Suppressed v. Suppressed

Filing 122

MEMORANDUM Opinion and Order: For the reasons stated herein, Defendants' Rule 12(b)(1) and Rule 12(b)(6) Motions to Dismiss are denied. Defendants to answer by 4/25/19. Status hearing set for 5/2/19 at 9:00 a.m. Signed by the Honorable Harry D. Leinenweber on 4/3/19: Mailed notice(maf) (Main Document 122 replaced on 4/3/2019) (maf, ).

Case: 1:14-cv-09412 Document #: 122 Filed: 04/03/19 Page 1 of 18 PageID #:1467

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES, ex rel.
RONALD J. STRECK,
Plaintiff,

Case No.

v.

14 C 9412

Judge Harry D. Leinenweber

TAKEDA PHARMACEUTICALS
AMERICA, INC., et al.,
Defendants.

MEMORANDUM OPINION AND ORDER
I.

BACKGROUND

The relator, Ronald J. Streck (“Relator”), a former executive
of a network of drug regional wholesalers, brings this qui tam
action against Defendants, Astellas Pharma US, Inc. (“Astellas”)
and Eli Lilly and Company (“Lilly”).

The action is being brought

on behalf of the United States and 26 states.

Neither the United

States nor any of the states has sought to intervene.
The underlying facts of the case are not in dispute.

The

case involves the allegation that Astellas and Lilly defrauded
Medicaid in violation of the False Claims Act and corresponding
state statutes, when they calculated certain rebates owed under
the

Medicaid

Drug

Rebate

Program

(“MDRP”).

This

program

is

designed to offset the cost of prescription drugs dispensed to
Medicaid

patients.

Participating

manufacturers

must

pay

the

Case: 1:14-cv-09412 Document #: 122 Filed: 04/03/19 Page 2 of 18 PageID #:1468

government a rebate of a portion of the proceeds of their drug
sales that are covered by a state’s Medicaid plan.

The base for

computation of the rebate is the Average Manufacturer’s Price
(“AMP”), which is the average price wholesalers pay participating
manufacturers for drugs.

The lower the AMP, the lower the rebate

that the manufacturer must pay to the government.

This case

involves two separate methods that the defendants employed to lower
their AMPs, which in turn lowered the rebates that they paid under
the MDRP.

The Relator contends that these methods, or “schemes,”

constitute fraud on the government and violate the False Claims
Act.
According to the Complaint, Astellas, from April 1, 2005
through

March

wholesalers

31,

under

2010,
which

entered
the

into

agreements

wholesalers

would

with

provide

drug
“core

services” to Astellas of real value to it, and in return, Astellas
agreed to pay the wholesaler a payment of a percentage of gross
purchases.

These

services

included,

among

others,

contract

administration; inventory and sales reports; returns processing;
and

inventory

management.

The

wholesale

agreement

allowed

Astellas to account for these payments as discounts from its sales
price which reduced its AMP, which in turn resulted in a reduced
rebate under the MDRP.

The Complaint classifies Astellas as a

“Discount Defendant.”

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With

respect

to

Lilly,

the

Complaint

alleges

Complaint describes as the “service fee scheme.”

what

the

According to the

Complaint, Lilly adopted a method to reduce its AMP by deducting
“price-appreciation credits” (“PACs”) from the service fees it
agrees to pay its wholesalers for performing services such as
previously described as services performed by Astellas’ wholesale
customers.

PACs were created to inhibit drug wholesalers from

speculative buying to build up stocks of drugs in the hope that
the manufacturers would increase their prices in the future.

Such

increases would enable a wholesaler to sell its extra inventory at
a profit.

To deter this practice manufacturers, such as Lilly,

began

insert

to

so-called

“clawback”

provisions

in

their

agreements with their wholesalers, which obligated the wholesalers
to

return

their

profits

to

the

manufacturer.

The

clawback

provisions, instead of providing for cash payments for these excess
inventory

profits,

were

structured

so

that

the

manufacturer

received credits for these profits, known as “price appreciation
credits” (“PAC”), which were used to offset the service fees the
manufacturer paid to the wholesaler.

By statute and regulation,

however, the service fees incurred by a manufacturer, provided
they are bona fide, are not deductible from its sale price when
calculating its AMP.

