Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Commonwealth of Pennsylvania v. Tap Pharmaceutical Products

August 31, 2011

COMMONWEALTH OF PENNSYLVANIA, PLAINTIFF
v.
TAP PHARMACEUTICAL PRODUCTS, INC.; ABBOTT LABORATORIES; ASTRAZENECA PLC; ASTRAZENECA, HOLDINGS, INC.; ASTRAZENECA PHARMACEUTICALS LP; ASTRAZENECA LP; BAYER AG; BAYER CORPORATION; SMITHKLINE BEECHAM CORPORATION D/B/A GLAXOSMITHKLINE; PFIZER, INC.; PHARMACIA CORPORATION; JOHNSON & JOHNSON; ALZA CORPORATION; CENTOCOR, INC.; ETHICON, INC.; JANSSEN PHARMACEUTICAL PRODUCTS, L.P.; MCNEIL-PPC, INC.; ORTHO BIOTECH, INC.; ORTHO BIOTECH PRODUCTS; L.P.; ORTHO-MCNEIL PHARMACEUTICAL, INC; AMGEN, INC.; IMMUNEX CORPORATION; BRISTOL-MYERS SQUIBB COMPANY; BAXTER INTERNATIONAL INC.; BAXTER HEALTHCARE CORPORATION; IMMUNO-U.S., INC.; AVENTIS PHARMACEUTICALS, INC.; AVENTIS BEHRING, L.L.C.; HOECHST MARION ROUSSEL, INC., BOEHRINGER INGELHEIM CORPORATION; BOEHRINGER INGELHEIM PHARMACEUTICALS, INC.; BEN VENUE LABORATORIES; BEDFORD LABORATORIES; ROXANE LABORATORIES; SCHERING-PLOUGH CORPORATION; WARRICK PHARMACEUTICALS CORPORATION; SCHERING SALES CORPORATION; DEY, INC., DEFENDANTS



The opinion of the court was delivered by: Robert Simpson, Judge

Argued: May 9, 2011

BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge HONORABLE ROBERT SIMPSON, Judge (P) HONORABLE BARRY F. FEUDALE, Senior Judge

