Watson Labs., Inc. v. State

Decision Date11 January 2018
Docket NumberNO. 2014–CA–01213–SCT,2014–CA–01213–SCT
Parties WATSON LABORATORIES, INC. and Actavis Pharma, Inc. f/k/a Watson Pharma, Inc. v. STATE of Mississippi
CourtMississippi Supreme Court





¶ 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.


¶ 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 (19902005), Mississippi Medicaid defined estimated acquisition cost as average wholesale price minus ten percent (May 1990March 2002); average wholesale price minus twelve percent (April 2002June 2005); and average wholesale price minus twenty-five percent (July 2005October 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

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