WATSON LABORATORIES, INC. AND ACTAVIS PHARMA, INC. f/k/a WATSON PHARMA, INC.
STATE OF MISSISSIPPI
OF JUDGMENT: 05/14/2014
COUNTY CHANCERY COURT HON. HOLLIS McGEHEE JUDGE
ATTORNEYS: GEOFFREY C. MORGAN TIMOTHY HOWARD HAROLD PIZZETTA
RONNIE MUSGROVE LERAY McNAMARA FRANK JOHN KOLB, IV CLINTON C.
CARTER JASON D. WATKINS WALKER W. JONES, III DAVID T. MARON
WILLIAM N. REED DARREN M. GUILLOT LAURA SANDERS BROWN RAYMOND
L. BROWN THOMAS NEAL JAMERSON LUTHER T. MUNFORD MIKE WALLACE
GEORGE Q. EVANS TOM JULIAN MARK A. DREHER LEE DAVIS THAMES P.
RYAN BECKETT C. MICHAEL MOORE WILLIAM F. GOODMAN, III FRANK
A. WOOD, JR. KATHY K. SMITH KATHRYN H. HESTER JOHN G. SIMS,
III R. PEPPER CRUTCHER, JR. ROBERT D. GHOLSON JAMES R.
MOZINGO NEVILLE H. BOSCHERT WILLIAM C. BRABEC RICK A. LA
TRACE JOSEPH A. SCLAFANI CHRISTOPHER A. SHAPLEY CARLTON W.
REEVES J. DOUGLAS MINOR RICHARD O. BURSON
ATTORNEYS FOR APPELLANTS: RANDI P. MUELLER RONALD G. PERESICH
JAMES W. MATTHEWS KATY E. KOSKI JOHN F. NAGLE JOHANNA M.
ATTORNEYS FOR APPELLEE: OFFICE OF THE ATTORNEY GENERAL BY:
GEORGE W. NEVILLE GEOFFREY C. MORGAN JACQUELINE H. RAY S.
MARTIN MILLETTE D. RONALD MUSGROVE MICHAEL S. SMITH, II BLAKE
D. SMITH CHARLES G. COPELAND REBECCA S. BLUNDEN ELLEN PATTON
ROBB ANDY LOWRY
In 2005, the State of Mississippi filed suit against more
than eighty prescription drug manufacturers alleging, among
other things, that each committed common-law fraud and
violations of the Mississippi Consumer Protection Act. The
allegations, which will be more thoroughly discussed, focused
on whether the prescription-drug manufacturers inflated
reported prices, which caused the Mississippi Division of
Medicaid ("Mississippi Medicaid") to reimburse
pharmacies at the inflated rates. The cases were eventually
severed, so the present case and appeal involves only Watson
Laboratories, Inc., Watson Pharma Inc., and Watson
Pharmaceuticals, Inc. (collectively "Watson").
Following a bench trial, the Rankin County Chancery Court
concluded that Watson had committed common-law fraud and had
violated the Mississippi Consumer Protection Act. As a
result, the chancery court awarded the State a total of $30,
262, 052 in civil penalties, compensatory damages, and
punitive damages. The chancery court also awarded
post-judgment interest of three percent on the compensatory
and punitive damages. Unsurprisingly, Watson appealed,
challenging the chancery court's decision; the State also
has filed a cross-appeal related to damages.
The Court affirms the chancery court's judgment in favor
of Mississippi Medicaid. Further, the Court holds that the
ruling on the State's cross-appeal is, likewise,
AND PROCEDURAL HISTORY
The Center for Medicare and Medicaid Services
("CMS") administers Medicaid on the federal level,
and Mississippi Medicaid administers Medicaid on the state
level. Watson manufactures prescription drugs, primarily
generic drugs, and these drugs then are provided by
pharmacies to Medicaid patients. In order for Mississippi
Medicaid to reimburse pharmacies, Mississippi Medicaid is
required by CMS to have an approved State Plan, which, among
other things, defines the scope of services provided and how
the services would be reimbursed.
