357 F.Supp.2d 314 (2005) | Cited 10 times | D. Massachusetts | February 4, 2005



The Commonwealth of Massachusetts brings this case against thirteenDefendant pharmaceutical manufacturers for their alleged role in causingMassachusetts to overpay pharmacies and other providers for genericprescription drugs under the Commonwealth's Medicaid Program byfraudulently inflating the "Wholesale Acquisition Cost" ("WAC") ofcovered drugs.1 Massachusetts also alleges that Defendants reportedfalse prices to the federal Secretary of Health and Human Services("HHS") under the Best Prices rebate program, depriving Massachusetts ofamounts itPage 2would have received from the Defendants. With respect to the allegationsof inflated WACs, Massachusetts asserts causes of action for fraud (CountI), unjust enrichment (Count II), violations of the MassachusettsMedicaid False Claims Act, Mass. Gen. L. Ann. ch. 118E, §§ 40 and 41(Count III), and violation of the Massachusetts False Claims Act, Mass.Gen. L. Ann. ch. 12, § 5A et seq. (Count IV). With respect to the claiminvolving Best Prices, Massachusetts asserts Defendants breached theirfederal Rebate Agreements with HHS (Count V), breached the impliedcovenant of good faith and fair dealing (Count VI), and violated theRebate Statute, 42 U.S.C. § 1396r-8 (Count VII).2 Defendants havemoved to dismiss all counts of the Complaint.

After hearing and review of the briefs, the motion to dismiss Count VIIis ALLOWED because the Court finds that there is no implied cause ofaction for the states under the Best Prices Statute. Otherwise, themotion to dismiss is DENIED.


The following facts are drawn from the Complaint3 andPage 3accepted as true for purposes of this motion to dismiss. Defendantsdispute many of the facts.4

A. The Federal Medicaid Program

The Medicaid program, established by Title XIX of the Social SecurityAct, is a uniquely cooperative federal-state program that providesmedical assistance to certain low income individuals. See42 U.S.C. §§ 1396-1396v.

Congress passed the Medicaid Best Prices Statute, 42 U.S.C. § 1396r-8,as part of the Omnibus Budget Reconciliation Act of 1990. Under thatstatute, a drug manufacturer must enter into a Rebate Agreement with theSecretary in order for federal matching funds to be made available forthat manufacturer's covered outpatient drugs. 42 U.S.C. § 1396r-8(a)(1).The RebatePage 4Agreement provides that the Secretary enters the agreement "on behalf ofthe Department of Health and Human Services and all States and theDistrict of Columbia (except to the extent they have in force anIndividual State Agreement)." (Rebate Agreement at Preamble.) Uponentering a Rebate Agreement with the Secretary, the manufacturer must paya quarterly rebate directly to each participating state based on all ofthe manufacturer's drugs purchased by that state pursuant to its Medicaidplan during that quarter.

For single source or innovator multiple source drugs, the rebate due oneach unit paid for under the state plan is the difference between theaverage manufacturer price ("AMP")5 and the manufacturer's bestprice, defined as the lowest price available from the manufacturer to anyprivate purchaser or governmental entity (with certain exclusions) withinthe United States, or 15.1% of AMP, whichever is greater.42 U.S.C. § 1396r-8(c)(1), (2). For multiple source non-innovator drugs,the rebate is 11% of AMP. 42 U.S.C. § 1396r-8(c)(3). Each state mustagree to cover all of the manufacturer's covered outpatient drugs unlessthe state complies with one of several statutory provisions allowing itto exclude or restrict coverage.

Page 542 U.S.C. §§ 1396a(a)(54), 1396r-8(d). Any rebate amounts received by thestate must be offset against the state's Medicaid expenditures thatquarter for purposes of calculating the matching federal financialparticipation. 42 U.S.C. § 1396r-8(b)(1)(B).

