By JP Ellison –
In a July 3, 2012 memorandum opinion out of the Eastern District of Pennsylvania, the court granted in part and denied in part the defendants’ motion to dismiss the plaintiff’s claims for failure to state a claim. The case, United States of America ex rel Streck v. Allergan Inc., is a qui tam alleging federal and state false claims action violations arising out of average manufacturer price (“AMP”) reporting. The relator alleged that various drug manufacturers violated the false claims acts through their treatment of service fees paid by manufacturers to wholesalers. Hyman Phelps represented two of the defendants in the case. The relator divided the defendants into two groups, so-called “Discount Defendants” and “Service Fee Defendants.”
As to the Discount Defendants, the plaintiff alleged that these defendants improperly treated the service fees paid to wholesalers as discounts, resulting in lower and allegedly false AMPs. As to the Service Fee Defendants, the plaintiff alleged that these defendants had contracts with wholesalers pursuant to which any service fees owed by manufacturers to wholesalers were offset by price increases that occurred after the wholesaler had been invoiced by the manufacturer. The plaintiff further alleged that this offset—a “price appreciation credit” hid these price increases and similarly resulted in lower and allegedly false AMPs.
The defendants made several arguments in support of their motion to dismiss including the argument that the plaintiff failed to plead sufficient facts to allow the court to conclude that it was plausible that the defendants had acted with the intent necessary to commit a false claims act violation. Under the federal false claims act, a defendant must act “knowingly” which is defined to include both deliberate ignorance of and reckless disregard for the truth or falsity of the information—in this case the reported AMPs.
After a review of the statutory and regulatory history of the AMP statute and regulatory guidance , the court concluded that the absence of relevant guidance was fatal to all of plaintiff’s claims prior to January 1, 2007, when Congress changed—and in the court’s view clarified--the statutory definition of AMP. From that date forward, the court ruled that there was sufficient guidance that plaintiff’s claims against the Discount Defendants were plausible, and thus could survive a motion to dismiss. At a later stage in the case, the Discount Defendants will be able to present evidence that even after January 1, 2007, their AMP calculations did not violate the false claims act, but at this juncture, the court only considered the plaintiff’s allegations and was required by law to accept them as true.
As to the Service Fee Defendants, the court noted that the absence of guidance continued until much more recently, specifically February 2, 2012, when CMS, in the preamble to a proposed rule opined that price appreciation credits did not meet the definition of bona fide service fees. Because that guidance post-dated the plaintiff’s complaint, it was of no help in establishing a “knowing” violation by the Service Fee Defendants. Consequently, the court dismissed the claims against those defendants in their entirety.