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July 19, 2012

19 July 2012

Alabama Supreme Court Rejects False Claims Allegations Where State Knew or Should Have Known of Alleged Falsity

In Sandoz v. Alabama, the Supreme Court of Alabama extended its earlier opinion in AstraZeneca v. Alabama (2009) and overturned a jury verdict, holding that the State could not prevail on a fraud theory where it had actual knowledge that the defendant’s reported list prices did not reflect actual transaction prices.

Proceeding under various state law fraud theories, Alabama alleged that Sandoz had provided false “Wholesale Acquisition Cost” (“WAC”) and Average Wholesale Price (“AWP”) information to national price compendia, such as First Databank, leading Alabama’s Medicaid program to over-reimburse generic drug purchases. Specifically, Alabama alleged that Sandoz reported its list price without accounting for discounts, rebates, and other inducements, which had the effect of lowering the actual transaction prices to customers.

At trial, Alabama put on evidence that WAC data should reflect a drug manufacturer’s net price, that is the price ultimately charged to wholesalers. By reporting only its list price, exclusive of rebates, discounts, and the like, Sandoz led the compendia to overstate its prices. Alabama, in turn, relied on these allegedly inflated prices in reimbursing drug purchases covered by its Medicaid program, which, it alleges, resulted in over-reimbursements. Sandoz presented contrary evidence showing that WAC is commonly understood to reflect list, not net, prices. The jury disagreed, and found Sandoz liable for hundreds of millions of dollars in compensatory and punitive damages.

On appeal, Sandoz argued that regardless of whether WAC and AWP reflect list or net prices, Alabama could not reasonably have relied on the data it received from the compendia because it had actual knowledge that WAC and AWP pricing data routinely overstates manufacturers actual prices to wholesalers. Applying AstraZeneca, the Court agreed. “To claim reliance upon a misrepresentation, the allegedly deceived party must have believed it to be true. If it appears that he was in fact so skeptical as to its truth that he placed no confidence in it, it cannot be viewed as a substantial cause of his conduct.” Moreover, “plaintiffs alleging fraud cannot be said to have reasonably relied on alleged misrepresentations when they have been presented with information that would either alert them to any alleged fraud or would provoke inquiry that would uncover such alleged fraud.”

The Court pointed to evidence in the record showing that both federal and state officials had long been aware that AWPs routinely exceed actual transaction prices. The record also showed that Sandoz had voluntarily submitted Average Manufacturer Price (“AMP”) data to the state Medicaid agency, which should have put the agency on notice that its WAC and AWP data did not reflect its actual prices.

Although not an FCA case, this decision reflects similar considerations as the District of Massachusetts’ recent decision in United States ex rel Banigan v. Organon USA, which rejected FCA claims predicated on alleged off label promotion where the State knowingly reimbursed purchases of drugs for off label uses.

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