More specifically, once a pharmacist dispenses a drug to a
Medicaid patient, it submits a claim form to Mississippi
Medicaid, and the claim is processed. The claim is reimbursed
based on the lowest rate produced by any one of the three
possible reimbursement formulas. The three formulas are the
following: 1. Federal Upper Limit; 2. the Usual and Customary
charge to the general public-i.e., cash customers; and 3. the
Estimated Acquisition Cost plus a reasonable dispensing fee.
The third formula is the only one at issue here.
According to CMS regulations, the Federal Upper Limit rate is
set at 150% of the lowest published price when three or more
manufacturers of the particular drug are available on the
market. 42 C.F.R. § 447.332(b) (2006). A Federal Upper
Limit cannot be set if there are not three or more
manufacturers of the particular drug on the market. 42
U.S.C.A. § 1396r-8. The second formula is fairly
self-explanatory, referring to the usual and customary charge
to the general public.
The third formula is the primary formula discussed in the
instant case. Mississippi Medicaid defined estimated
acquisition cost as the "best estimate of the price [for
a drug] generally and currently paid" by pharmacies. The
estimated acquisition cost was quantified in terms of a
percentage less than the average wholesale price. Mississippi
Medicaid subscribed to First DataBank and utilized the
reported average wholesale prices in determining the
estimated acquisition costs for drug reimbursements. Watson
and other drug manufacturers determined their respective
average wholesale prices ("AWP") and reported them
to third-party publishers such as First DataBank, which then
published the prices to its subscribers. For the relevant
damages period (1990-2005), Mississippi Medicaid defined
estimated acquisition cost as average wholesale price minus
ten percent (May 1990-March 2002); average wholesale price
minus twelve percent (April 2002-June 2005); and average
wholesale price minus twenty-five percent (July 2005-October
The parties' understanding of the term "average
wholesale price" is the subject of the present appeal.
The State filed suit against Watson in 2005 claiming that
Watson "knowingly, willfully, and/or intentionally
provided or caused to be provided false and extraordinarily
inflated" average wholesale prices that Watson knew
Mississippi Medicaid relied upon for its reimbursement
formulas. The State further explained that Watson "had a
duty to report pricing information that fairly and accurately
reflected the [average wholesale price] of their products
rather than artificially inflated prices that fraudulently
increased Mississippi Medicaid reimbursement payments to
providers." Based on the inflated average wholesale
prices, the State claimed that Watson could "market the
spread" to pharmacies, which encouraged pharmacies to
use Watson products in order to return a greater profit, all
to the detriment of Mississippi Medicaid, which was
overpaying based on the reported prices. "By marketing
the 'spread' on their products, [Watson] intended to
induce providers to purchase [its] drugs, knowing that the
larger 'spreads' would allow the provider to pocket
more money from the State in the form of higher Medicaid
reimbursements." "Marketing the spread" also
would "increase the individual market share of their
drugs, thereby increasing their own profits."
The State also argued that Watson's actions or inactions
violated Mississippi's Consumer Protection Act by
"intentionally committ[ing] unfair and deceptive trade
practices by falsely and fraudulently advertising the
[average wholesale prices] of their products well above their
actual acquisition costs with the intent not to sell them as
advertised" and by "intentionally misrepresenting
the facts concerning the reasons for, existence of, or
amounts of price reductions provided to providers."
