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Watson Laboratories, Inc. v. State

Supreme Court of Mississippi, En Banc

January 11, 2018

WATSON LABORATORIES, INC. AND ACTAVIS PHARMA, INC. f/k/a WATSON PHARMA, INC.
v.
STATE OF MISSISSIPPI

          DATE OF JUDGMENT: 05/14/2014

         RANKIN 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. McMULLAN

          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

          CHAMBERLIN, JUSTICE

         ¶1. 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").

         ¶2. 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.

         ¶3. 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, affirmed.

         FACTS AND PROCEDURAL HISTORY

         ¶4. 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.

         ¶5. 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.

         ¶6. 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.

         ¶7. 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")[1] 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 2005).

         ¶8. 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."

         ¶9. 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 allegations.

         ¶10. 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 Protection Act.
. . .
[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.

         ¶11. 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.

         ¶12. 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., [2] 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.

         ¶13. 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.

         STATEMENT OF THE ISSUES

         ¶14. 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 prices.
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 "DOM[3]understood 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.

         ¶15. 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?

         STANDARD ...


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