So, the service fee “scheme,” as alleged in

the Complaint, charges that Lilly, knowing that service fees were
not deductible from its sales price, lowered its service fees by
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deducting the PACs, thereby increasing its profits without raising
its AMP.
II.

STATUTORY AND REGULATORY HISTORY

Since the adoption of the MDR Program in the 1990s, Congress
and the Center for Medicare and Medicaid Services of the Department
of HHS (“CMS”) have adopted comprehensive statutes and regulations
that govern the calculation of the AMP.

In 1991 Congress defined

AMP as “the average price paid to the manufacturer for the drug in
the United States by wholesalers for drugs distributed to the
retail pharmacy class of trade.”

42 U.S.C. § 1396-8(k)(1).

In

2006, Congress directed CMS to promulgate a regulation to clarify
the requirements for determining the AMP.

CMS responded with a

regulation that, among other things, prohibited the inclusion of
“bona fide service fees” (“BFSF”) in the calculation of the AMP.
BFSF were defined as:
fees paid by manufacturer to an entity; that represent
fair market value for a bona fide, itemized service
actually performed on behalf of the manufacturer that
the manufacturer would otherwise perform (or contract
for) in the absence of the service arrangement; and that
are not passed on in whole or in part to a client or
customer of an entity, whether or not the entity takes
title to the drug. Id. at § 447.502 (2007).
The regulation also required the manufacturer to adjust the
AMP for a specific rebate period if cumulative discounts, rebates,
or other arrangements subsequently adjusted the prices that the
manufacturer actually realized from the wholesaler.
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In

2010,

Congress

enacted

the

Patient

Protection

Affordable Care Act, a/k/a “Obama Care” (the “ACA”).

and

As a result,

CMS withdrew its 2007 regulation to account for the changes brought
about by the ACA.

Manufacturers were directed to comply with the

ACA’s statutory requirements, which included a prohibition of
deducting

fees

paid

for

distribution

service

and

inventory

management fees from the AMP calculation.
In 2012, CMS proposed a regulation that largely tracked the
2007

regulation

in

defining

service

fees.

CMS

specifically

mentioned PACs in the preamble to that proposed regulation.

It

said, “retroactive price adjustments, sometimes known as price
appreciation credits, do not meet the definition of a bona fide
service fee as they do not reflect any service or offset of a bona
fide service performed on behalf of the manufacturer.”
Reg. 5318,5332 (Feb. 2, 2012).

77 Fed.

However, the regulation adopted in

2016, did not mention PACs.
III.

PREVIOUS LITIGATION
A.

Streck I

The relator commenced his litigation in 2008 when he filed a
qui

tam

action

(“Streck I”).

in

the

Eastern

District

of

Pennsylvania.

Both Astellas and Lilly, together with a number of

other drug manufacturers, were named as Defendants. The government
declined to intervene in the case against Astellas and Lilly and
a number of other manufacturers. Streck then voluntarily dismissed
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Astellas and Lilly and some of the other defendants, from Streck I.
However,

the

defendants

remaining

and

Complaint,

service

contending

requirements

governing

Defendants,
fee

including

defendants,

that

the

the

AMP

moved

statutory
were

both
to
and

ambiguous,

discount

dismiss

the

regulatory
that

their

interpretations were reasonable, and therefore that the complaint
should be dismissed for failing plausibly to plead scienter.

The

District Court denied the motion with respect to the discount
defendants but granted the motion with respect to the service fee
defendants.
and

the

The discount defendants then settled with the relator

relator

appealed

the

dismissal

of

the

service

fee

defendants to the Third Circuit. That court affirmed the dismissal
in a non-precedential opinion.

U.S. v. Allergan, Inc., 746 Fed.

Appx. 101 (3rd Cir. 2018).
B.

Streck II

In 2013, Streck filed a new lawsuit in the Eastern District
of Pennsylvania, U.S. ex rel. Streck v. Bristol-Myers Squibb
Company (“BMS”) (“Streck II”), against several drug manufacturers
including BMS.
BMS.

Streck dismissed all Defendants from the case save

BMS, according to the Complaint, engaged in both the service

fee scheme and the discount fee scheme.