Additionally, the State claimed that Watson committed
common-law fraud by knowingly misrepresenting the average
wholesale prices "with the intent of inducing [Medicaid]
to rely on the false information in setting prescription drug
reimbursement rates." The State's amended complaint
removed a large amount of the language from the initial
complaint, but it still asserted that Watson had violated
Mississippi's Consumer Protection Act and had committed
common-law fraud. The State's second amended complaint,
filed July 25, 2012, did not materially alter the
After a lengthy pretrial process, the chancery court held a
bench trial in the matter starting on November 7, 2012. Both
sides presented numerous witnesses and a multitude of
documents for the chancery court to consider, and on
September 6, 2013, the chancery court entered its findings of
fact and conclusions of law. As the chancery court explained:
"The outcome of this case hinges upon the parties'
understanding and the meaning of the phrase 'Average
Wholesale Price' . . . ." The chancery court further
explained as follows:
The State introduced substantial evidence in support of its
position that [Mississippi Medicaid] understood that the term
AWP means just what it says: the Average Wholesale Prices
paid to Watson by retailers for the drugs at issue. In turn,
Watson introduced a voluminous amount of evidence in support
of its position that the pharmaceutical industry . . . have
understood for years that the term "AWP" does not
mean what it says, and in fact, is a term of the trade known
and acknowledged by all participants in the pharmaceutical
industry . . . to reflect to mean a "suggested wholesale
price" or "sticker price." Watson acknowledges
that its published "AWPs" reflect a price that is
higher than the average of wholesale prices paid by a
retailer for Watson pharmaceuticals.
. . .
After carefully reviewing all of the evidence submitted by
the parties on the issue of the meaning of AWP and more
importantly, Watson's and [Mississippi Medicaid]'s
understanding of the meaning of AWP, the evidence establishes
that both Watson and [Mississippi Medicaid] understood that
Watson's AWPs published in [First DataBank] that were
relied upon by [Mississippi Medicaid] in determining its
estimated acquisition cost reimbursement for Watson's
drugs were not true average[s] of wholesale prices charged by
Watson to retailers for its particular drug products.
Having concluded that [Mississippi Medicaid] was aware that
Watson's published AWPs at issue in this case represented
higher prices than the average of wholesale prices being paid
to Watson by retailers, the Court also concludes that the
State had no knowledge during the relevant damage period of
the true Average Wholesale Prices being paid by Mississippi
pharmacists to Watson for drugs being dispensed through and
reimbursed by Medicaid. The evidence also conclusively
establishes that no employee/representative of [Mississippi
Medicaid] had any idea/belief that Watson's published
AWPs were inflated to the extent that they were.
. . . However, the fact that the Legislature and [Mississippi
Medicaid] were discounting AWPs and continuously changing or
increasing the discount to AWP for
[estimated-acquisition-cost] reimbursement purposes shows
that both the Legislature and [Mississippi Medicaid] were
attempting (futilely as we now know) to reimburse pharmacies
at a true Average Wholesale Price paid by pharmacies for
drugs dispensed through Medicaid . . . .
. . . Although [Mississippi Medicaid] understood that
Watson's published AWPs were higher than true Average
Wholesale Prices being paid by Mississippi pharmacies,
Mississippi had no idea as to the extent that Watson's
published AWPs were inflated over true Average Wholesale
Prices. . . . As previously noted, the State's effort was
futile, and the evidence establishes that [Mississippi
Medicaid's] reimbursement for [estimated acquisition
cost] based upon a discount to AWP fell far short of arriving
at a true AWP paid by Mississippi pharmacies. . . .
. . .
Although there may have been an understanding in the
pharmaceutical industry and in [Mississippi Medicaid] that a
drug manufacturer's such as Watson's published AWPs
were higher than prices actually being paid by retailers for
Watson's drugs, there was never an understanding by
[Mississippi Medicaid] of the true prices that Mississippi
pharmacies were paying for Watson's drugs.
The fact that some employees of [Mississippi Medicaid] and
individuals associated with the pharmaceutical industry
recognized that published AWPs were inflated does not require
this Court to conclude that AWP was a term of art in the
pharmaceutical industry that carried with it a particular
definition. In fact, the definition(s) that Watson proposes
to assign to the phrase AWP, renders the phrase completely
meaningless and useless for Medicaid reimbursement purposes.
. . .
Watson argues, and the Court agrees, that Watson had no legal
obligation to publish its AWPs. However, once Watson caused
to be published its AWPs, Watson did have an obligation to
publish true and accurate AWPs that were relied upon and used
by Mississippi [Medicaid] . . . .
. . .
Based upon the evidence presented, this [chancery c]ourt
concludes that the spread between the prices actually paid by
Watson's customers for Watson's products and
Watson's published AWPs for these products were important
to Watson from a marketing/profit standpoint and to its
customers from a profit standpoint.
