b). As part of the budget, states provide estimates of various types of service costs including drug costs. Regional CMS analysts review the budget and make recommendations as to whether they agree with the state's funding request. Id. § 430.30(d). These recommendations are then reviewed by the central CMS office. Id. § 430.30(d)(1). In determining the appropriate level of funding, CMS "considers the State's estimates, the regional office recommendations and any other relevant information, including any adjustments to be made under paragraph (d)(2) of this section, and computes the grant." Id. Adjustments under paragraph (d)(2) entail an examination of expenditures from previous quarters. Id. § 430.30(d)(2).

Once the budget is approved, the state can draw down on a federal letter of credit for the allotted amount as costs are incurred. Id. § 230(d)(3)-(d)(4). The awarded funding amount "authorizes the State to draw Federal funds as needed to pay the Federal share of disbursements." Id. § 230(d)(3). States draw down federal funds as actual reimbursement claims are made by Medicaid providers. Id. § 430.30(d)(3)-(d)(4).

After each quarter, the state submits its actual Medicaid expenditures to CMS as part of a reconciliation process. Id. § 430.30(c). If CMS believes that it has overpaid a state, CMS may adjust future authorizations to offset the overpayment or seek to recover the amount overpaid. See 42 U.S.C. § 1396b(d)(5).

III. DISCUSSION

A. The Defendants' Joint Motion

Defendants' joint motion to dismiss stakes out four grounds for dismissal: (1) VAC cannot satisfy the FCA's public disclosure/original source rule; (2) VAC has failed to state a claim for relief under 31 U.S.C. §§ 3729(a)(1) or (a)(2); (3) VAC has failed to plead its claims with the specificity required by Fed.R.Civ.P. 9(b); and (4) VAC's claims are barred by the FCA's sixyear statute of limitations.

1. Public Disclosure

Section 3730(e)(4) of the FCA provides:

No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

31 U.S.C. § 3730(e)(4)(A). This operates as a jurisdictional bar when (1) there has been a "public disclosure," (2) the relator has "based" its suit on the disclosure, and (3) the relator was not the original source of the information on which its suit is based. See In re Pharm. Indus. Average Wholesale Price Litig., 538 F.Supp.2d at 375-79.

Defendants argue that reports prepared by the United States Department of Health & Human Services, Officer of the Inspector General ("OIG") and the United States General Accounting Office ("GAO") constitute public disclosures on which this action is based. Defendants specifically point to an OIG report from August of 1997 entitled "Medicaid Pharmacy—Actual Acquisition Cost of Generic Prescription Drug Products." The report found that pharmacies' actual acquisition costs for generic drugs were, on average, 42.5% less than reported AWPs. (Carroll Decl. Ex. 9.)

To support their claim that VAC's case is based upon public disclosures, the Defendants point to a number of similarities between the Complaint and information in the 1997 report and other OIG and HHS reports. Specifically, they note that:

the Complaint alleges, and the 1997 Report states, that drug manufacturers set the AWPs reported by drug pricing compendia. The Complaint alleges, and the 1997 Report states, that the AWPs provided by drug manufacturers to pricing publications are significantly higher than Medicaid providers' actual acquisition costs. Finally, the Complaint alleges, and the 1997 Report states, that, as a result, Medicaid reimbursement payments for drugs are significantly higher than providers' actual acquisition costs.

(Defs.' Mem. in Supp. of Joint Mot. to Dismiss 15.)

Although the reports do disclose some of the Complaint's essential background information, that manufacturers' reported prices were higher than actual acquisition costs and thus that Medicaid was paying too much in general for drugs, they do not reveal nearly enough information to constitute public disclosures on which the Complaint is based. `[I]f X+Y=Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed.' Under the framework, X stands for the allegedly false set of facts set forth in the claim at issue, and Y is a proxy for the allegedly true set of facts. Thus `when X [the false set of facts] and Y [the true set of facts] surface publicly, or when Z is broadcast ... there is little need for qui tam actions' and the claim will be barred.

In re Pharm. Indus. Average Wholesale Price Litig., 538 F.Supp.2d at 383 (quoting United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14...