OPINION BY JUDGE SIMPSON

OPINION re POST-TRIAL MOTIONS of the COMMONWEALTH of PENNSYLVANIA and JOHNSON & JOHNSON DEFENDANTS TABLE OF CONTENTS

I. BACKGROUND...........................................................................5

A. Opening..............................................................................5

B. Parties................................................................................8

1. Plaintiff Agencies...........................................................8

a. DPW/Pennsylvania Medicaid.....................................8

b. Department of Aging/PACE.....................................10

2. Johnson & Johnson Defendants.........................................12

C. Procedural History................................................................16

II. FINDINGS AND CONCLUSIONS: INFLATED "PRICES"................22

A. WAC and AWP - Generally...................................................22

B. AWP System and Confusion - Findings......................................25

C. CPL Violation.....................................................................34

1. Tendency to Deceive......................................................34

2. Materiality..................................................................35

3. ―Government Knowledge‖...............................................35

a. Generally............................................................35

b. ―Government Knowledge‖ - Other Findings..................36

(1) Radke Testimony..........................................36

(2) Other DPW Evidence.....................................38

(3) PACE Evidence............................................43

c. ―Government Knowledge‖ - Conclusions......................46

4. Reliance/―Government Choice‖.........................................46

a. Generally............................................................46

b. ―Government Choice‖ - Findings...............................48

5. Causation....................................................................50

6. Restoration Amounts......................................................53

a. Generally............................................................53

b. Rebates - Findings.................................................54

D. Negligent Misrepresentation....................................................56 2

E. Conspiracy.........................................................................58

III. FINDINGS AND CONCLUSIONS: MARKETING THE SPREAD......60

A. Procrit®...........................................................................60

B. Remicade®........................................................................64

C. Conclusions.......................................................................67

IV. J&J GLOBAL CHALLENGE: JUDICIAL ESTOPPEL.....................68

A. Contentions........................................................................68

B. Analysis............................................................................70

V. J&J GLOBAL CHALLENGE: NON-JUSTICIABLE POLITICAL

QUESTION.................................................................................75

A. Contentions.........................................................................75

B. Analysis............................................................................76

VI. J&J CHALLENGES TO CPL AWARDS.......................................84

A. Plaintiff Agencies Not Consumers.............................................84

1. Contentions................................................................84

2. Analysis....................................................................84

B. Challenge to Meaning and Application of ―AWP‖..........................89

1. Contentions................................................................89

2. Analysis....................................................................91

a. ―Plain Meaning‖ Construction of AWP........................91

b. Target Audience...................................................95

c. Sophisticated Parties..............................................95

d. Materiality.........................................................98

e. Causation of Harm.................................................98

C. Injunction Improper............................................................100

1. Contentions...............................................................100

2. Injunction Moot..........................................................101

3. Injunction Unnecessary.................................................105

a. Contentions.......................................................105

b. Standard for Injunction Under CPL...........................106

c. Urgent Necessity.................................................110

4. First Amendment.........................................................119

D. Restoration Improper...........................................................122

1. Contentions................................................................122

2. Analysis - Generally....................................................123

3. No Basis for Injunction.................................................124

4. J&J Not ―Acquire‖ Funds..............................................124

5. No Evidence of ―Overpayment‖.......................................126

6. Challenge to Warren-Boulton's PBM Model........................127

a. Contentions.......................................................127

b. Analysis - Generally.............................................128

c. Global Challenges to ―But For‖ Methodology...............129

d. Real-World Factors..............................................130

e. Improper Inclusions..............................................131

7. Restoration Before 1997................................................131

a. Contentions.......................................................131

b. Waiver.............................................................132

E. Civil Penalties Improper.......................................................132

1. Contentions...............................................................132

2. Evidence of Willfulness.................................................134

3. Changes to NDCs........................................................134

VII. COMMONWEALTH DEMAND FOR JNOV..............................136

A. Contentions......................................................................136

B. Analysis...........................................................................138

1. Generally..................................................................138

2. Negligent Misrepresentation...........................................141

3. Civil Conspiracy.........................................................144

VIII. COMMONWEALTH DEMAND FOR NEW TRIAL.....................145

A. Contentions......................................................................145

B. Analysis..........................................................................147

IX. COMMONWEALTH DEMAND FOR MODIFICATION...............150

A. Contentions......................................................................150

B. Analysis..........................................................................152

X. CONCLUSION....................................................................156

I. BACKGROUND

A. Opening

This complex original jurisdiction action, which comes before a panel of this Court for a third time, involves the pricing of pharmaceuticals reimbursed by the Pennsylvania Department of Public Welfare (DPW), which administers Pennsylvania's Medicaid program, and by the Department of Aging, which administers the Pharmaceutical Assistance Contract for the Elderly (PACE) program, based on Average Wholesale Price (AWP) between 1991 and 2008.

In particular, the Commonwealth, through its Attorney General, filed suit against numerous pharmaceutical companies, including defendant Johnson & Johnson and several of its current or former subsidiary operating companies*fn1 (collectively, ―Johnson & Johnson Defendants‖), which, the Commonwealth claimed, engaged in improper conduct that caused DPW and PACE (collectively, ―Plaintiff Agencies‖) to pay inflated prices for pharmaceuticals the defendant pharmaceutical companies manufactured, marketed and sold. Among other things, the Commonwealth alleged the defendant pharmaceutical companies, including Johnson & Johnson Defendants, reported, or contributed to the reporting of, inflated AWPs for certain branded drugs which are published in commercial publications. These inflated prices caused damages to DPW and PACE, which relied on these reported prices.

Central among the Commonwealth's claims is that the published AWPs for Johnson & Johnson Defendants' branded drugs are fictitious because they do not reflect an accurate average wholesale price charged by wholesalers to providers, including physicians and pharmacists. Because AWP was the predominant benchmark for reimbursement by government and third-party payors, including DPW and PACE, the Commonwealth asserted that Johnson & Johnson Defendants, and other pharmaceutical companies, inflated or contributed to the inflation of each drug's AWP to create a ―spread‖ between a provider's actual acquisition cost and the fictitious, published AWP, and that pharmaceutical companies, including Johnson & Johnson Defendants, market this spread in order to sell more product.

The Commonwealth's suit against Johnson & Johnson Defendants, which asserted claims of common law fraud or misrepresentation, civil conspiracy and unjust enrichment, as well as violations of the Unfair Trade Practices and Consumer Protection Law (CPL),*fn2 culminated in a five-week non-jury trial.

Ultimately, the trial judge issued a Non-Jury Decision (Decision) in which he found in favor of Johnson & Johnson Defendants on the Commonwealth's common law claims. With regard to the CPL claims, the trial judge found Johnson & Johnson Defendants violated the CPL. As to the remedy for the CPL violations, the Decision provided for a grant of perpetual injunctive relief, which essentially restrains Johnson & Johnson Defendants from contributing to the reporting of inflated AWPs for their drugs and from marketing or promoting the spread for their drugs. In addition, the trial judge ordered Johnson & Johnson Defendants to restore to the Commonwealth the amount of $45,283,562. Further, pursuant to Section 8(b) of the CPL, 73 P.S. §201-8(b), the trial judge found Johnson & Johnson Defendants willfully used practices declared unlawful by the CPL. Thus, in addition to restoration, the trial judge awarded civil penalties against Johnson & Johnson Defendants in the amount of $6,567,000.

Both the Commonwealth and Johnson & Johnson Defendants filed post-trial motions. For its part, the Commonwealth seeks judgment non obstante veredicto (JNOV) as to DPW's claim for negligent misrepresentation as well as both Plaintiff Agencies' claims for civil conspiracy. Alternatively, the Commonwealth seeks a new trial on its negligent misrepresentation and civil conspiracy claims for both Plaintiff Agencies as well as modification of the trial judge's Decision under the CPL to include an award of costs and attorney fees.

On the other hand, Johnson & Johnson Defendants challenge the trial judge's determinations that they violated the CPL. They therefore request the Court vacate the trial judge's Decision awarding injunctive relief and restoration.

For the following reasons, we deny the Commonwealth's post-trial motions. In addition, we decline Johnson & Johnson Defendants' request to vacate the award of injunctive relief and restoration.

B. Parties

1. Plaintiff Agencies

As noted above, the Commonwealth, through its Attorney General, filed this action on behalf of DPW and PACE.*fn3 A brief description of the roles of the Plaintiff Agencies is helpful.

a. DPW/Pennsylvania Medicaid

DPW administers Pennsylvania's Medicaid program. Medicaid is a joint state-federal funded program for medical assistance in which the federal government approves a state plan for the funding of medical services for the needy and then subsidizes a significant portion of the financial obligations the state agreed to assume. See Notes of Testimony (N.T.), 11/2/10, at 2196; Eastwood Nursing & Rehab. Ctr. v. Dep't of Pub. Welfare, 910 A.2d 134 (Pa. Cmwlth. 2006). Once a state voluntarily chooses to participate in Medicaid, the state must comply with the requirements of Title XIX of the Social Security Act, 42 U.S.C. §§1396-1396(q), and applicable regulations. Eastwood Nursing.

DPW provides medical benefits to the poor in Pennsylvania. N.T., 11/2/10, at 2184. According to Dr. Terri Cathers, who testified as designee for DPW, and who serves as the Director of Pharmacy for the Fee-for-Service Program of DPW's Office of Medical Assistance Programs:

Medical Assistance is an entitlement program that is essentially awarded to those recipients who are a hundred percent of the federal poverty level. And it ensures access to quality health care, pharmacy benefits, and in some cases food stamps and cash as needed for the poor and indigent, the poorest folks in the state of Pennsylvania, many of which are children.

