Court Finds No Definitive Guidance on Whether Drug Discounts Must be Aggregated to Define Government’s Best Price; United States District Court for the District of Maryland No. ELH-14-2535, U.S. ex rel. Deborah Sheldon v. Forest Laboratories LLC, et al.


The district court granted the defendants’ motion to dismiss a qui tam case alleging they failed to provide accurate best pricing to the government for their pharmaceuticals and thus avoided paying substantial rebates. The court found that both the relator and defendants had reasonable interpretations of CMS guidance on calculating best price. Because the regulations were ambiguous, the court could not definitively conclude the defendants were required to aggregate multiple discounts provided for the same drug to the same patient in order to arrive at the lowest possible price for the government. Similarly, because the guidance was ambiguous and the defendants’ approach was reasonable, the court held the relator could not demonstrate scienter.

The late Troy Sheldon filed a qui tam lawsuit alleging that his employer, Forest Laboratories LLC, and Forest Pharmaceuticals Inc. provided false price reports to the government under the Medicaid Drug Rebate Program and, in turn, caused the government to overpay for Forest’s drugs. After Sheldon died, his wife Deborah Sheldon, as executrix of his estate, was substituted as the plaintiff. The court also entered an order substituting Allergan PLC, f/k/a Actavis PLC, as the successor in interest to Forest. The government declined to intervene. In these proceedings, the defendants have moved to dismiss.

During his employment with Forest, Sheldon worked in various sales management roles and was directly involved in the launch, marketing, and sale of Forest drugs, which he alleged provided him direct, personal knowledge of drug rebates and discounts that affected the reported best price for each drug.

Medicaid’s Best Price rebate mechanism is intended to allow the government to purchase a drug at the lowest price per unit that a manufacturer has actually received on the open market. When originally enacted, the Medicaid Rebate Statute defined the Best Price as the lowest price available from the manufacturer to any wholesaler, retailer, nonprofit entity, or governmental entity within the United States (excluding depot prices and certain single award contract prices), and inclusive of cash discounts, free goods, volume discounts, and rebates. Drug manufacturers must enter into a rebate agreement in order to qualify for federal payment under Medicaid. Under that agreement, a manufacturer must report the average manufacturer price and best price for its covered drugs.

In addition, manufacturers must pay each state a quarterly rebate equal to the number of drug units purchased by the state Medicaid program times the greater of (1) the statutory minimum rebate percentage, or (2) the difference between the average manufacturer price and the best price. For the rebate period from December 31, 1995 until January 1, 2010, the statutory minimum rebate percentage was 15.1 percent. For the rebate period after December 31, 2009, the statutory minimum rebate percentage is 23.1 percent.

According to the relator, the rebate agreement clearly states that the best price is the final lowest price a manufacturer receives for a single drug unit (e.g., per pill) after taking into account any and all pricing arrangements with any and all entities.

The relator alleged that Forest fraudulently reported its best price to the government, because it failed to account for double-rebates provided to two separate customers on the same dispensed drug units to the same patient. The relator explained that Forest offers discounts to private insurance companies in exchange for placing its drugs on a preferred tier in their reimbursement formulary. Forest uses this rebate to calculate the best price reported to the government. However, Forest also provides discounts to pharmacy providers and group purchasing organizations, such as group home facilities. When a pharmacy or GPO purchases a Forest drug, the distributor provides a discount which is charged back to Forest. Forest also pays rebates to pharmacies and GPOs. Because of this additional rebate program, Forest could offer double rebates on drugs issued to a single patient, with one rebate to the insurer and one rebate to the dispensing pharmacy.

According to the relator, Forest is required to aggregate both discounts to calculate the lowest best price to be offered to the government. However, by using only the discounts available to private insurers, Forest calculated a knowingly incorrect best price. In support, the relator provided various government documents supporting his interpretation of the best price calculation, including GAO reports, HHS and CMS guidance, and CMS’s clarifying responses to comments on regulations implementing the best price calculation.

The relator asserted that Forest managers discussed the fact that two rebates were occasionally claimed or paid on the same drug being dispensed to a single patient. The managers were concerned that a patient might have both primary and secondary private medical insurance that would each pay a portion of the patient’s drug treatment and then each seek a rebate on the same drug disbursements, creating a double rebate on the same dispersed drug. In response to these concerns, Forest implemented a data audit process for all rebate claims submitted by private insurance companies in the commercial market. The process identified outliers in a customer’s rebate submissions, including double rebate claims for the same dispensed drug units to the same patient, so that Forest did not pay for both claims.

According to the relator, Forest initiated the audit because it was aware of the potential best price violation based on duplicative rebate claims from its customers.

The relator asserted that Forest initiated this audit because it was “[a]ware of the potential Best Price violation based upon double rebate claims from its customers.” However, the relator noted that Forest chose not to institute this process for pharmacy/GPO customers in order to avoid a negative effect on its relationships. Therefore, it continued paying double rebates without accounting for them in its Best Price calculations, resulting in reduced rebates to Medicaid. Using CMS formulas, the relator estimated failed to pay $686.64 million in rebates, up through the date his employment was terminated.

The defendants moved to dismiss on four grounds. First, they argued that the relator hadn’t shown that Forest made a false statement or acted with the requisite scienter. Second, the defendants challenged the complaint on the particularity standard. Third, they argued the conspiracy claim failed because the Forest entities could not conspire amongst themselves. Finally, they argued the claims were foreclosed by the public disclosure bar.

