Courts Reject States’ Drug Pricing “Regulation Through Litigation”

Guest Commentary

by Frank Cruz-Alvarez and Jared Sherr, Shook, Hardy & Bacon, L.L.P.*

Over the past several years, states represented by contingency-fee attorneys have sued virtually the entire pharmaceutical industry alleging fraud in the reporting of prices and other information for drugs covered under Medicaid programs.  In recent weeks, two more courts have ruled against states pursuing these types of claims, and in the process have rejected the underlying “regulation through litigation” agenda presented by these types of lawsuits.

In the first case, Sandoz, Inc. v. State of Alabama, 2012 WL 1081402 (Ala. July 13, 2012), the Alabama Supreme Court ruled 7-1 to overturn a verdict against generic drug manufacturer Sandoz, Inc. totaling over $78 million in compensatory and punitive damages.  Sandoz involved almost identical claims as the 2009 Alabama Supreme Court case of AstraZeneca LP v. State of Alabama, 41 So. 3d 15 (Ala. 2009). Specifically, the State of Alabama alleged that it was unaware that Sandoz reported inflated “list prices” to an independent price reporting service that did not include discounts, rebates or other price concessions. The state alleged that it relied on these “list prices” in its Medicaid reimbursement formulas and, as a consequence, over-reimbursed providers and pharmacies.

After a review of the factual record, and an analysis of the 2009 ruling in AstraZeneca, the Alabama Supreme Court concluded that the state could not have reasonably relied on Sandoz’s published prices for two reasons.  First, the state had actual knowledge of the inflated prices reported by Sandoz, a conclusion the court supported by chronicling the history of the Alabama Medicaid Agency’s awareness of the reporting of inflated prices.  Second, the court, reaffirming its holding in AstraZeneca, concluded that the state did not rely on the reported prices because   the state’s reimbursement formulations were the result of independent “conscious and deliberate policy decisions.” 

In the second case, Commonwealth of Pennsylvania v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 2012 WL 3030512 (Pa. Commw. Ct. July 26, 2012),the State of Pennsylvania alleged that a prescription drug maker withheld information about the drug, forcing the state to over-reimburse providers and pharmacies under the state’s Medicaid laws.  Specifically, the state claimed that Janssen, the maker of a brand-name anti-psychotic drug failed to reveal certain safety and efficacy information about the drug.  The state claimed that Janssen’s failure to disclose this information caused the state to falsely believe there was a justification for reimbursing the higher price of the brand-name drug over far cheaper generic alternatives. The state sought the difference in costs that it paid for Janssen’s product and similar generic products – a difference of about $3.50 per pill.  After the close of the state’s case, Janssen filed a motion for compulsory nonsuit, which was granted by the trial court.  Shortly thereafter, the State of Pennsylvania appealed the trial court’s order granting nonsuit.

The Commonwealth Court of Pennsylvania affirmed the trial court’s ruling granting Janssen a nonsuit on all of the state’s claims, including fraudulent misrepresentation because the state failed to meet its burden of proving justifiable reliance on a misrepresentation made by Janssen.  The court found that the state offered no proof that the alleged “misrepresentation induced or influenced the [state’s] course of conduct.”  As such, the court concluded that the state’s evidence failed to prove reliance and causation—essential elements of their claims.

Sandoz and Janssen are further examples of the trend of courts rejecting states’ attempts “to use tort law to re-define [state] Medicaid reimbursement obligations” in a style of litigation that raises a number of “serious questions of federal preemption and supremacy.”  AstraZeneca, 41 So. 3d at 33.  The rulings also demonstrate the significant hurdles that states pursuing these types of claims face when trying to prove the reliance element of their fraud claims.  Despite these obstacles, it is unclear whether this type of litigation will slow down with private contingency-fee lawyers driving it.

*Mr. Cruz-Alvarez is a partner, and Mr. Sherr is an associate, both in Shook Hardy’s Miami office. For Mr. Cruz-Alvarez’s past Legal Pulse guest commentaries, click here.

2 thoughts on “Courts Reject States’ Drug Pricing “Regulation Through Litigation”

  1. Pingback: Pharmaceutical roundup - Overlawyered

  2. Pingback: Pennsylvania High Court Joins Judicial Stampede That’s Trampling State Attorneys-General/Plaintiffs’ Bar Alliances | The Legal Pulse

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s