Id.

With regard to prescription reimbursement, because of the number of claims Pennsylvania Medicaid processes every day, claims are submitted electronically. Id. at 2193. The Medicaid fee-for-service program covers approximately 25,000 national drug codes (NDCs). Id. at 2188.

Pennsylvania Medicaid benefits are delivered through two systems: the ―fee-for-service‖ system and the managed care system. Id. at 2184-85. In Pennsylvania, 42 counties operate under the fee-for-service program. Id. at 2185. These counties are located in the center and the northern tier of the state (configured in a ―T‖ formation). Id. at 2185-86. The fee-for-service program reimburses providers for prescription drugs and pays a dispensing fee on a claimby-claim basis. Id. at 2192-93.

Pennsylvania's lower southeast and southwest regions are known as ―mandatory managed care‖ zones; nine managed care organizations (MCOs) contract with DPW to provide Medicaid benefits and services. Id. at 2185. DPW reimburses these MCOs on a monthly, fixed fee basis per recipient. Id.*fn4

DPW reimburses drug providers, like pharmacies, at the lesser of estimated acquisition cost, which is DPW's best estimate of the rate that ensures access to the provider, or a ―usual and customary‖ charge, which is the amount a pharmacy would submit or charge a cash-paying customer.

The baseline value for DPW reimbursement is AWP, which is listed in the national pricing compendia, including First DataBank and Medispan. Id. at 2193.

The reimbursement formula for Medicaid is fixed by state regulation. Between 1991 and 1995, DPW reimbursed providers at 100% of AWP. Id. at 2195. From 1996 through 2004, DPW reimbursed providers at a rate of AWP- 10%. Id.

b. Department of Aging/PACE

PACE provides a comprehensive prescription drug benefit to qualified, older Pennsylvania residents. Id. at 2060-61. PACE is available to Pennsylvania residents, aged 65 or older, with limited incomes. Id. PACE eligibility requirements are based on income, residency and age. Id.

PACE is funded through revenue generated by the Pennsylvania Lottery. Id. at 2064. PACE has an annual budget that exceeds $200 million, approximately 97% of which is used to pay for prescription drugs for its beneficiaries. Id. at 2066.

Thomas Snedden, who has served as the Director of PACE for over 25 years, gave partly credible testimony as to the program. He believably explained the typical PACE beneficiary is a 78-year-old, widowed female who lives alone in a private residence, who has less than a 10th grade education, and who has four or five chronic medical conditions. Id. at 2067.

PACE reimburses providers for a drug's ingredient cost and a dispensing fee. When a pharmacy fills a PACE beneficiary's prescription, it bills PACE, which, in turn, electronically reimburses the pharmacy for the prescription. Id. at 2069-71.

Because of the complex administration of the PACE program, the voluminous claims PACE receives are handled and processed electronically. Id. at 2071. PACE covers as many as 60,000 drugs. Id. at 2068-69. It reimburses providers for approximately 40,000 prescriptions each day. Id. at 2069.

PACE's reimbursement formula is fixed by statute. Id. at 2072. AWP is the basis upon which PACE reimburses pharmacies. Id. PACE initially reimbursed providers at 100% of AWP. Id. Beginning in 1996, the statutory reimbursement rate changed to AWP-10%. Id. In 2003, PACE's reimbursement formula changed to AWP-20%. Id. PACE uses the pricing publication Red Book. Id. at 2087.

2. Johnson & Johnson Defendants

Defendant Johnson & Johnson is a New Jersey corporation. N.T., 10/18/10, at 127. Alza Corporation, Centocor, Inc., Ethicon, Inc., Janssen L.P., McNeil-PPC, Inc., Ortho-Biotech, Inc., Ortho-Biotech Products, L.P. and Ortho- McNeil Pharmaceutical, Inc. are or were subsidiary operating companies of Johnson & Johnson. Id. Johnson & Johnson Defendants engage in or did engage in the business of manufacturing, distributing, marketing and selling prescription drugs, some of which were reimbursed by the Plaintiff Agencies. Id. at 128.

The specific Johnson & Johnson branded drugs at issue in this case are: Procrit, Remicade, Topamax, Aciphex, Bicitra, Doxil, Duragesic, Elmiron, Erycette, Flexeril, Floxin, Floxin I.V., Grifulvin, Haldol, Haldol Decanoate, Levaquin, Monistat, Mycelex, Pancrease, Parafon, Polycitra, Propulsid, Regranex, Reminyl, Renova, Retin-A, Retin-A Micro, Risperdal, Spectazole, Sporanox, Terazol, Testoderm, Tolectin, Tylenol/COD, Tylox, Ultracet, Ultram, Urispas, Vascor and Viadur. Id. at 132-33.

The majority of the claims by the Plaintiff Agencies involve self- administered, branded drugs, such as pills. Self-administered, branded drugs are usually obtained from pharmacies, which are reimbursed for their cost through the Medicaid and PACE programs. During the period of the Plaintiff Agencies' claims, reimbursement for these drugs was based on estimated acquisition cost paid by the pharmacies, for which some variation of AWP was a proxy. Pharmacies were also paid a dispensing fee.

A smaller percentage of the Plaintiff Agencies' claims here involve Medicare Part B drugs. These are injectable or infusible drugs which require administration by a physician. Eighty percent of the cost is reimbursed by the Plaintiff Agencies. See 42 U.S.C. §1395l; See In re Pharm. Indus. Average Wholesale Price Litig., 491 F.Supp.2d 20, 33 (D. Mass. 2007), aff'd, 582 F.3d 156 (1st Cir. 2009), cert. dismissed sub. nom., AstraZeneca Pharm. LP v. Blue Cross Blue Shield of Massachusetts, ___ U.S. ___, 131 S.Ct. 60 (2010) (MDL 2007). Patients or someone on their behalf (such as an insurer) are responsible for a 20% co-payment. Id. at 38-39 (discussing Johnson & Johnson Defendants). Since 1992, reimbursement and co-payment for Medicare Part B drugs has been based on a formula which included an AWP factor (plus an allowance for other costs, such as a dispensing fee). See id. at 33-34, 38.