The Complaint charged

that “[a]t various times [BMS] deducted service fees from the
calculation of the AMP and at other times it deducted the price
appreciation credits from the service fees, when it did not deduct
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the service fees from the calculation of the AMP.”

Recently the

District court denied BMS’s motion to dismiss concluding that the
complaint plausibly alleged falsity, scienter, and materiality,
and complied with Rule 9(b).
C.

Streck III

The relator filed this suit in 2014 on behalf of the United
States and 28 states plus the District of Columbia, against various
defendants, including Astellas and Lilly (“Streck III”).

In

January 2018, the federal government notified the Court that it
was declining to intervene with respect to Astellas and all other
defendants save Lilly, which it was continuing to investigate.
The

relator

then

voluntarily

Astellas and Lilly.

dismissed

all

defendants

except

Defendants filed a motion to dismiss, after

which the Relator filed a first amended complaint.

The relator in

this complaint, as was the case with his previous complaints,
alleged that Astellas and Lilly improperly accounted for service
fees paid to wholesalers and, in doing so, improperly reduced their
AMPS, which in turn improperly reduced their rebate obligations.
Astellas also is alleged to have wrongfully treated all service
fees it paid to wholesalers as deductions in computing its AMP (a
“Discount

Defendant”).

Lilly

is

alleged

to

have

wrongfully

deducted price appreciation credits from the service fees it paid
to manufacturers, improperly reducing its AMP.
Defendant”).
- 7 -

(“Service Fee

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Defendants, Astellas and Lilly, have once again filed Motions
to Dismiss, one, for lack of jurisdiction pursuant to Rule 12(b)(1)
and, two, for failure to state a claim pursuant to Rule 12(b)(6).
IV.

THE RULE 12(B)(1) MOTION

According to Defendants’ Rule 12(b)(1) Motion, Streck III
runs afoul of two provisions of the Federal False Claim Act:
Section

3750(b)(5),

the

so-called

“first

to

file

Section 3750(e)(4)(A), the “public disclosure” bar.

bar,”

and

Accordingly,

the court does not have jurisdiction.
The basis for the first to file bar claim is that at the time
the Relator filed this suit against Astellas and Lilly, Streck I
was

a

pending

action

in

a

Pennsylvania

District

Court.

Section 3750(b)(5) states “[w]hen a person brings an action under
this subsection, no person other than the Government may intervene
or bring a related action based on the facts underlying the pending
action.” Defendants, in arguing for dismissal, argue that Streck I
was filed on October 28, 2008, and Streck III was filed on
November 24, 2014, while Streck I was still pending (it was not
over until the Third Circuit affirmed the dismissal in 2018). They
also contend that the two actions are “related,” citing U.S. ex
rel. Chovanec v. Apria Healthcare Group Inc., 606 F.3d 361, 365
(7th Cir. 2010), because they rely upon essentially the same
factual scenarios.

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The Relator contends however that, at the time of the filing
of Streck III, Astellas and Lilly had been voluntarily dismissed
from Streck I and been out of the case for over three years prior
to the filing of Streck III.
of relatedness:

He also cites Covanec for the test

whether the two actions are “materially similar,”

i.e., whether the two cases have the material facts in common.

He

argues that the defendants are different, the service agreements
upon which the alleged frauds are based are different, and the
actual drug purchases are different, although the general scheme
may be common.
The Relator is correct on his first point:

because Astellas

and Lilly had been dismissed but not on the merits, i.e., without
prejudice, a dismissal here, as sought by defendants, would, in
effect, constitute a “dismissal with prejudice” and would insulate
defendants from any future qui tam actions based on the two
schemes.

Such a result that would be contrary to the approach the

Supreme Court took in Kellogg Brown & Root Services, Inc. v U.S.
ex rel. Carter, 135 S. Ct. 1970, 1978 (2015).

In Kellogg Brown &

Root, the relator’s case was dismissed without prejudice under the
first to file bar because a previous qui tam case having similar
claims was pending and was considered to be a related case.

While

the relator’s appeal of the dismissal was pending, the so-called
related case was dismissed for want of prosecution.