. . .
If this [chancery c]ourt were to accept Watson's
suggestion or urging that the term Average Wholesale Price is
a technical term of art within the pharmaceutical agency
which merely means a "suggested price" or
"list price[, ]" the effect of such a decision
would be: (1) to condone Watson's conduct of causing the
publication of its Average Wholesale Prices that are
meaningless; (2) to permit Watson to cause to be published
any price whatsoever that it chooses as its AWP for a
particular drug with the published Average Wholesale Price
having no relationship whatsoever to the true Average
Wholesale Price of Watson's product; and (3) to permit
Watson to cause to be published its Average Wholesale Prices
for its drugs when the published prices are in fact, prices
for which its customers never paid for Watson's drugs. .
. . .
. . . [t]he State has presented no evidence which shows that
[Actavis, Inc. f/k/a Watson Pharmaceuticals, Inc.] . . .
participated in the manufacture, sales or marketing of the
drugs at issue in this litigation. . . . For this reason, the
[chancery c]ourt dismisses Actavis, Inc. f/k/a Watson
Pharmaceuticals, Inc. as a Defendant from this action.
. . .
This [chancery c]ourt concludes that Watson's conduct in
causing to be published AWPs that have no predictable
relationship to what customers pay for its drugs while
knowing Mississippi relied on this information in determining
[estimated acquisition cost] is an unfair and deceptive trade
or practice within the meaning of Mississippi's Consumer
. . .
[With respect to the common-law fraud claim, ] [t]he
[chancery c]ourt concludes that Watson made a representation
by causing its AWPs to be published by [First DataBank] with
the intent that [First DataBank] publish this information to
third parties such as [Mississippi Medicaid]. . . . [Further,
t]he evidence establishes that [Mississippi Medicaid]
believed that Watson's published AWPs were at least
reasonably close to the average prices its customers were
paying for Watson's drugs . . . .
. . .
Watson's conduct caused Mississippi to overpay for its
prescription drugs and as a result, Mississippi sustained
proximate injury and damages as a result of Watson causing
the reporting of false and inflated AWPs.
In sum, the chancery court concluded that Watson violated
Mississippi Code Section 75-24-19(1)(b) of the Mississippi
Consumer Protection Act 5, 241 times based on the number of
times Watson published an inflated average wholesale price
for a drug Medicaid reimbursed. As a consequence, the
chancery court ordered Watson to pay civil penalties in the
amount of $1, 000 per violation for a total of $5, 241, 000.
The chancery court declined to award the State's
requested injunction because the State failed to offer any
evidence about Watson's current practices or
Medicaid's current reimbursement method. The chancery
court also awarded the State $7, 141, 552 in compensatory
damages for the common-law-fraud violation. The damages
amount was based on the State's expert witness's
testimony regarding how much Mississippi Medicaid overpaid
for reimbursements. Lastly, the chancery court postponed a
punitive judgment award pending another hearing.
On February 28, 2014, the chancery court heard argument
regarding whether the State was entitled to punitive damages
and post-judgment interest. In its opinion letter, the
chancery court noted that "[t]his is clearly not a
'run of the mill' fraud case but rather a planned,
calculated, bold and fraudulent effort to, in a highly
improper and unfair manner, maximize the company's
profits and to do so on the backs of the taxpayers who are
ultimately footing the bill for Watson's 'free run of
the candy store' of the public trust and money." The
chancery court further elaborated that "[t]his case is
the 'textbook' case where punitive damages are not
only appropriate but highly needed." Further, the
chancery court explained that the award of punitive damages
is "reasonably and rationally related to the purpose to
punish what occurred giving rise to the award and to deter
its repetition . . . ." The chancery court then stated
that Watson's conduct was "clearly reprehensible[,
]" "continued for a long period of time, " and
that Watson was aware of its actions and attempted to conceal
them. Finally the chancery court ordered that Watson
Pharmaceuticals, Inc.,  pay $17, 879, 500 in punitive damages.