There are no generic drugs involved in this case.

Johnson & Johnson acquired Defendant Centocor, Inc. after Centocor obtained federal approval to market Remicade® (infliximab), a Medicare Part B infusible drug. N.T., 10/18/10, at 128-29.

Defendant Ortho-Biotech Products, L.P. was a limited partnership. Id. at 131. During its existence, Ortho-Biotech Products was a wholly owned subsidiary of Johnson & Johnson. Id. Ortho-Biotech Products marketed branded drugs, which included Procrit® (epoetin alfa), a Medicare Part B injectable drug. Id.

In December 2008, a new company, Centocor Ortho-Biotech, Inc. was created through a merger between Ortho-Biotech, Inc. and Centocor, Inc. Centocor Ortho-Biotech, Inc., f/k/a Centocor, Inc., is a wholly owned subsidiary of Johnson & Johnson.

Defendant Ortho-McNeil Pharmaceutical, Inc. (OMP) was formerly a wholly owned subsidiary of Johnson & Johnson. Id. OMP was formed through the merger of two other Johnson & Johnson subsidiaries, Ortho Pharmaceutical Corporation and McNeil Pharmaceutical. Id. at 131-32. OMP's drugs included Terezol, Terconazole, and Elmiron capsules. Id. at 132. OMP transferred its assets and liabilities to Janssen Pharmaceutica, Inc. and simultaneously changed its name to Ortho-McNeil-Janssen Pharmaceuticals, Inc. Id.

Defendant Janssen Pharmaceutical Products, L.P. was formerly a wholly owned subsidiary of Johnson & Johnson. Id. at 129. A Janssen predecessor was founded in Belgium as an independent company in 1953. Id. Johnson & Johnson acquired that company in 1961 and opened its first office in the United States in 1973. Id. Janssen was engaged in the manufacture and sale of branded anti-psychotic pharmaceutical products, including Risperdal. Id. at 129-30.

Defendant McNeil Consumer and Specialty Pharmaceuticals, a division of McNeil-PPC Inc., was a New Jersey corporation. Id. at 130. McNeilPPC, Inc. is an indirect wholly owned subsidiary of Johnson & Johnson. Id. Through its McNeil Consumer and Specialty Pharmaceuticals Division, McNeil manufactures and sells a variety of 15 over-the-counter and branded prescription drugs. Id. McNeil's prescription drugs include Flexeril. Id.*fn5

As discussed in more detail hereafter, Johnson & Johnson Defendants typically sell their pharmaceutical products to wholesalers, warehousing chains, and specialty pharmacies at or below a published list price sometimes referred to as wholesale acquisition cost, or WAC. Id. at 133-34. In turn, these wholesalers sell Johnson & Johnson branded drugs to providers, such as pharmacies and physicians.

Some Johnson & Johnson Defendants sell their branded Medicare Part B injectable drugs directly to physicians. Id. at 134. Other Johnson & Johnson Defendants sell self-administered drugs that are typically dispensed to patients by retail pharmacies or in hospitals. Id.

Johnson & Johnson Defendants report their WACs to pricing compendia and others. Id. at 134. Prior to 2004, certain Johnson & Johnson Defendants reported suggested AWPs that were generally 20% or 25% above WAC. Id. at 133.

C. Procedural History

The initial procedural background to this complex litigation is set forth in this Court's two prior en banc decisions at the preliminary objection stage. See Commonwealth ex rel. Pappert v. TAP Pharm. Prods., Inc., 885 A.2d 1127 (Pa. Cmwlth. 2005) (TAP II); Commonwealth ex rel. Pappert v. TAP Pharm. Prods., Inc., 868 A.2d 624 (Pa. Cmwlth. 2005) (TAP I).

Briefly, in March 2004, the Commonwealth filed its original complaint against 14 pharmaceutical companies alleging the companies engaged in improper conduct that caused certain Commonwealth entities, including DPW and PACE, to pay inflated prices for various pharmaceuticals the companies manufacture, market and sell. In response, the companies filed preliminary objections. In TAP I, we sustained the defendant pharmaceutical companies' preliminary objections challenging the sufficiency of the factual averments in the Commonwealth's original complaint, but we granted the Commonwealth leave to amend.

Shortly thereafter, the Commonwealth filed a corrected amended complaint, to which the defendant pharmaceutical companies again filed preliminary objections. The Commonwealth's corrected amended complaint pled four causes of action: fraud or misrepresentation, civil conspiracy, unjust enrichment and violations of the CPL.

In TAP II, we overruled the defendant pharmaceutical companies' global preliminary objections that challenged the sufficiency of the corrected amended complaint. We directed the defendant pharmaceutical companies to file answers to the amended complaint, which they did.

This case then proceeded through a lengthy period of robust discovery administered in part by a discovery master. By order, discovery closed on July 30, 2010.

In late-May 2010, the trial judge scheduled the case for jury trial in Northampton County on August 9, 2010. The pharmaceutical company defendants filed motions seeking separate trials.

After status conference with all remaining defendants, the trial judge granted in part, and deferred in part, the defendants' motion for separate trials. In particular, the trial judge granted Defendant Bristol-Myers Squibb Co.'s (BMS) motion so that only BMS would be involved in the August 9 jury trial. Ultimately, the Commonwealth's suit against BMS proceeded to a five-week jury trial, after which a jury returned verdicts in favor of BMS on the Commonwealth's common law claims. Consistent with his prior instructions, the trial judge issued a decision on the Commonwealth's CPL claims. In his decision, the trial judge determined BMS violated the CPL, and he awarded a perpetual injunction and restoration against BMS.