States may enter directly into Rebate Agreements with drugmanufacturers as authorized by the Secretary. 42 U.S.C. § 1396r-8(a)(1).To date, the Secretary has approved supplemental drug Rebate Agreementsin at least twenty states. States may also control their Medicaid drugcosts and coverage by establishing prior authorization programs,42 U.S.C. § 1396r-8(d)(1)(A), or by creating drug formularies,42 U.S.C. § 1396r-8(d)(1)(B)(iv). Though not part of the rebate statute,states are also permitted to set payment rates with respect to covereddrugs. See 42 U.S.C. § 1396(a)(30); 42 C.F.R. 447.331-447.333.

Drug manufacturers are required under the rebate statute and agreementto calculate and report their AMPs and best prices to the Secretary on aquarterly basis. 42 U.S.C. § 1396r-8(b)(3)(A)(i); Rebate Agreement at §II(e). Any information provided by a manufacturer or wholesaler under therebate statute is confidential and "shall not be disclosed by theSecretary . . . or a State agency . . . except as the Secretarydetermines to be necessary to carry out this section."42 U.S.C. § 1396r-8(b)(3)(D); Rebate Agreement at § VII. States arerequired toPage 6report their total Medicaid drug utilization to each manufacturer and theSecretary sixty days after the end of the rebate quarter.642 U.S.C. § 1396r-8(b)(2)(A). Using the manufacturer pricing data, theCenters for Medicare & Medicaid Services ("CMS") computes the unitrebate amount ("URA") "to which the Medicaid utilization information maybe applied by States in invoicing the Manufacturer for the rebate paymentdue." Rebate Agreement at § I(dd).

The Secretary may survey wholesalers and manufacturers to verifyreported AMPs and best prices, 42 U.S.C. § 1396r-8(b)(3)(B), and mayaudit manufacturer calculations of AMP and best price, Rebate Agreementat § III(c). The Secretary may impose civil money penalties onmanufacturers that either fail to timely report their pricing informationor submit false information to the Secretary. 42 U.S.C. § 1396r-8(b)(3)(C);Rebate Agreement at §§ III, IV. Section 1396r-8(b)(3)(C)(ii) also providesthat any civil money penalties imposed under this subsection are "inaddition to other penalties as may be prescribed by law." The Secretarymay terminate the Rebate Agreement for either violations of the RebateAgreement or for other good cause shown. 42 U.S.C. § 1396r-8(b)(4)(B)(i).The statute further provides:Page 7

Such termination shall not be effective earlier than 60 days after the date of notice of such termination. The Secretary shall provide, upon request, a manufacturer with a hearing concerning such a termination, but such hearing shall not delay the effective date of the termination.Id. If there is a termination, the Secretary must notify the states, §1396r-8(b)(4)(B)(iv), and the Statute requires the Secretary to delayreinstatement of any terminated contract for one calendar quarter absentgood cause. 42 U.S.C. § 1396r-8(b)(4)(C).

Rebate Agreements are effective only for one year, and "shall beautomatically renewed for a period of not less than one year unlessterminated under subparagraph (B)." 42 U.S.C. § 1396r-8(b)(4)(A).

While the Rebate Agreement does not address remedies for breach ofcontract, it specifies that it shall be construed under federal commonlaw, and states that nothing in it shall be construed as a waiver of anylegal right of the Secretary or the manufacturer under state or federallaw. Specifically, it provides that: "The Rebate Agreement shall beconstrued in accordance with federal common law and ambiguities shall beinterpreted in the manner which best effectuates the statutory scheme."Id. at IX(e).

B. The Massachusetts Medicaid ProgramPage 8

The Massachusetts Medicaid program provides health benefits, includingprescription drugs, to low-income residents. The Massachusetts Medicaidprogram spends approximately $1.2 billion annually on pharmaceuticalproducts.