The relator conceded that the conspiracy claims were subject to dismissal, allowing the court to focus on the remaining three grounds for dismissal.

The court started with the motion to dismiss under the public disclosure bar. Due to the timing of the alleged fraud, the court found that both versions of the public disclosure bar should be considered. Before the 2010 amendments, “disclosures in federal and state trials and hearings” qualified as public disclosures, as did “disclosures in federal and state reports, audits, or investigations.” After the 2010 amendments, “only disclosures in federal trials and hearings and in federal reports and investigations qualify as public disclosures.”

The amendments also altered the original source exception. Under the current definition, an original source is an individual who either: (i) prior to a public disclosure, has voluntarily disclosed to the government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the government before filing an action under this section.

Forest argued that the relator’s claims were barred under either version of the statute, because the factual allegations underlying his suit were based on publicly available sources and he was not the original source of those disclosures. The defendants argued that the claims were inferred from publicly disclosed federal regulations, administrative reports, and sales data.

In response, the relator argued there had been no qualifying public disclosure of his allegations. He argued that his allegations were not based on and were not substantially the same as any public disclosure, and that he qualified as an original source.

As a threshold matter, the court noted the bar does not apply unless the fraud was disclosed to the public via a source described in the statute. The disclosure must be a disclosure of fraudulent allegations, not merely a disclosure of information. By that standard, the defendants failed to show the bar applied. The relators sources revealed important background information but did not make allegations of fraudulent conduct or suggest any. Rather, most of the documents merely noted the various reporting requirements or the confusion about certain requirements. Further, the public sales data may have disclosed rebate percentages and price points—the allegedly false set of facts—but not the true facts the relator alleged should have been reported to the government. Finally, none of the documents suggested that Forest’s Best Price violated the requirements of the Rebate Statute.

On the merits, the defendants argued the relator hadn’t shown they had knowingly made false statements to the government to avoid paying rebates. Forest insisted that it was not legally required to aggregate rebates to unrelated customers when it calculated its best price. Alternatively, even if the court found it did have this legal obligation, the defendant argued that its interpretation of the regulation was objectively reasonable, and therefore the relator could not demonstrate scienter. In response, the relator argued that the requirement was unambiguous.

The court found both interpretations of the statute reasonable. Based on the statute’s text, the court concluded that the Best Price means the lowest price made available by the manufacturer, including all price concessions, to any one of the listed entities, but not to multiple entities. The court found its reasoning supported by the definition of the Average Manufacturer Price, which is the average price paid to the manufacturer for the drug in the United States. Based on that definition, the AMP is generally understood as requiring manufacturers to “stack” price concessions provided to any single best price-eligible entity on a single unit of a product. The court concluded that the linguistic difference between the definition of AMP and Best Price indicates that Congress knew what language to use to indicate a requirement for manufacturers to aggregate discounts from multiple transactions, and chose not to use that language in the definition of Best Price.

However, the court noted that the language of the Rebate Statute was susceptible to other interpretations, particularly with respect to its use of “any,” as used in “any wholesaler, retailer, nonprofit entity, or governmental entity.” The relator urged the court to interpret the term “any” to mean “all,” which would suggest that the defendant should have aggregated the rebates it provided to all entities along the distribution chain. The court found the relator’s interpretation plausible, but not definitive.

The court found the implementing regulations and related CMS released could be read to support either the relator’s or defendants’ view. For example, the Rebate Agreement states that the best price for a quarter shall be adjusted by the manufacturer if cumulative discounts, rebates or other arrangements subsequently adjust the prices actually realized. Further, CMS guidance from 1991 and 1994 also state that the best price should reflect the effect of cumulative discounts or other arrangements.

The relator argued that “actually realized” means the lowest final price received after taking into account any and all pricing arrangements with any and all entities. The defendants argued that this phrase means the price the manufacturer realizes on a sale to an individual customer, after accounting for all price concessions provided to that customer, whether realized at the time of sale or at a later date. The court found both reasonable.

However, a CMS final rule issued in 2007 requires a manufacturer to adjust the best price for a rebate period if cumulative discounts, rebates, or other arrangements subsequently adjust the prices available from the manufacturer. The court found the difference between “prices available” and “prices actually realized” to be significant. The fact that CMS seemed to use these two phrases interchangeably weakened the relator’s argument because he relied on CMS’s use of “price actually realized” to support his interpretation calling for an aggregation of multiple price concessions.

The court concluded that the absence of clear or consistent language in the relevant texts weighed against the relator, as the court could not say that the Best Price provision unambiguously referred to cumulative rebates from all entities. Further, the relator’s other sources also did not unequivocally support the relator’s reading. Generally, the court found the relator had not pointed to a single example where CMS explicitly stated that manufacturers must aggregate discounts to different customers along the supply chain in a given sale.

Finally, the court noted that CMS’ rulemaking process revealed confusion over the language governing best price. However, the comments to CMS also suggested that pharmaceutical manufacturers widely believed that the best price to the government would be the single lowest price offered to any particular customer. None of the comments acknowledge a requirement to aggregate discounts to multiple entities.

The court found these comments supported the conclusion that the regulation was ambiguous, and overall, held that claims based on Forest’s interpretation could not qualify as objective falsehoods or constitute false statements under the FCA. Further, because Forest’s interpretation was reasonable, the relator could not demonstrate scienter. Because none of the CMS guidance cited by the relator explicitly warned the defendants against their approach, the court held the relator could not show the defendants had knowingly attempted to defraud the government. The court therefore granted the dismissal on all counts.

FCA - Sheldon v Forest Laboratories