Third Circuit Affirms False Claims Act Dismissal Based on Reasonable Interpretation

In United States of America ex rel Streck v. Allergan Inc., a federal False Claims Act (FCA) case alleging that several pharmaceutical manufacturers knowingly calculated false Average Manufacturer Prices (AMPs) that affected their Medicaid rebate payments, the U.S. Court of Appeals for the Third Circuit agreed with the district court that the relator failed to adequately plead such a claim. Hyman, Phelps & McNamara, P.C. represented two of the manufacturers in the case.

We previously posted here about the district court’s decision. The relator alleged that the manufacturers had failed to include so-called “price appreciation credits” as a price adjustment in calculating AMP. The issue considered on appeal by the Third Circuit was whether the relator had pled that the manufacturers had acted “knowingly,” a required intent for an FCA claim. In concluding that the relator had not done so, the court quoted from a D.C. Circuit decision reasoning: “Consistent with the need for a knowing violation, the FCA does not reach an innocent, good-faith mistake about the meaning of an applicable rule or regulations. Nor does it reach those claims made based on reasonable but erroneous interpretations of a defendant’s legal obligations.” (quoting U.S. ex rel Purcell v. MWI Corp., 807 F.3d 281, 287-288 (D.C. Cir. 2015).

Relying on Purcell, the Third Circuit applied a three part test: (1) whether the relevant statute was ambiguous; whether the defendant’s interpretation was objectively reasonable; and (3) whether the defendant was “warned away” from that interpretation “by available administrative and judicial guidance.” With respect to the last item, it is noteworthy that Purcell, citing to the Supreme Court’s 2007 decision in Safeco Insurance Co. of America v. Burr, made it clear that such guidance must be “authoritative guidance” because “[i]n Safeco the Supreme Court explained that informal guidance . . . is not enough to warn a regulated defendant away from an otherwise reasonable interpretation.” The FCA violations alleged by the relator took place between 2004 and 2012. The Third Circuit found that, during that period, the available CMS guidance on calculating AMP in general “failed to articulate a coherent position on AMP and, specifically, price-appreciation credits.” Under those circumstances, the court found that the relator had failed to plead that the defendants were “warned away” from their interpretation that price appreciation credits were excluded from AMP.

Based on the Purcell framework, the Third Circuit agreed with the district court that the manufacturers’ alleged failure to include price appreciation credits as a price adjustmemt in calculating AMP could not sustain an FCA claim, because even if their interpretation was incorrect — which the Third Circuit did not decide but assumed for purposes of its analysis — it was not unreasonable.

It is important to note that, following the period of the violations alleged in the Streck case, CMS did specifically address price appreciation credits. In the preamble to a 2016 regulation, CMS expressed its view that price appreciation credits amount to a price adjustment that should be recognized in AMP. 81 Fed. Reg. 5170, 5228 (Feb. 1, 2016). Therefore, although the Third Circuit’s decision provides helpful support for the proposition that an FCA claim may not be proven based on an innocent mistake about the meaning of ambiguous regulations or guidance, it is questionable whether the exclusion of price appreciation credits from AMP could be defended based on Purcell and the Third Circuit’s decision in Streck after CMS’s 2016 preamble statement.