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United States of America Ex Rel. Ronald J. v. Allergen

July 3, 2012


The opinion of the court was delivered by: Eduardo C. Robreno, J.



I. INTRODUCTION..............................................2

II. BACKGROUND................................................3

III. STANDARDS OF REVIEW.......................................8

A. Pleading Under Rule 8(a).............................8

B. Pleading Under Rule 9(b)............................10

IV. DISCUSSION...............................................11

A. Whether Plaintiff's Fourth Amended Complaint Meets the Pleading Requirements of Rule 8(a)..................13

1. Statutory and Regulatory Scheme for AMP Calculations...................................16

2. Discount Defendants............................19

a. Whether Discount Defendants' AMP interpretation was reckless before 2007...21

b. Whether Discount Defendants' AMP interpretation was reckless after 2007....24

3. Service Fee Defendants.........................31

B. Whether Plaintiff's Fourth Amended Complaint Meets the Pleading Requirements Under Rule 9(b)...............36

C. Whether Plaintiff's State Law Claims Should be


1. Delaware and New Mexico Claims.................43

2. New Hampshire and Texas Claims.................46

3. Remaining State Law Claims.....................47

V. CONCLUSION...............................................48


Relator Ronald J. Streck ("Plaintiff") brings this health care fraud qui tam suit in accordance with the False Claims Act ("FCA"), 31 U.S.C. § 3729 (2006 & Supp. IV 2011). Plaintiff alleges that Defendants Allergan, Inc., Amgen, Inc., AstraZeneca Pharmaceuticals, L.P., Biogen Idec, Inc., Bradley Pharmaceuticals, Inc., Cephalon, Inc., Eisai, Inc., Genzyme Corp., Mallinckrodt, Inc., Novo Nordisk, Inc., Reliant Pharmaceuticals, Inc., Sepracor, Inc., and Upsher-Smith Laboratories, Inc. (collectively, "Defendants") fraudulently reported their Average Manufacturer Price ("AMP") to the Government in an effort to pay a smaller Medicaid rebate. In his Fourth Amended Complaint, Plaintiff pleads twenty-eight counts. Counts I through III allege violations of the FCA. Counts IV through XXVIII allege violations of the false claims statutes of the District of Columbia and the following states: Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Rhode Island, Tennessee, Texas, Virginia, and Wisconsin. Defendants collectively filed a Motion to Dismiss Plaintiff's Fourth Amended Complaint.

For the reasons that follow, the Court will grant Defendants' Motion in part and deny it in part.


Plaintiff is a pharmacist and lawyer with over forty years of experience in the pharmaceutical industry. Plaintiff spent eleven years as the president and chief executive officer of the Healthcare Distribution Management Association. In 2008, when Plaintiff filed this lawsuit, he was the chief executive officer of Rx Distribution Network, a network of regional pharmaceutical wholesalers. While in this role, Plaintiff avers he became familiar with the practices of pharmaceutical manufacturers, including Defendants, and the agreements Defendants entered into with various wholesalers and retailers.

Defendants are pharmaceutical manufactures and all participate in the Medicaid Drug Rebate Program. This program endeavors to "establish a rebate mechanism in order to give Medicaid the benefit of the best price for which a manufacturer sells a prescription drug to any public or private purchaser." H.R. Rep. No. 101-881, at 96 (1990), reprinted in 1990 U.S.C.C.A.N. 2017, 2108. In compliance with this program, Defendants pay rebates to state Medicaid programs. This rebate is calculated based, at least in part, on each manufacturer's AMP.*fn2 AMP, generally speaking, is the price that a wholesaler or retailer pays directly to the manufacturer for a product, on a per unit basis. To determine the amount of the rebate, each manufacturer must submit its calculated AMP to the Center for Medicaid and Medicare Services ("CMS"), a federal agency. According to Plaintiff, a lower reported AMP will result in Defendants paying a smaller rebate.

Plaintiff avers that Defendants engaged in two practices that fraudulently lowered the AMPs they reported. Plaintiff avers that from 2004 to the present Defendants and the pharmaceutical industry's wholesalers began executing and implementing distribution service agreements. Wholesalers generally purchase drugs from the manufacturer and then act as the distributor to retailers for the manufacturer's drugs. These agreements generally discussed a service arrangement between Defendants and wholesalers where wholesalers would perform services for Defendants such as warehousing goods, distributing goods, various accounting, and other services. In exchange for these services, Defendants generally paid wholesalers a certain percentage of the net sales each wholesaler purchased from Defendants.

