Fourth Circuit Highlights Tougher Path to Dismissal of FCA Cases Post-SuperValu
A divided panel of the Fourth Circuit reversed the dismissal of a qui tam FCA suit alleging that the defendant pharmaceutical company underpaid Medicaid rebates by misreporting “best price” under the Medicaid Drug Rebate Statute. The decision marks the Fourth Circuit’s first application of the subjective scienter standard articulated by the Supreme Court in United States ex rel. Schutte v. SuperValu Inc., and underscores the difficulty defendants may face in securing dismissal at the pleading stage on the scienter element.
The relator, a former senior manager at the defendant, alleges that the defendant systematically underreported its “best price” under the Medicaid Drug Rebate Statute, which defines “best price” to mean the “lowest price available from any manufacturer during the rebate period.” Specifically, relator alleges that, in reporting its “best price,” the defendant failed to aggregate multiple rebates and discounts provided to different entities (e.g., wholesalers, long‑term care pharmacy providers, group purchasing organizations, and private insurers) in the distribution chain for the same unit of drug ultimately dispensed to a single patient. Relator alleges that, as a result, the defendant routinely paid more than one rebate or discount on the same prescription (for example, 15% to a facility and 18% to the private insurer covering the same patient and drug), but reported “best price” to CMS using only the single largest discount, rather than the aggregate discount.
In seeking dismissal, the defendant argued, in part, that the relator failed to allege scienter because the definition of “best price” could reasonably be interpreted to require only reporting of the “lowest price” available to a single entity. Relator countered that the defendant acted with knowledge based on four allegations: (1) in response to a CMS proposed rule addressing the definition of “best price,” the defendant submitted a comment letter acknowledging that the rule appeared to require aggregation of discounts across entities and urged CMS to revise its approach; (2) the defendant knew CMS rejected its proposed revisions and finalized the rule without changes; (3) post-implementation of the Final Rule, the defendant conducted an internal audit to identify “double rebates” and changed its practices for many customers; and (4) for certain preferred customers (e.g., pharmacy providers and GPOs), the defendant continued offering double discounts/rebates while still reporting its “best price” to CMS without aggregation.
The district court twice dismissed the relator’s complaint. In the first dismissal, the district court applied an “objective reasonableness” standard for scienter and determined that the defendant’s interpretation of “best price” was objectively reasonable. The relator appealed the decision to the Fourth Circuit and, ultimately, the Supreme Court. While under consideration there, the Supreme Court issued its decision in SuperValu and vacated the district court’s decision. On remand, now applying SuperValu’s subjective scienter standard, the district court still determined that the relator failed to adequately plead scienter because of the ambiguity in the definition of “best price.” The district court also suggested that same ambiguity undermined the relator’s allegations that the claims at issue were false. The relator again appealed to the Fourth Circuit.
In a split opinion, the Fourth Circuit reversed the district court. The majority held that the relator “plausibly alleged facts to support an inference” that the defendant acted with knowledge of the falsity of its “best price” reporting. In doing so, the majority emphasized that “scienter may be alleged generally” and that “[c]ourts must not impose a higher bar for pleading scienter,” particularly “at the pleading stage before the parties have had an opportunity to engage in discovery.” The majority did not substantively address the district court’s suggestion that statutory ambiguity undermined falsity. However, it did observe that “falsity is an objective inquiry” and therefore “ambiguity in a statute is not a defense to the falsity of the claim.” The majority thus remanded the case to the district court with the directive that “[w]hen considering whether a plaintiff sufficiently alleges the element of falsity, the district court must determine whether the claims were objectively false by interpreting the relevant statute.”
The dissent would have affirmed dismissal. In the dissent’s view, the term “best price” unambiguously refers to “‘the lowest price available,’ meaning a singular cost at which the drug can be obtained by a purchaser from a manufacturer,” rather than an aggregated, “theoretical price that no purchaser pays.” Accordingly, the dissent would have held that the defendant’s “best price” reporting was not false as a matter of law.
A copy of the decision can be found here.
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