On the same day the trial judge issued his decision on the Commonwealth's CPL claims against BMS, he issued an order denying in part, and deferring in part, the remaining defendants' motion for separate trials. In particular, the trial judge denied the motions for separate trials filed by Johnson & Johnson Defendants and TAP Pharmaceutical Products, Inc. and scheduled a jury trial involving those two defendants for October 18, 2010, in Northampton

County.*fn6 Prior to final pretrial conference, TAP Pharmaceutical Products reached a settlement agreement with the Commonwealth. As a result, the second trial involved only the Commonwealth's claims against Johnson & Johnson Defendants.

After final pretrial conference for the trial involving Johnson & Johnson Defendants, the trial judge issued an order indicating his intention to submit issues related to the Commonwealth's common law claims to the jury. The trial judge also indicated he would render a non-jury decision on the Commonwealth's unjust enrichment and CPL claims. Shortly thereafter, the parties agreed to waive their right to a jury trial, thereby electing to proceed to non- jury trial. Prior to trial, the trial judge disposed of more than 20 motions in limine, filed by the Commonwealth and Johnson & Johnson Defendants. Of particular note, the trial judge issued a 13-page opinion denying Johnson & Johnson

Defendants' Supplemental Motion In Limine to Preclude Reference to or Application of the Court's prior ―Plain Meaning‖ Interpretation of AWP. In that opinion, the trial judge explained his interpretation of the term average wholesale price or AWP as set forth in the relevant statutory and regulatory provisions.

Trial commenced as scheduled on October 18 and continued over the course of the ensuing five weeks. At trial, the parties presented 19 live witnesses. In addition, the parties read or played videotapes of prior testimony by more than 20 witnesses. Hundreds of exhibits, many voluminous, were also received.

Ultimately, the judge issued his Decision, finding in favor of Johnson & Johnson Defendants on the Commonwealth's unjust enrichment, misrepresentation/fraud and civil conspiracy claims. However, the trial judge found Johnson & Johnson Defendants violated the CPL by engaging in unfair or deceptive practices. See Non-Jury Decision, 12/7/10 (Attached as Appendix A). Consistent with Pa. R.C.P. No. 1038, the trial judge did not issue findings and conclusions, but he did dispose of all issues.

In particular, the trial judge stated the standard in an enforcement action applying the catch-all provision of the CPL is different than the standard applicable to common law fraud and misrepresentation claims. Commonwealth v. Manson, 903 A.2d 69 (Pa. Cmwlth. 2006); Commonwealth v. Percudani, 825 A.2d 743 (Pa. Cmwlth. 2003); see Weinberg v. Sun Co., Inc., 565 Pa. 612, 777 A.2d 442 (2001). Under this approach, a plaintiff's knowledge of the inaccuracy of a representation and a plaintiff's lack of reliance, while factors to be considered, are not necessarily complete defenses in an enforcement action brought in the public interest. See Manson; Percudani; see also MDL 2007 (in AWP litigation under unfair trade practice statute, private payors' knowledge that AWPs were not actual averages of wholesale prices did not shield drug manufacturers from liability). Cf. Helbros Watch Co. v. Federal Trade Comm'n, 310 F.2d 868 (D.C. Cir. 1962), cert. denied, 372 U.S. 976 (1963) (fictitious pricing or fictitious pre-ticketing is illegal even if sophisticated purchaser knows price is fictitious).

Based on his findings that Johnson & Johnson Defendants violated the CPL, the trial judge issued a perpetual injunction. Specifically, the trial judge restrained Johnson & Johnson Defendants from contributing in any manner, directly or indirectly, to the reporting to the Plaintiff Agencies of inflated AWPs for Johnson & Johnson Defendants' branded drugs without also arranging for the transmission to the Plaintiff Agencies of current, accurate estimated acquisition costs, such as average manufacturers' prices (AMPs) or average sales prices (ASPs), for each of their branded drugs, in a format equivalent to that in which AWPs are reported to the Plaintiff Agencies, or in another format acceptable to the Plaintiff Agencies. The injunction also restrained Johnson & Johnson Defendants from contributing in any manner, directly or indirectly, to the promotion or marketing of spreads for their branded drugs that are reimbursed by the Plaintiff Agencies.

In addition, pursuant to Section 4.1 of the CPL,*fn7 the trial judge directed Johnson & Johnson Defendants to restore to the Commonwealth money in the amount of $45,283,562. In so doing, the trial judge accepted as credible the expert testimony in general, and the ―PBM‖ (pharmacy benefit manager) damage methodology excluding interest in particular, of the Commonwealth's damage expert, Frederick R. Warren-Boulton, Ph.D. The trial judge calculated restoration using Dr. Warren-Boulton's suggested figures and preferred methodology for the period 1991 through 2004, subject to two exceptions.*fn8

The trial judge further found Johnson & Johnson Defendants willfully used practices declared unlawful by the CPL. As a result, he awarded the Commonwealth civil penalties under Section 8(b) of the CPL, 73 P.S. §201-8(b), in the amount of $6,567,000.00. In so doing, the trial judge credited the civil penalty methodology set forth by Dr. Warren-Boulton, concluding a violation occurred each time the reported AWP changed for a Johnson & Johnson Defendant branded drug in this case during the period 1991-2004, and assessing each violation at $1,000. The trial judge declined to award any sums under Section 9.2 of the CPL, 73 P.S. §201-9.2.*fn9

Further, the trial judge rejected the affirmative defenses asserted by Johnson & Johnson Defendants that the Commonwealth was judicially estopped, and that the case presented a non-justiciable, political question.

