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State v. Watson Pharmaceuticals Inc.

Court of Appeals of Utah

February 28, 2019

State of Utah, Appellant,
Watson Pharmaceuticals Inc., Watson Laboratories Inc., and Watson Pharma Inc., Appellees.

          Third District Court, Salt Lake Department The Honorable Matthew Bates The Honorable Kate A. Toomey No. 070913719

          Sean D. Reyes, Robert E. Steed, W. Daniel Miles III, Alison D. Hawthorne, Joseph W. Steele, and Kenneth D. Lougee, Attorneys for Appellant

          Richard A. Vazquez, James W. Matthews, and Katy E. Koski, Attorneys for Appellees

          Judge Jill M. Pohlman authored this Opinion, in which Judges David N. Mortensen and Diana Hagen concurred.


          POHLMAN, JUDGE:

         ¶1 After observing a trend of allegedly fraudulent pharmaceutical prices being submitted to the State Medicaid program, the State of Utah brought civil actions against a number of pharmaceutical companies for fraud and alleged violations of the Utah False Claims Act (the UFCA). Utah Code Ann. §§ 26-20-1 to -15 (LexisNexis 2013). Watson Pharmaceuticals Inc. and two of its subsidiaries, Watson Laboratories Inc. and Watson Pharma Inc. (collectively, the Watson Defendants), were among the named defendants.[1] The district court dismissed the claims against the Watson Defendants because the State failed to plead its claims against each defendant separately and instead identified them collectively in the complaint as "Defendant Watson." We affirm.


         ¶2 Under Utah's Medicaid program, medical providers are reimbursed for drugs prescribed to Medicaid recipients. Reimbursement is set by state and federal rules, and the amount a medical provider receives is calculated by looking at, among other things, the Average Wholesale Price (AWP) reported by drug wholesalers or manufacturers. The Watson Defendants each allegedly reported inflated AWPs, resulting in the State over-reimbursing physicians and pharmacists for drugs prescribed for and dispensed to Utah Medicaid recipients. The over-reimbursement in turn allowed the Watson Defendants to market the "spread" between their inflated AWPs and the actual AWPs, thereby increasing sales by inducing doctors to buy their drugs.

          ¶3 The State found a widespread practice of inflated AWP reporting and brought civil actions against numerous pharmaceutical companies. In three separate actions against three different groups of defendants, the State alleged violations of the UFCA and claims for fraudulent misrepresentation. While each case followed a different procedural path, the complaints were virtually identical.

         ¶4 One of these companion cases found its way to the Utah Supreme Court, and the current case was stayed during the pendency of that appeal. See generally State v. Apotex Corp., 2012 UT 36, 282 P.3d 66. In Apotex, the district court had dismissed the State's complaint with prejudice for failing to plead its claims with particularity under rule 9(c) of the Utah Rules of Civil Procedure.[3] Id. ¶ 11; see also Utah R. Civ. P. 9(c) ("In alleging fraud . . ., a party must state with particularity the circumstances constituting fraud . . . ."). The district court concluded that the State had "failed to identify each defendant's allegedly fraudulent misrepresentations and UFCA violations with particularity" and instead "offered only broad conjecture of alleged false or fraudulent statements that the Defendants made as a group." Apotex, 2012 UT 36, ¶ 12 (quotation simplified).

         ¶5 On appeal, the supreme court held that, while rule 9(c) applied to the State's UFCA and fraudulent misrepresentation claims, "a relaxed standard is appropriate where a plaintiff asserts a widespread fraudulent scheme that involves the submission of many false claims over a lengthy period." Id. ¶ 20. This relaxed standard provides that "if a plaintiff cannot allege the details of an actually submitted false claim, the plaintiff may nevertheless survive [rule 9(c)] by alleging particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted by each defendant." Id. ¶ 29 (quotation simplified). "[I]n the interest of justice," the court remanded the case to the district court to allow the State an opportunity to meet the new standard. Id. ¶¶ 31, 39.

         ¶6 The State here was similarly given the opportunity to replead its claims to satisfy Apotex. In its Third Amended Complaint (the Complaint), [4] the State alleged that the defendants had each "made false publications" for the prescription drugs identified in Exhibit A to the Complaint. In that exhibit, the State identified hundreds of drugs, listing each by product name and National Drug Code (NDC). The State also identified the specific defendant associated with each drug, except for the drugs associated with the Watson Defendants. For those drugs, the State alleged that the Watson Defendants collectively "made false publications" for the drugs identified in Exhibit A as being jointly associated with the three entities.

         ¶7 The State also embedded in the Complaint charts purporting to show "representative examples" of alleged false claims. See id. ¶ 35 (listing "representative examples" of alleged false claims as an example of "reliable indicia that lead to a strong inference that false claims were actually submitted" (quotations simplified)). For each prescription drug listed in the charts, the State identified the drug by name and NDC, along with each drug's reported AWP, actual AWP, and the spread between the two. Again, the State provided separate charts for each defendant except for the Watson Defendants. The representative examples for the three Watson Defendants were combined without distinction in a single chart under the name "Defendant Watson."

         ¶8 Under rules 9(c) and 12(b)(6) of the Utah Rules of Civil Procedure, all of the named defendants, including the Watson Defendants, filed a joint motion to dismiss the Complaint, alleging that the State failed to satisfy the Apotex pleading standard. The district court ruled that the State pleaded its facts with sufficient particularity except as to the Watson Defendants, which the court recognized "is not a single defendant, but instead, is comprised of three distinct entities." The court noted that the State was "not required to identify the minutia related to each alleged bad act," but that Apotex required that each defendant must be "individually ...

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