The relator

immediately filed a new complaint, which the court again dismissed
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on the basis of the first to file bar, because the relator’s first
case was pending on appeal. The relator then voluntarily dismissed
the appeal and filed a new complaint which was against dismissed,
but this time with prejudice.

On appeal to the Supreme Court, the

case was reversed and remanded to remove the “with prejudice”
provision as being error, because it was based on an improper
interpretation of the word “pending.”

The Supreme Court said:

[n]ot only does petitioners’ argument push the term
“pending” far beyond the breaking point, but it would
lead to strange results that Congress is unlikely to
have wanted.
Under petitioners’ interpretation, a
first-filed suit would bar all subsequent related suits
even if that earlier suit was dismissed for a reason
having nothing to do with the merits.
* * *
[w]e hold that a qui tam suit under the FCA ceases to be
“pending” once it is dismissed. We therefore agree. . .
that the dismissal with prejudice. . . was error.
The point the Supreme Court was making was that Congress would not
have wanted a dismissal, which was not on the merits, to act as a
bar to a subsequent effort to recover funds for the government
which may have been lost due to fraud.

Here,

like

in

Kellogg,

Brown & Root, the claims against Astellas and Lilly were dismissed
without reaching the merits.
The Relator also makes the additional point that the first to
file bar is not jurisdictional.

U.S. ex rel. Health v. AT&T, Inc.,

791 F.3d 112 (D.C. Cir. 2015); U.S. ex rel. Berkowitz v. Automation

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Aids, No. 13 C 08185, 2017 WL 1036575, at *10 (N.D. Ill. Mar. 16,
2017).
The Defendants’ second basis for dismissal is the prior public
disclosure bar.

This provision of the False Claims Act reads as

follows:
The court shall dismiss an action or claim under this
section, unless opposed by the Government.
If
substantially the same allegations or transactions as
alleged in the action or claim were publicly disclosed
- (i) in a Federal criminal, civil, or administrative
hearing in which the Government or its agent is a party;
(ii) in a congressional, Government Accountability
Office, or other Federal report hearing audit, or
investigation, or (iii) from the news media. Unless the
action is brought by the Attorney General or person
bringing the action is an original source of the
information.
The government has filed its notice of opposition to dismissal on
this ground.

The government’s right to object was created in a

2010 amendment to the False Claims Act, so the objection only
applies to claims arising on or after March 23, 2010.

The

government however has taken no position as to claims arising prior
to that date.

The issue is whether a refiling of a case against

two defendants who were originally named in a prior suit but who
were dismissed without prejudice, i.e., not on the merits, warrants
dismissal with prejudice because of the public disclosure bar.
The answer here should be the same as the answer was to the motion
to dismiss a qui tam suit with prejudice under the first to file
bar.

Why should a possible claim under False Claims Act be
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dismissed with prejudice because the claim had been previously
dismissed for reasons other than the merits?

If Streck was the

original source of the false claims alleged against Astellas and
Lilly in Streck I, then why would he not be the original source in
Streck III, which is essentially the same case as Streck I but
with considerably more detail pled with respect to Astellas and
Lilly?

What we have is a qui tam action filed against Defendants

in Streck I, which was dismissed against Astellas and Lilly on
Relator’s motion for reasons other than the merits.

Streck III,

a refiling of Streck I, which at the time was no longer pending
against Astellas and Lilly, if dismissed because of the public
disclosure bar, would amount to a dismissal with prejudice, and
would raise the same question the Supreme Court posed in Kellogg
Brown & Root, “[w]hy would Congress want the abandonment of an
earlier suit to bar a later potentially successful suit that might
result in a large recovery for the Government?”

Id. at 1978.

The cases cited by Defendants do not require a different
result.

In U.S. ex rel. Lisitza v. Par Pharm. Companies, Inc.,

No. 06 C 06131, 2017 WL 3531678 (N.D. Ill. Aug. 17, 2017), an
alleged

prescription-switching

scheme,

was

well

known

to

the

government at least four years before the Relator filed his suit.
In U.S. ex rel. Bogina v. Medline Indus., Inc., No. 11 C 05373
2015 WL 1396190 (N.D. Ill. Mar. 25, 2015), involved a second
complaint by a different relator, that basically parroted the
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allegations of an earlier complaint.