As a final point, the trial judge indicated the Decision was not immediately effective and would not become effective until the completion of post-trial practice. See Pa. R.A.P. 311(a)(4).

Shortly thereafter, both the Commonwealth and Johnson & Johnson Defendants filed post-trial motions. For its part, the Commonwealth seeks JNOV as to DPW's claim for negligent misrepresentation as well as both Plaintiff Agencies' claims for civil conspiracy. Alternatively, the Commonwealth seeks a new trial on its negligent misrepresentation and civil conspiracy claims for both Plaintiff Agencies as well as modification of the trial judge's Decision under the CPL to include an award of costs and attorney's fees.

On the other hand, Johnson & Johnson Defendants challenge the trial judge's findings that they violated the CPL. Therefore, they request the Court vacate the trial judge's Decision awarding injunctive relief, restoration and civil penalties.

II. FINDINGS AND CONCLUSIONS: INFLATED "PRICES"

A. WAC and AWP - Generally

Throughout the period for which damages were awarded, Johnson & Johnson Defendants reported AWPs or suggested AWPs for each of their branded pharmaceuticals. N.T., 10/18/10, at 133-34. No Defendant reported or suggested an AWP after 2004. Id. The AWPs were published by pricing compendia.

As explained in more detail hereafter, Johnson & Johnson Defendants typically sell their products to wholesalers, warehousing chains, or specialty distributors at or below a published price sometimes referred to as a wholesaler acquisition cost, or WAC. The Defendants report their WACs to pricing compendia and others. Id.

Prior to 2004, Johnson & Johnson Defendants reported suggested

AWPs that were generally 20% or 25% above their WACs. Id. Johnson & Johnson Defendants expected that the AWP values they gave to the pricing compendia would be published to and used by third-party payors such as the Plaintiff Agencies when reimbursing for their pharmaceutical products.

The Defendants' reported WACs (wholesale acquisition costs) were inflated. Johnson & Johnson Defendants often sold their branded drugs to wholesalers at WAC less 2%, reflecting a prompt pay discount. PX-980n; PX- 10052.004. Johnson & Johnson Defendants frequently sold their branded drugs to wholesalers at WAC less up to 2.9%. PX-10052.007. Specialty distributors of Remicade, a Centocor product, had the opportunity to get the 2% prompt pay discount plus an additional 1% to 1.5% discount off of WAC. Deposition of Ronald J. Krawczyk, 6/22/10, at 101; N.T., 10/20/10, at 719. Pharmacies and physicians purchasing Procrit, a product of Ortho Biotech, received discounts of 5% to 10% off WAC, while some high-volume purchasing physicians could obtain greater discounts off WAC. PX-982bb ¶15.

Where drug manufacturers offer discounts below WAC, it tends to increase spreads between the acquisition cost of the drugs paid by providers and the amount of reimbursement paid to providers. N.T., 10/26/10, at 1493 (Comanor). With larger spreads, higher quantities of drugs can be sold, which would be a benefit to the manufacturer. Id.

The published AWPs for Johnson & Johnson Defendants' branded pharmaceuticals were further inflated by the 20% to 25% markup over WAC (30% for Remicade). There was no connection between the reported AWP values and actual transactions in the market. In particular, there is no believable evidence that any Pennsylvania pharmacy or physician ever paid full AWP to acquire Johnson & Johnson Defendants' branded drugs. Thus, the published AWPs were fictitious prices. See MDL 2007, 491 F.Supp.2d 20, 105 (where 50% of sales made below stated price, the stated price is deemed fictitious).

Those writing Pennsylvania's reimbursement laws intended the phrase ―average wholesale price‖ to mean what it plainly says, that is, an average of wholesale prices paid by providers. Trial Judge's Opinion of October 14, 2010 (attached as Appendix B), slip op. at 8. This conclusion is consistent with evidence received during the trial involving Johnson & Johnson Defendants. However, the AWPs for Johnson & Johnson Defendants' branded drugs were not an average of wholesale prices.

By reporting inflated WACs and reporting and suggesting fictitious AWPs for further publication and use, Johnson & Johnson Defendants materially contributed to a deceptive reimbursement system creating the likelihood of confusion, and in many cases actual confusion, for state legislators, state regulators, state reimbursement administrators, and patients who were responsible for co-payments toward drug reimbursements. The confusion regards the actual acquisition cost paid by providers for the reimbursed pharmaceuticals.

B. AWP System and Confusion - Findings

The AWP-based system for drug reimbursement is inherently a complicated system in which ―average wholesale price‖ or ―AWP‖ is the cornerstone of a larger pricing infrastructure. PX-980b. Because AWP is an inflated and fictitious price within a complicated system, its unclarified use creates a regime with a tendency to deceive those that must deal with the reimbursement system.

Since the late 1960s, almost every branded prescription drug sold in the United States has an average wholesale price, which is published in commercial compendia like Red Book, First DataBank, and Medispan. During the period covered by this lawsuit, AWP is provided in a current, digital format for each available branded pharmaceutical, in each dosage and packaging size. The digital format and the constantly updated value are essential for use in computerdominated reimbursement systems, such as those used by Plaintiff Agencies. N.T., 11/2/10, at 2193, 2196 (Cathers).

AWP was the pricing benchmark used by the federal government for Medicare reimbursement until the 2005 effective date of the Medicare Prescription Drug, Improvement & Modernization Act of 2003. *fn10 MDL 2007. By statute and regulation, it has also been the pricing benchmark used by the Plaintiff Agencies for Medicare Part B and Medicaid drug reimbursements. N.T., 10/18/10, at 125-26.

Neither the federal government's Centers for Medicare and Medicaid Services (CMS) (and its predecessor, the Healthcare Finance Administration, ―HCFA‖), nor the Plaintiff Agencies regulate or set the AWPs; rather, they entrusted the pharmaceutical companies with the task of reporting the AWPs accurately to the publications. MDL 2007, 491 F. Supp. 2d at 32; N.T., 10/25/10, at 1261 (Crane); N.T., 10/27/10, at 1580 (Bohn).