Watson Pharma was deemed to have a negative net worth, so it
was not ordered to pay any punitive damages. The chancery
court awarded three percent of post-judgment interest on the
compensatory and punitive-damages amounts.
The chancery court entered its final judgment on May 16,
2014. Following Watson's post-trial motion, the chancery
court made some small changes to its findings, but otherwise
denied Watson's motion on July 25, 2014. Watson appealed
and the State filed a cross-appeal.
OF THE ISSUES
On appeal, Watson asks the Court to vacate the judgment and
render judgment for all claims in Watson's favor.
Specifically, Watson raises the following issues, presented
verbatim, with any emphasis appearing in the original:
I. Whether the Chancellor erred as a matter of law when he
substituted "equity" for law in determining that
Watson made false statements when it attached the label
"Average Wholesale Price" to pricing information
that the Chancellor found was known by industry participants,
including Mississippi Medicaid, to represent reimbursement
benchmarks known to be higher than averages of actual market
II. Whether the Chancellor erred as a matter of law in
finding Watson liable for fraud despite having determined
that the State failed to prove an essential element of its
claim, to wit, "the hearer's ignorance of [the
representation's] falsity, " based on his conclusion
that "DOMunderstood that Watson's AWPs . . .
were not true average (sic) of wholesale prices charged by
Watson to retailers for its particular drug products."
III. Whether the Chancellor erred as a matter of law when he
found that DOM reasonably relied on its (alleged)
belief that Watson's "AWPs" were
"reasonably close" or "predictably
related" to averages of actual market price, despite
that Watson never made any such statements and despite that
the Chancellor found that Watson's alleged "false
statement" was a different statement, i.e., Watson's
alleged representation that "AWPs" are equal to
averages of actual market prices.
IV. Whether the Chancellor erred as a matter of law and fact
when he concluded that despite his finding that Watson's
conduct was consistent with industry custom and practice, the
State had nevertheless proven by clear and convincing
evidence that Watson intended to defraud Mississippi Medicaid
when it engaged in that conduct.
V. Whether the Chancellor erred as a matter of law and fact
in finding that Watson's conduct caused the State to pay
more for drugs than it otherwise would have based upon the
speculative assertion that had DOM known the average prices
paid for Watson's drugs it would have reimbursed
pharmacies exactly at such average, when the undisputed
evidence established that DOM's reimbursement rates were
the result of complicated political compromise necessary to
protect Medicaid beneficiaries' access to care.
VI. Whether the Chancellor erred as a matter of law and fact
by finding that Watson violated the Mississippi Consumer
Protection Act ("MCPA") by (a) ignoring that
Watson's "AWPs" were not "unfair" or
"deceptive" for the same reasons they were not
fraudulent, and (b) relying on legal standards that were
modified decades ago.
VII. Whether the Chancellor erred as a matter of law and fact
by finding that Watson Lab's conduct merited punitive
damages (a) based on evidence relating to the conduct of
Schein, Inc. (later known as Watson Pharma) before Schein,
Inc. was acquired by WPI, and thus evidence that was not
relevant and should not have been considered in considering
whether Watson Labs'[s] conduct warranted punitive
damages; (b) despite the Chancellor's finding that Watson
Labs ['s] conduct comported with industry custom and
practice, evidence that established that Watson Labs's
conduct was not extreme or otherwise outside of industry
norms; and (c) despite failing to account for DOM's own
conduct which militated against awarding punitive damages.
For organizational purposes and clarity, the Court combines
the issues raised into issues involving the common-law-fraud
finding, the Mississippi Consumer Protection Act finding, and
the punitive-damages award. The State's cross-appeal
raises the following issue:
1. The trial court ordered Watson to pay $7, 141, 552 in
compensatory damages due to Watson fraud. The trial court
also found that Watson violated the Mississippi Consumer
Protection Act but did not alternatively award the $7, 141552
under the MCPA because it had ruled that the State was
procedurally barred from recovering damages under the MCPA.
Should the trial court have allowed the State to collect
compensatory damages under the MCPA?