The panel also recognized that the Medicaid Drug Rebate program implemented by CMS presents the regulated community (pharmaceutical manufacturers) with exactly the kind of complex and ambiguous regime in which this critical defense should be available.
Fourth Circuit Adopts Safeco Scienter Standard
In U.S. ex rel. Sheldon v. Allergan Sales, LLC, the Fourth Circuit, “[l]ike every other circuit to consider this issue,” held that the objective reasonableness scienter standard from Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), “applies with equal force to the FCA’s scienter requirement.” Sheldon at *4. The relator in Sheldon had alleged that Forest Laboratories LLC engaged in a fraudulent price reporting scheme under the Medicaid Drug Rebate Statute, 42 U.S.C. § 1396r-8, by failing to aggregate discounts given to separate customers for purposes of calculating a product’s “Best Price.” Id. at *1. The Fourth Circuit affirmed the district court’s dismissal of the relator’s complaint and, in doing so, provided the latest word on the FCA’s scienter standard.
The FCA imposes liability on anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a)(1)(A). And the statute defines “knowingly” to mean that a person “(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b)(1)(A).
In Safeco, the Supreme Court interpreted the Fair Credit Reporting Act’s willfulness scienter requirement, which it interpreted to include both knowledge and recklessness. 551 U.S. 57, 68. The Fourth Circuit concluded that given the parallel with the FCA’s scienter requirement, “Safeco’s reasoning applies to the FCA’s scienter requirement.” Sheldon at *5. The Fourth Circuit then adopted the Supreme Court’s two-step analysis in Safeco for reckless disregard, holding that “[u]nder the FCA, a defendant cannot act ‘knowingly’ if it bases its actions on an objectively reasonable interpretation of the relevant statute when it has not been warned away from that interpretation by authoritative guidance. This objective standard precludes inquiry into a defendant’s subjective intent.” Id.
While the Fourth Circuit described the Safeco standard as a “threshold requirement” for demonstrating scienter, the court limited its applicability to legally false claims that involve contested statutory and regulatory requirements. Id. at *6. Looking to the Seventh Circuit’s recent opinion on this same issue, the Fourth Circuit explained that “[a] defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.” Id. (quoting Schutte, 9 F.4th at 468). The opinion also noted that the two elements of the Safeco standard limit its the applicability—it “does not shield bad faith defendants that turn a blind eye to guidance indicating that their practices are likely wrong.” Id. (quoting Schutte, 9 F.4th at 468). Instead, the Fourth Circuit reasoned, it puts the burden where it belongs: “[i]f the government wants to hold people liable for violating labyrinthine reporting requirements, it at least needs to indicate a way through the maze.” Id.
Finally, the opinion explained that the Safeco standard ensures that before facing liability for allegedly failing to comply with complex legal requirements, defendants will be put on notice, which is required to receive due process. Id. at *7. This aligns with the Supreme Court’s directive in Escobar that “ ‘concerns about fair notice and open-ended liability can be effectively addressed through strict enforcement’ of the FCA’s ‘rigorous’ scienter requirement.” Id. (quoting United Health Servs. v. U.S. ex rel. Escobar, 136 S. Ct. 1989, 2002 (2016)).
The dissent argues that the Safeco standard should not apply in FCA cases, taking issue with the majority’s conclusion, adopted from Safeco, that the objective standard precludes inquiry into a defendant’s subjective intent. Id. at *23-24. This is the same position taken recently by the dissent in Schutte and by other courts, the Department of Justice, and the relators’ bar. The Seventh Circuit was not persuaded that this issue warranted rehearing en banc in Schutte, but it remains to be seen whether the relator in that case will successfully petition for review of this issue by the Supreme Court.
Fourth Circuit Affirms Dismissal for Lack of Scienter
The Fourth Circuit then applied the Safeco standard and concluded that the relator had failed to plausibly plead scienter. First, the court concluded that Forest’s reading of the Medicaid Rebate Statute—that Best Price measured the lowest price available from Forest to any individual customer and did not require aggregating discounts given to separate entities in the supply chain (sometimes called “follow the pill”)—was objectively reasonable. Sheldon at *8-9. In reaching this conclusion, the court looked to the plain meaning of the statute and CMS regulations. Id.