Those writing Pennsylvania's laws governing reimbursement intended: 1) to use an easily ascertained estimate of providers' acquisition costs for pharmaceuticals; and 2) to integrate reimbursement into an existing industry system so the thousands of daily transactions could be processed efficiently. Opinion of October 14, 2010, slip op. at 7. Thus, those writing Pennsylvania's reimbursement laws sought a formula to give an easily ascertained, objective, accurate estimate of acquisition costs for pharmaceuticals, not a fictitious value unrelated to prices actually paid by providers. Id. at 7-8.

Further, those writing Pennsylvania's reimbursement laws intended the phrase ―average wholesale price‖ to mean what it plainly says, that is, an average of wholesale prices paid by providers. Id. at 8. This conclusion is consistent with evidence received during the trial involving Johnson & Johnson Defendants. PX-980b; PX-1085n; N.T., 10/26/10, at 1309-10 (Ortiz); N.T., 11/2/10, at 2078 (Snedden).

Accordant with this intention, AWP initially was in fact the average price charged by wholesalers to providers, like doctors and pharmacies. MDL 2007, 491 F.Supp. 2d at 33. However, the market evolved.

In general, and on the specific topic of evolution of the AWP-based pricing system, the trial judge accepted the testimony of the Commonwealth's expert witness on liability and causation, Dr. William Comanor, currently Professor of Economics at UC Santa Barbara, and Professor of Health Services at UCLA, and Director of the research program of pharmaceutical economics and policy at UCLA.

Throughout the period in question, AWP was derived from the markup charged by wholesalers over their actual acquisition cost, sometimes called the ―wholesale acquisition cost‖ or ―WAC.‖ N.T., 10/20/10, at 1423 (Comanor). WAC is a conventional term which signifies the acquisition price paid by the wholesalers before discounts. Id. In contrast, the AWP is the average wholesale price charged by wholesalers, which is the basis under which most reimbursement payments are made to pharmacies and other providers.

Originally, the AWP was 20-25% higher than WAC because that reflected the typical costs at the outset of the distribution process of pharmaceuticals. Id. at 1424. However, competition and improved efficiency forced down prices charged by wholesalers. Id. Eventually, the markup was eliminated in the market, so that the wholesaler-charged prices approached WAC values. Id.; see also, MDL 2007, 491 F.Supp.2d at 33.

As discussed above, Johnson & Johnson Defendants often sold their branded drugs to wholesalers at discounts of 2% or more below WAC. As a result, the WACs reported by Johnson & Johnson Defendants to the commercial compendia were not real wholesale acquisitions costs but were inflated.

Despite the greatly reduced prices in sales from wholesalers to pharmacies, Johnson & Johnson Defendants, and the manufacturers of other branded drugs, did not change the process for determining and reporting AWP.

N.T., 10/20/10, at 1425 (Comanor). Thus, despite market changes, the AWP continued to be set equal to the WAC price plus an established markup. Id. In other words, the market changed, but the mechanism by which the AWP was set did not change, so there became an increasing disconnect between reality and price-setting. Id. By this process, AWP was further inflated over an already inflated WAC value. This resulted in AWP being ―a fictitious number.‖ N.T., 11/2/10, at 2197 (Cathers).

It is undisputed that wholesalers' profit margins were very thin or nonexistent. N.T., 10/20/10, at 1424 (Comanor) (―markup eliminated in the market‖). From all the above circumstances the trial judge inferred that a real average of wholesale prices for Johnson & Johnson branded drugs was below WAC. See PX-10052.005 (slide referring to sales from wholesalers to retailers: ―The competitive wholesale market allows some large customers to purchase at WAC or less.‖). Evidence to the contrary was rejected as of lesser weight, and the trial judge declined to draw different inferences.*fn11

There is no believable evidence that any Pennsylvania pharmacy or physician ever paid full AWP to acquire Johnson & Johnson Defendants' branded drugs. Nevertheless, for years the Plaintiff Agencies reimbursed Pennsylvania pharmacies and other providers at full AWP for Johnson & Johnson branded drugs. Gradually, the Plaintiff Agencies were able to convince other parties involved in setting reimbursement rates to lower rates to reflect discounts off AWP. Only recently was DPW able to partially escape an AWP-dominated reimbursement regime.

Johnson & Johnson Defendants understood that AWP was intended to represent the average price at which wholesalers sell drugs to physicians, pharmacies and other customers. PX-980b. Johnson & Johnson Defendants recognized AWP is considered a flawed pricing mechanism that, although not widely understood, plays a pivotal role in the overall prescription drug pricing and reimbursement systems. Id. Johnson & Johnson Defendants understood that inflated AWPs will increase the cost of prescription drugs to the commercial and public payors, putting additional pressure particularly on the state budgets. Id. In a January 9, 2001, letter, Robert G. Savage, Johnson & Johnson Company Group Chairman, responded to inquiries from Congressman Stark in part by indicating that ―we agree that the governments' use of AWP as a benchmark for reimbursement may be an anachronism that bears reexamination.‖ PX-10012. Johnson & Johnson Defendants understood that ―AWP is not sustainable.‖ PX- 10020.20.

In addition, Johnson & Johnson Defendants knew that governments were confused about AWP. As referenced above, Johnson & Johnson Defendants knew that the flaws in the AWP pricing regime were not widely understood. PX980b. In a February, 2002 e-mail, Shannon Salmon wrote to Alex Gorsky, thenPresident of Janssen Pharmaceutica, ―Congress has tried to figure out how to address AWP under Medicare for at least 5 years.‖ PX-1615.0001.

