United States ex rel. Sheldon v. Forest Labs., LLC, Civil Action No. ELH-14-2535

Decision Date05 November 2020
Docket NumberCivil Action No. ELH-14-2535
Citation499 F.Supp.3d 184
Parties UNITED STATES, et al., EX REL. Deborah SHELDON, Plaintiffs v. FOREST LABORATORIES, LLC, et al., Defendants.
CourtU.S. District Court — District of Maryland

499 F.Supp.3d 184

UNITED STATES, et al., EX REL. Deborah SHELDON, Plaintiffs
v.
FOREST LABORATORIES, LLC, et al., Defendants.

Civil Action No. ELH-14-2535

United States District Court, D. Maryland.

Signed November 5, 2020
Filed November 6, 2020


499 F.Supp.3d 188

Joel D. Hesch, Lynchburg, VA, Gregory M. Utter, Pro Hac Vice, Joseph Michael Callow, Jr., Pro Hac Vice, Keating Muething and Klekamp PLL, Cincinnati, OH, for Plaintiffs.

Sean Hennessy, Christian D. Sheehan, Arnold & Porter Kaye Scholer LLP, Lauren Champaign, Foley and Lardner LLP, Washington, DC, James W. Matthews, Pro Hac Vice, Katy E. Koski, Pro Hac Vice, Foley and Lardner LLP, Boston, MA, Michael Allan Rogoff, Paula Ramer, Pro Hac Vice, Arnold & Porter Kaye Scholer LLP, New York, NY, for Defendants.

MEMORANDUM OPINION

ELLEN L. HOLLANDER, United States District Judge

499 F.Supp.3d 189

This qui tam action concerns an allegedly fraudulent reporting scheme under the Medicaid Drug Rebate Program (the "Rebate Program"). Pursuant to the False Claims Act ("FCA"), 31 U.S.C. §§ 3729 et seq., and analogous state statutes, the late Troy Sheldon, as Relator, filed suit against his employer, Forest Laboratories, LLC, f/k/a Tango Merger Sub 2 LLC, f/k/a Forest Laboratories, Inc., and Forest Pharmaceuticals, Inc., as well as Allergan, PLC, f/k/a Actavis, PLC, "as acquirer" of Forest (collectively, "Forest").1 See ECF 16 (the "Amended Complaint").2 Suit was filed on behalf of the United States of America, the District of Columbia ("D.C."), and numerous states.3

Mr. Sheldon died on November 10, 2017. His wife, Deborah Sheldon, as Executrix of the Estate of Troy Sheldon, was substituted as the plaintiff on March 19, 2018. ECF 29 (Motion to Substitute Party); ECF 31 (Order Granting Motion to Substitute Party). And, based on the Joint Stipulation of the Parties (ECF 71), the Court entered an Order substituting Allergan as the successor in interest to Forest. ECF 75.

Mr. Sheldon, the Relator, filed his initial Complaint (ECF 1) on August 11, 2014, and the Amended Complaint (ECF 16) was filed on August 30, 2016.4 It is 184 pages in length. In the suit, Sheldon alleged that Forest engaged in a fraud scheme by which it provided false price reports to the government and, in turn, this caused the government to overpay for Forest's drugs under the Rebate Program. ECF 72-1 at 11; ECF 16 at 6-7. Among other things, Sheldon claimed that Forest was required to aggregate the rebates it paid to its customers for purposes of calculating and reporting the "Best Price" for the drug, but failed to do so. Id.

The FCA and related state statutes permit a private party, a whistleblower known as a relator, to sue on behalf of the government to recover damages from a defendant who has caused the submission of fraudulent claims for payment injuring the public fisc. As an incentive to bring such suits, a successful relator is entitled to share in the government's recovery. See United States ex rel. Bunk & Ammons v. Gov't Logistics N.V. , 842 F.3d 261, 265 n.3 (4th Cir. 2016) ; see also

499 F.Supp.3d 190

Schindler Elevator Corp. v. United States ex rel. Kirk , 563 U.S. 401, 404, 131 S.Ct. 1885, 179 L.Ed.2d 825 (2011) ; ACLU v. Holder , 673 F.3d 245, 246-51 (4th Cir. 2011) (describing history and current provisions of FCA).

Pursuant to the initial sealing provisions of the FCA, suit was filed under seal in order to provide time to the United States and the Qui Tam States to decide whether they wished to intervene. See 31 U.S.C. § 3730(b)(2).5 The government undertook a lengthy investigation. See ECF 17; ECF 21; ECF 23; ECF 24; ECF 26; ECF 30; ECF 33; ECF 35; ECF 37; ECF 39. Eventually, on September 17, 2019, the United States and the Qui Tam States declined to intervene. ECF 41. The suit was unsealed on October 16, 2019. ECF 42. Thereafter, on December 9, 2019, defendant waived service of process. ECF 47; ECF 48.

Defendant subsequently moved to dismiss, pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b). ECF 72. The motion is supported by a memorandum of law (ECF 72-1) (collectively, the "Motion") and one exhibit. ECF 72-2. The Relator opposes the Motion (ECF 79), supported by five exhibits. ECF 79-1 to ECF 79-5. And, defendant has replied (ECF 82), supported by five exhibits. ECF 82-1 to ECF 82-5. In addition, defendant has submitted a Notice of Supplemental Authority (ECF 84), and plaintiff has replied. ECF 85.

No hearing is necessary to resolve the Motion. See Local Rule 105.6. For the reasons that follow, I shall grant the Motion.

I. Factual Background6

Forest was a Delaware limited liability company with its principal place of business in New Jersey. ECF 16, ¶ 9. It manufactured, sold, and distributed prescription drug products in the United States. Id. ¶ 10. Forest also participated in the Rebate Program. Id. ¶ 12. In January 2018, Forest merged into Allergan. ECF 72-1 at 11 n.1.