Next, the court examined whether Forest was warned away from this interpretation by authoritative guidance. Id. at *9-10. Such guidance must come from either circuit court precedent or guidance from the relevant agency. Id. at *9. And it must “canvass the issue” with sufficient specificity to be able to function as a warning.” Id. It’s not enough for agency guidance “merely to be related to the question at hand;” it “must have a high level of specificity to control an issue.” Id. (quoting Schutte, 9 F.4th at 471). The court found that CMS knew drug manufacturers were not aggregating discounts given to different entities along supply chains, that manufacturers asked CMS to clarify, and that CMS “failed to clarify and thereby maintained strategic ambiguity.” Id. at *10. Instead, the court found, CMS’s Rebate Agreement with manufacturers provides that “in the absence of specific guidance,” manufacturers should “make reasonable assumptions in their calculations of … Best Price, consistent with the requirements and intent of ‘[the Rebate Statute], Federal regulations and the terms of this agreement.” Id. at *11. Given all this, CMS did not warn Forest away from its objectively reasonable reading of the Rebate Statute. Id. at *12.
Medicaid Drug Rebate Program “Stacking” of Discounts for Best Price, and “Reasonable Assumptions”
Best Price is commonly understood in the pharmaceutical industry to measure the lowest price realized by an individual eligible customer on a unit basis, net of all price concessions attributable to that customer from the manufacturer. This is because the Medicaid statute defines Best Price as “the lowest price available from the manufacturer … to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States,” subject to certain exclusions. 42 U.S.C. § 1396r-8(c)(1)(C); see also CMS regulations at 42 C.F.R. § 447.505. Further, the legislative history of the Best Price statute indicates that Congress intended to give Medicaid the benefit of discounts commensurate with those negotiated by commercial customers—not to advantage or disadvantage the program relative the commercial marketplace.
The Fourth Circuit agreed with this widely accepted interpretation of Best Price, as focusing on the customer’s realized price. In doing so, it rejected the relator’s suggestion that Best Price ought to be calculated as the manufacturer’s gross-to-net realized price, inclusive of and aggregating discounts to unrelated entities at different levels of the distribution and reimbursement chains—i.e., a price that does not really represent a “price” to any particular customer. For example, relator alleged the Best Price requirements directed that a 20% discount to an insurer to be “stacked” with a 10% discount to a pharmacy to create a Best Price discount of 30%. Id. at *3. The majority opinion found that Forest’s position to not aggregate such discounts to distinct entities was “objectively reasonable,” and further that it was “the best reading” of the Medicaid Rebate Act. Sheldon at *9. 2
Ultimately, the import of the Fourth Circuit’s decision from a Medicaid Drug Rebate Program perspective—with respect to which the court notes the “statutes and regulations are among the most completely impenetrable texts within human experience”—is to confirm that documenting reasonable assumptions where the legal standards are unclear is a best practice. The case further solidifies the importance of manufacturer’s “reasonable assumptions” in defending against fraud theories related to the Medicaid Drug Rebate Program. The court stated “[h]aving told manufacturers to rely on reasonable assumptions, the government cannot receive damages when Forest has done exactly that. Moreover, it cannot do so when CMS has refused to respond to manufacturer requests for clarification.” Id. at *11.
1 The ruling is focused on the fact that Forest’s particular assumptions to not stack in this case were objectively reasonable based on the guidance (or lack thereof) at the time. We recommend that manufacturers continue to review and confirm that their assumptions are reasonable in accordance with current standards.
2U.S. ex rel. Schutte v. SuperValu Inc., 9 F.4th 455, 459 (7th Cir. 2021); U.S. ex rel. Streck v. Allergan, Inc., 746 F. App'x 101, 106 (3d Cir. 2018); U.S. ex rel. McGrath v. Microsemi Corp., 690 F. App'x 551, 552 (9th Cir. 2017); U.S. ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281, 290–91 (D.C. Cir. 2015).
Authored by Jonathan Diesenhaus, Alice Valder Curran, Jessica Ellsworth, Gejaa Gobena, Michele Sartori, Mitchell Lazris, Kathleen Peterson and Emily Lyons.