During his trial testimony, Alex Gorsky conceded that, in February 2002, there was a lot of confusion around AWP and AMP (average manufacture's price, used in rebate calculations) because it was a very complex system. N.T., 10/25/10, at 1152. AWP had been an issue for the entire industry and the government and the press, and there was confusion for some time. Id. at 1153. Later in 2002, it was Johnson & Johnson Defendants' perception that there was still confusion. Id. at 1154; N.T., 11/4/10, at 2694 (Scodari).

In a March, 2002 e-mail exchange between Brian Bastean, Strategic Account Manager for Ortho-McNeil Pharmaceutical, Inc. and Kay [Morgan] at First DataBank, Mr. Bastean wrote, ―Thanks again-it never ceases to amaze me how confusing this price structure is but it is clear as to why very few understand it.‖ PX-980ee.0004.

Indeed, at times there was confusion among Johnson & Johnson executives regarding AWP. As an example, in prior testimony accepted for the truth of the matter asserted, Rose Crane, former Company Group Chairperson of OTC and Nutritionals for Johnson & Johnson, stated that AWP is ―an average wholesale price that we used when we did promotional items, so it has to be a real price I assume.‖ N.T., 10/25/10, at 1232. The expert witness for Johnson & Johnson Defendants, Dr. Earnest R. Berndt, believably testified on cross- examination that he was not surprised that there was confusion even among Johnson & Johnson executives about AWP. N.T., 11/15/10, at 3998; see Non-Jury Decision, filed December 7, 2010, slip op. at 3-4, n.2 (although for the most part Dr. Berndt's testimony was rejected, certain parts were accepted as credible).

Interestingly, there was also significant information submitted to Judge Saris in MDL 2007 regarding ―real and understandable confusion‖ about ―the type of price AWP measures‖ from Dr. Berndt. N.T., 11/15/10, at 4005; see also id. at 3989-96, 4001-04. Unfortunately, Dr. Berndt did not include the same type of record analysis in his expert report in this case. Id. Dr. Berndt's reasons for not doing so were rejected. His failure to be as forthcoming in this trial until confronted by the Commonwealth's counsel was disappointing, and this failure contributed to concerns about his objectivity.

Consistent with the understanding of Johnson & Johnson Defendants regarding AWP confusion, the Plaintiff Agencies were not aware of the formulaic relationship between WAC and AWP. N.T., 11/12/10, at 3769, 3735-36, (Love), id. at 3834, (Radke), and N.T., 11/2/10, at 2222-23, 2259, 2273 (Cathers). While those responsible for reimbursement programs at the Plaintiff Agencies knew there was a difference between AWPs and actual acquisition costs paid by providers, they did not know the extent of the inaccuracy. N.T., 11/2/10, at 2197-98

(Cathers); id. at 2090 (Snedden); N.T., 11/12/10, at 3616-17 (Love). Thus, the Plaintiff Agencies did not fully understand, and could not prove, the manner in which AWPs were inflated and the full extent of the inflation. Id. Also, they did not know a real average of wholesale prices for a given branded drug, and they did not have a better estimate of provider acquisition cost available in a current, digital format for each drug in the case. Id.

An example of the tendency of the AWP-based reimbursement system to confuse Pennsylvania state legislators and state regulators involves the role of the Independent Regulatory Review Commission (IRRC)*fn12 in reviewing and approving proposed changes in the levels of reimbursement. Suzanne Love, a former, long-time DPW employee who had significant involvement in pharmaceutical reimbursement, explained that the commissioners ―frequently may not know anything about pharmaceuticals and pharmaceutical pricing. The whole process is just laden with all these technical terms that, you know, people get really confused about.‖ N.T., 11/12/10, at 3620-21. She further testified that she attempted to simplify it so that the average person could understand the proposal. Id. This testimony illustrates that people with no technical background and no insider knowledge nevertheless participated significantly in setting Pennsylvania reimbursement levels. From all these circumstances the trial judge inferred that the regime was likely to cause confusion and that a fictitious price, AWP, was a cornerstone of that regime.

Of further interest was a portion of the testimony of Johnson & Johnson Defendants' expert witness, Dr. Berndt. Among other current positions, Dr. Berndt is a professor in Applied Economics at the MIT Sloan School of Management, and a member of the affiliated faculty at Harvard-MIT Division of Health Sciences and Technology. J&J Demonstrative Ex. 1. Despite his qualifications, Dr. Berndt testified that he had ―no clue‖ about a real average wholesale price for Johnson & Johnson Defendants' drugs. N.T., 11/15/10, at 4006. Further, he was not sure he could figure out a real average wholesale price for the drugs. Id. at 4006-07. The trial judge declined to infer that the responsible persons at the Plaintiff Agencies could do what an MIT healthcare economist could not do.

Given the foregoing findings regarding confusion, the trial judge rejected conflicting evidence that there was an industry/government-wide understanding regarding the meaning and use of AWP. Thus, the trial judge rejected as not credible evidence suggesting that AWP was a term of art, widely known to be derived from a formulaic relationship of known proportions over WAC.

C. CPL Violation

1. Tendency to Deceive

Because AWP is an inflated and fictitious value within a complicated system, and is not the price intended by those writing Pennsylvania's reimbursement laws, its unclarified use has a tendency to deceive those who must deal with the reimbursement system. These practices fall under the ―catchall‖ provision in Section 2(4) (xxi) of the CPL as prohibited unfair or deceptive practices. 73 P.S. §201-2(4)(xxi). The unfair and deceptive practices may be restrained under Section 4 of the CPL, 73 P.S. §201-4, and restoration may be ordered under Section 4.1 of the CPL, 73 P.S. §201-4.1.

2. Materiality

Also, Johnson & Johnson Defendants' conduct was material, as it impacted a nonmalleable reimbursement system to which the Plaintiff Agencies were chained by statute and regulation. Stated differently, because at all relevant times the Plaintiff Agencies were required by law to reimburse according to some form of ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.