Sheldon worked for Forest from the 1990s until he was terminated in 2014. ECF 16, ¶ 55. He served "in managerial roles and had responsibilities over billions in revenues streams, overseeing many sales representatives, and overseeing Pharmacy Provider and GPO account managers." Id. Moreover, Sheldon was "directly involved in the launch, marketing and sale of Forest" drugs, which included negotiating discounts, rebates, and other incentives to drug purchasers. Id. Relator claimed that he "ha[d] direct, personal knowledge of the drug rebates and other discounts given to Forest customers that impact the reported Best Price for each drug." Id. ¶¶ 55, 62.

A. Medicaid Drug Rebate Program

Medicaid is a joint federal-state program that pays for health care services, including prescription drug coverage, for low-income individuals. Id. ¶ 13. State Medicaid programs reimburse providers for prescription drugs. Id. ¶ 15. "Most states contract with private companies" to evaluate and process "claims submitted by providers for reimbursement under the Medicaid program." Id. In general, a provider submits claims electronically to a private company for reimbursement, and the company then processes and pays the claim on behalf of the state or provides the state with the information needed for the state to pay the claim. Id. On a quarterly basis, each state submits a claim to the Department of Health and Human Services ("HHS") "for

499 F.Supp.3d 191

payment of the federal share of the state's Medicaid spending, including prescription drug reimbursements." Id.

Drug manufacturers, like Forest, usually do not submit claims for reimbursement directly to Medicaid. Id. ¶ 18. Rather, "Forest markets its drug products to its customers, who then purchase the products either directly or through wholesalers, based on a price the customers negotiated with Forest." Id. Customers might also purchase products through Group Purchasing Organizations ("GPOs"), which negotiate prices on behalf of Forest's customers. Id. After dispensing or administering the drugs purchased from Forest, the customers submit claims for the drugs to Medicaid. Id. ¶ 19.

The drugs at issue in this case include Celexa, Lexapro, Armour Thyroid, Levothroid, Namenda, and many others. Id. ¶¶ 17, 56. The Food and Drug Administration ("FDA") assigns each drug product "a unique 11-digit, 3-segment number, known as the National Drug Code (‘NDC’)." Id. ¶ 17.7

Medicaid drug reimbursement formulas vary by state. ECF 16, ¶ 22. But, state Medicaid programs generally reimburse based upon the lower of the estimated acquisition cost ("EAC") as determined by the state, the maximum allowable cost ("MAC") set by the state, or the provider's usual and customary charge. Id.8

Congress established the Rebate Program in 1991 to create a rebate mechanism that gives " ‘Medicaid the benefit of the best price for which a manufacturer sells a prescription drug to any public or private purchaser.’ " Id. ¶ 26 (quoting H.R. Rep. No. 101-881, at 96 (1990), reprinted in 1990 U.S.C.C.A.N. 2017, 2108). According to Relator, "the overarching purpose of the Best Price rebate mechanism is to reduce total Medicaid expenditures by giving the government the benefit of purchasing a drug at the lowest price per unit that a manufacturer has actually realized (i.e. , received) in selling that drug on the open market." ECF 16, ¶ 26.

When originally enacted, the Medicaid Rebate Statute ("Rebate Statute") defined the Best Price as follows, 42 U.S.C. § 1396r-8(c)(1)(C) (1991) ; ECF 16, ¶ 27:

[T]he lowest price available from the manufacturer to any wholesaler, retailer, nonprofit entity, or governmental entity within the United States (excluding depot prices and single award contract prices, as defined by the Secretary, of any agency of the Federal Government). The best price shall be inclusive of cash discounts, free goods, volume discounts, and rebates....

The Center for Medicaid and Medicare Service ("CMS"), a federal agency within HHS, promulgated a regulation in 1991 with the requisite language for the Rebate Agreement. ECF 16, ¶¶ 6, 29. The Rebate Statute was amended in 1993. Id. ¶ 27. It added "providers" to the list of exemplar entities included for purposes of...

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4 cases
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    • U.S. Court of Appeals — Fourth Circuit
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    ...must aggregate discounts to different customers along the supply chain in a given sale." United States ex rel. Sheldon v. Forest Laboratories, LLC , 499 F. Supp. 3d 184, 209, 211 (D. Md. 2020). Sheldon in addition recommends we ignore all our sister circuits which have followed the framewor......
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    ...regarding her personal experiences are, by contrast, largely ornamental. Second, and relatedly, Burke asserts that “[s]imilar to U.S. ex rel. Sheldon, the public disclosures disclose background information such as the battery defect, but do not rise to the level of revealing ‘allegations an......
2 firm's commentaries
  • Fourth Circuit Sheldon Decision Confirms Objective Standard For Scienter Under FCA
    • United States
    • LexBlog United States
    • February 1, 2022
    ...reasonable interpretation” of the Rebate Statute. Id. at 9 (quoting United States ex rel. Sheldon v. Forest Laboratories, LLC, 499 F. Supp. 3d 184, 209 (D. Md. 2020). The Fourth Circuit affirmed the district court dismissal of Sheldon’s complaint, after adopting the scienter analysis set fo......
  • Fourth Circuit Sheldon Decision Confirms Objective Standard For Scienter Under FCA
    • United States
    • LexBlog United States
    • February 1, 2022
    ...reasonable interpretation” of the Rebate Statute. Id. at 9 (quoting United States ex rel. Sheldon v. Forest Laboratories, LLC, 499 F. Supp. 3d 184, 209 (D. Md. 2020). The Fourth Circuit affirmed the district court dismissal of Sheldon’s complaint, after adopting the scienter analysis set fo......

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