These agreements are at the heart of Plaintiff's claims and are broken down into two types. One, there are agreements that facilitated certain Defendants ("Discount Defendants")*fn3 to report a lower AMP by illegally deducting the service fees under these agreements from the calculated AMP. Two, there are agreements that facilitate certain other Defendants ("Service Fee Defendants")*fn4 to report a lower AMP by concealing price increases and preventing such price increases from being considered in the AMP calculation. Plaintiff's FCA claims rest on these two types of alleged fraudulent dealings.

Briefly, the allegations are summarized as follows:

(1) Discount Defendants characterize service fees for the following types of services as "discounts": distribution services, data reporting services, inventory management services, chargeback and returns processing services, customer service support, new product launch services, consolidated deliveries to providers, consolidated accounts receivable management, and sophisticated ordering technology. Fourth Am. Compl. ¶¶ 66-67. Certain discounts may be deducted from an AMP calculation, but "bona fide service fees" are expressly excluded from the calculation of AMP. The services listed above that Discount Defendants contracted for, according to Plaintiff, are statutorily and regulatorily defined as bona fide service fees and should not be characterized as discounts. Therefore, by characterizing the service fees as discounts instead of bona fide service fees, Discount Defendants incorrectly reported lower AMPs because they deducted the amount of the fee from the price wholesalers paid. (2) Service Fee Defendants allegedly do not dispute that the same rendered services are bona fide services. Service Fee Defendants, however, require that wholesalers credit the service fees they charge Service Fee Defendants with any price increases in the market that wholesalers were able to take advantage of by selling already purchased stock at the new higher price. By doing this, Plaintiff avers that Service Fee Defendants effectively hide the true price paid by wholesalers to Defendants and, thus, effectively lower their AMP reported to the Government.

Plaintiff, as a relator under the qui tam provision of the FCA, brought this suit on October 28, 2008, against thirty pharmaceutical manufacturers under the FCA and various states' laws. ECF No. 1. In accordance with the FCA, Plaintiff's Complaint was under seal while the United States and the various states conducted an investigation to determine if they would intervene in this lawsuit. 31 U.S.C. § 3730(b)(2) (2006 & Supp. IV 2011). The Court extended this seal on several occasions to facilitate this investigation. See ECF Nos. 4, 11, 17, 24, 34, 39. During that time, Plaintiff amended his complaint three times. See ECF Nos. 5, 20, 45. On April 25, 2011, the Court ordered the unsealing of Plaintiff's Third Amended Complaint. See ECF No. 42. On May 9, 2011, all of the states declined to intervene in this case, and the Government declined to intervene except as to one Defendant. ECF No. 57. Thereafter, on September 29, 2011, Plaintiff filed, with leave of Court and no opposition, his Fourth Amended Complaint against only thirteen of the original defendants. ECF No. 76. On April 30, 2012, the Government provided notice that it declined to intervene in this case. ECF No. 164.

Defendants moved to dismiss this Fourth Amended Complaint. ECF No. 140. Plaintiff responded in opposition, and Defendants moved for leave to file a reply. ECF Nos. 147, 156. On May 18, 2012, the Court held oral argument. See ECF No. 168. The motion is now ripe for disposition.


A party may move to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). When considering such a motion, the Court must "accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the non-moving party." DeBenedictis v. Merrill Lynch & Co., Inc., 492 F.3d 209, 215 (3d Cir. 2007) (internal quotation marks omitted). Defendants move to dismiss Plaintiff's Fourth Amended Complaint under the pleading standards of Federal Rule of Civil Procedure 8(a) and Federal Rule of Civil Procedure 9(b).

A. Pleading Under Rule 8(a)

Under Rule 8(a), to withstand a motion to dismiss, the complaint's "[f]actual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). This "requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. Although a plaintiff is entitled to all reasonable inferences from the facts alleged, a plaintiff's legal conclusions are not entitled to deference and the Court is "not bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain, 478 U.S. 265, 286 (1986).

The pleadings must contain sufficient factual allegations so as to state a facially plausible claim for relief. See, e.g., Gelman v. State Farm Mut. Auto. Ins. Co., 583 F.3d 187, 190 (3d Cir. 2009). "'A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). In deciding a Rule 12(b)(6) motion, the Court is to limit its inquiry to the facts alleged in the complaint and its attachments, matters of public record, and undisputedly authentic documents if the complainant's claims are based upon these documents. ...

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