4th Circuit En Banc Judgment Affirms District Court Decision in Best Price Stacking Case

In November 2020, we blogged about a decision by the Federal District Court of Maryland dismissing a Federal False Claims Act (FCA) qui tam suit alleging that Forest Laboratories knowingly reported inflated best prices under the Medicaid Drug Rebate Program (MDRP), resulting in underpayment of rebates.  The relator claimed that Forrest knowingly failed to combine (“stack”) discounts on the same drug unit to two different customers when determining best price.  As we reported, on November 5, 2020, the District Court held that the relator could not plausibly plead the requisite scienter because Forest’s interpretation of the ambiguous statute was objectively reasonable and CMS did not warn Forest away from that interpretation through authoritative guidance.

The relator subsequently appealed to the 4th Circuit Court of Appeals but was unsuccessful.  In a January 25, 2022 decision, a three-judge panel upheld the District Court’s decision under a similar rationale.  Still undeterred, the relator requested and obtained en banc review.  Last Friday, September 23, the 4th Circuit issued an en banc per curiam judgment vacating the panel’s decision, and affirming the District Court’s decision by an equally divided court.  (The three-judge panel’s decision was vacated because, under the 4th Circuit’s appellate procedures, the granting of rehearing en banc vacates the previous panel judgment and the rehearing is a review of the lower court’s decision.)  The relator has until December 22, 2022 to petition for certiorari to the Supreme Court.

Apart from its importance in connection with best price stacking, the Sheldon case has been cited in a larger controversy about the intent standard under the FCA.  The 4th Circuit three-judge panel decision relied heavily on the Supreme Court’s decision in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), which addressed the intent standard under the Fair Credit Reporting Act.  In Safeco, the Supreme Court set forth a two-step analysis for determining whether a defendant exhibited reckless disregard where a statute is ambiguous:  (1) was the defendant’s interpretation objectively reasonable; and (2) was there authoritative guidance that might have warned defendant away from that reading.  Id. at 69-70.  The three-judge panel in Sheldon held that the Safeco test should apply in determining whether a defendant had “knowing” intent under the FCA.  Other circuit courts have disagreed, holding that the defendant’s subjective understanding of an ambiguous statute at the time of the violation can support scienter, regardless of the objective reasonableness of a post-hoc interpretation.  See, e.g., United States ex rel. Phalp v. Lincare Holdings, Inc., 857 F.3d 1148, 1155 (11th Cir. 2017).

In a certiorari petition appealing a 7th Circuit case that also applied Safeco to the FCA, U.S. ex rel. Schutte et al. v. SuperValu Inc., the Petitioner’s reply brief cited the Sheldon case as evidence of a circuit split.  The petitioner wrote:  [T]he Fourth Circuit has now changed positions. That court previously agreed with the [7th Circuit’s] decision below. . . .  The relator, however, sought rehearing en banc, and . . .  the Fourth Circuit granted the petition and vacated the panel opinion pending rehearing.”  The Supreme Court has sought the views of the Department of Justice on this issue.

The controversy over the FCA’s intent standard where the applicable statute or regulation is ambiguous has special relevance when the FCA is used to target inaccurate government price calculations.  The AMP, best price, and ASP statute and regulations are complex and full of gaps and ambiguities.  CMS itself has recognized this by repeatedly inviting manufacturers to use reasonable assumptions where a question is not addressed in the statute, regulations, or CMS guidance.  We are closely following the SuperValu cert. petition, and will post updates in this blog.