The fact that Streck was the

same Relator involved in both Streck I and Streck III is the
difference.

The Rule 12(b)(1) Motion is denied.
V.

THE RULE 12(b)(6) MOTION

The Defendants have moved to dismiss the qui tam action under
Rule 12(b)(6) and also for lack of specificity under Rule 9(b).
With respect to Lilly, the Defendant asks the Court to follow the
Third Circuit’s decision in Streck I which was a “non-precedential”
decision.
because

it

The Third Circuit decision does not help Astellas
concerned

“discount defendants.”

only

“service

fee”

defendants

and

not

See Allergan, 746 Fed. Appx. at n.2.

The Third Circuit’s decision in favor of the service fee
defendants

was

based

on

its

conclusion

that

the

applicable

requirements for calculating the AMP failed to specify whether the
AMP is the “initial price” or the “cumulative price” realized by
the manufacturer.

The court began its analysis by noting that the

PCA imposes liability on any person who “knowingly” makes a false
claim to the government.

31 USC § 3729(a)(1)(A).

A person acts

“knowingly” if he or she “acts in reckless disregard of the truth
or falsity of . . . information.”

§ 3729(b)(1)(A)(iii).

The court

in part relied upon the Supreme Court’s decision in Safeco Ins.
Co. of Am. v. Burr, 127 S. Ct. 2201 (2007), which suggested three
inquiries as to whether a decision was based on a reasonable, but
erroneous interpretation of a statute:
- 13 -

(1) whether the relevant

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statute was ambiguous; (2) whether a defendant’s interpretation of
that ambiguity was objectively unreasonable; and (3) whether a
defendant was “warned away” from the interpretation
administrative and judicial guidance.

by available

Safeco Ins. Co. of Am. v.

Burr, 127 S. Ct. 2201 (2007); United States ex rel. Purcell v. MWI
Corp, 807 F.3d 281, 287-88 (D.C. Cir. 2015).

The Third Circuit

found that the definition of AMP was ambiguous with regard to price
appreciation credits, by noting that nowhere did a statute or a
regulation address PACs.

It agreed that PACs could be considered

a component of the cumulative value that the manufacturer receives
for a drug, but it noted that neither the word “initial” nor the
word

“cumulative”

regulation.

appears

before

“price”

in

the

statute

and

The court agreed with the District Court that the

“price paid to the manufacturer” could be read as referring to the
price initially paid by the wholesaler because the versions of the
statute

and

regulations

referring to “price.”

lacked

“temporal”

limitations

when

Whether there was any guidance that could

have warned the manufacturers about their use of PACs, the Court
noted that the CMS as well as OIG suggested that there was
significant

confusion

regarding

what

to

include

in

an

AMP

calculation, and PACs were not addressed by the CMS until 2012,
and even then it did not do so definitively, when it expressed its
belief in a non-binding preamble that PACs should not be considered

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a

service

fee.

The

court

further

noted

that

the

ensuing

regulation, which was not adopted until 2016, did not mention PACs.
Streck, on the other hand, asks the Court to follow U.S. ex
rel. Streck v. Bristol-Myers Squibb (Streck II), No. No. 13-7547,
2018 WL 6300578 (E.D. Pa. Nov. 29, 2018), which found that BMS, as
a service fee defendant during some of the time period in question,
failed to heed the guidance given in 2012 by CMS where it opined
that PACs did not meet the definition of a bona fide service fee.
That court found that Streck had “plausibly” pled that BMS had
been

warned

that

it

was

incorrectly

calculating

considering PACs as deductible from service fees.

its

AMP

by

It therefore

denied BMS’s motion to dismiss the allegations relating to the
Service fee scheme.
The BMS court also discussed the discount scheme.

It was

noted that the law and regulations prior to 2007 were silent as to
how to treat bona fide service fees and whether they could be
considered

as

discounts

in

calculating

a

manufacturer’s

AMP.

However, in 2007 CMS identified certain specific types of discounts
that were not allowed in calculating the AMP and further stated
that

bona

service

calculation.

fees

also

could

not

be

included

in

the

In the 2010 regulation, inventory management and

distribution services were specifically excluded from the AMP
because these were considered to be bona fide service fees.

In

2012 the district court in Pennsylvania (Streck I), as previously
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noted, denied a motion to dismiss brought by discount defendants,
based on its conclusion that from 2007 onward CMS had provided
guidance to manufacturers that they should not include bona fide
service fees in the calculation of the AMP.
2d at 598.

Streck I, 894 F. Supp.

Thus, manufacturers were forewarned by both the CMS

and a federal district court not to consider service fees as
discounts.
The issue here is whether this Court should follow the Third
Circuit (Streck I) or follow the Pennsylvania Eastern District
Court (Streck II).

Since the case is before the Court on a Motion

to Dismiss where the Court should take all well pleaded facts as
true, the balance tips in the favor of denial of the Rule 12(b)(6)
Motions to Dismiss.

The issue is admittedly clearer on the

question of Discount defendants.

As noted by the District Court

Judge in Streck II, the CMS had clearly advised as early as 2010
that inventory management and distribution fees were bona fide
service fees and were not to be considered in calculating the AMP.
Earlier than that, the CMS regulations in 2007 stated that bona
fide service fees were to have no effect on the computation of the
AMP.

In 2012, the District Judge in Streck I denied the discount

defendant’s motion to dismiss finding that a discount defendant
was “reckless” for classifying service fees as discounts.
Court

therefore

finds

that

the

Complaint

- 16 -

adequately

The

alleges

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sufficient facts to prove scienter with respect to Astellas and
the discount scheme allegations in the Complaint.
With

respect

to

the

service

fee

Defendant

Lilly,

and

apparently Astellas at times, the Court finds, in agreement with
the District Judge in Streck II, that the preamble to the 2012
proposed

regulation

was

sufficiently

clear

with

respect

to

treatment of PACs, that, coupled with the wording of the 2007
regulation, which stated that a manufacturer “must adjust the AMP
for a rebate period if cumulative discounts, rebates, or other
arrangements subsequently adjust the prices actually realized” (72
DE R 39,242), were sufficient to have warned defendants away from
including PACs in the computation of their AMPs.

Thus, the

Complaint, as with the discount defendant, Astellas, adequately
alleges scienter with respect to Lilly, the service fee defendant.
The issue of scienter can be revisited at the summary judgment
stage when the Court will have a more complete record.
VI.

RULE 9(b)

The Defendants lastly argue that the Complaint fails to
satisfy Rule 9(b) due to lack of specificity with respect to the
allegations of false AMP submissions.

However, the Complaint

clearly alleges that Astellas subtracted the service fees it paid
from the prices it received from the wholesalers, thus treating
these fees as “discounts.”

Furthermore, the service fees are

clearly alleged to be “bona fide service fees.”
- 17 -

The Complaint

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also clearly alleges that Lilly deducted PACs from the bona fide
service fees it contracted to pay to its wholesalers, thus reducing
the total amount of money it paid for these service fees, which
reduced its AMP.

As explained by the district court in Streck I:

In this case, while Plaintiff has not provided the
exact claims filed by Defendants that are allegedly
fraudulent, Plaintiff did provide specific contracts
between Defendants and wholesalers. Plaintiff detailed
how the alleged fraud occurred. Plaintiff specified the
statutory and regulatory provisions violated, and also
indicated that Defendants had to file the wire AMP
reports with the Government “not later than 30 days after
the last day of each rebate period under the agreement.”
42 U.S.C. § 1396r-8(b)(3)(A)(i).
This detail is
sufficient to meet the particularity requirement of Rule
9(b) in this case.
U.S. ex rel. Streck v. Allergan, 894 F. Supp. 2d 585, 602 (E.D.
Pa. 2012).
The Court agrees and finds that the Complaint sufficiently
provides details of the two alleged schemes to satisfy Rule 9(b).
Therefore, the Motions to Dismiss under Rule 12(B)(6) and Rule 9(b)
are denied.
VII.

CONCLUSION

For the reasons stated herein, Defendants’ Rule 12(b)(1) and
Rule 12(b)(6) Motions to Dismiss are denied.
IT IS SO ORDERED.

Dated: 4/3/2019

Harry D. Leinenweber, Judge
United States District Court
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