Massachusetts reimburses "providers," meaning doctors who directlyadminister drugs and pharmacies, based on formulae set out inMassachusetts regulations, which were developed in accordance withfederal requirements. Reimbursement for noninnovator "multiple-sourcedrugs," which are the generic drugs primarily involved here, is thelowest of (a) the Federal Upper Limit payment ("FUL") for the drug, ifone is available, plus a dispensing fee; (b) the Massachusetts UpperLimit ("MUL") for the drug, if any, plus a dispensing fee; (c) theEstimated Acquisition Cost ("EAC") of the drug, plus a dispensing fee; or(d) the pharmacy's usual and customary charge for the drug. Mass. Regs.Code tit. 114.3, § 31.04.7

Massachusetts regulations define the EAC as "an estimate of theprice generally and currently paid by eligible pharmacy providersfor the most frequently purchased package size of a drug." Mass.Regs. Code tit. 114.3, § 31.02. See also Mass.Page 9Regs. Code tit. 130, § 406.402. Prior to August 3, 2002, EAC was definedto be the drug's WAC plus 10%. Mass. Regs. Code tit. 114.3, § 31.02.Effective August 3, 2002, EAC is defined as WAC plus 5%. Id.

The FULs are established by CMS and are defined as "a reasonabledispensing fee established by the agency plus an amount established bythe [CMS] that is equal to 150 percent of the published price for theleast costly therapeutic equivalent (using all available nationalcompendia) that can be purchased by pharmacists." 42 C.F.R. § 447.332(b).

Defendants supply pricing information in the form of WACs and AWPs tothird party publishers, such as First Data Bank, which publish listsorganized by drug. The published WACs do not reflect actual averageprices paid by wholesalers or providers for drugs. Instead, the WACSreported by defendants are materially inflated, leading Massachusetts topay excessive amounts to pharmacy providers. The difference between thereported prices and the actual average price is called the "spread" byMassachusetts. The complaint asserts: "The purpose of each defendant increating the spread was to provide incentives or kickbacks for customerswho buy and distribute its products, to increase the profits for suchcustomers at the expense of the state Medicaid programs, and to increaseits own profits by increasing its market share for particular drugs andPage 10classes of drugs." Throughout the period at issue, Defendantsaffirmatively endeavored to conceal the actual prices they charged tocustomers by using undisclosed discounts, rebates, and other inducementsthat had the effect of lowering the actual prices charged to pharmacies.

As an alternative theory, Massachusetts alleges that the AMPs reportedby the manufacturers who participated in the Best Prices rebate programwere materially understated, depriving Massachusetts of funds to which itwas entitled. The AMPs are materially lower than the reported WACs andAWPs. Massachusetts points out that it cannot be true that both the WACsand the AMPs were accurate reports of true prices to wholesalers,although it is possible that one of the sets was accurate.


A. Common Law Fraud (Count I)

Defendants have moved to dismiss the common law fraud count, claimingthat (1) Defendants never asserted that WAC was a net price; (2)Massachusetts knew or should have known that WAC was not a net price; and(3) in certain cases the injury is not traceable to Defendants' conductbecause Massachusetts reimbursed at rates above the applicable FULs.

"The elements of [intentional] misrepresentation are well established:in order to recover, plaintiff `must allege and prove that the defendantmade a false representation of aPage 11material fact with knowledge of its falsity for the purpose of inducingthe plaintiff to act thereon, and that the plaintiff relied upon therepresentation as true and acted upon it to his [or her] damage.'" Damonv. Sun Co., Inc., 87 F.3d 1467, 1471-72 (1st Cir. 1996) (quoting BarrettAssocs., Inc. v. Aronson, 190 N.E.2d 867, 868 (Mass. 1963)). "[I]nMassachusetts . . . a party who discloses partial information that may bemisleading has a duty to reveal all the material facts he [or she] knowsto avoid deceiving the other party." Id. at 1478 (quoting Nei v. Burley,446 N.E.2d 674, 676 (Mass. 1983)).

Although there may be "no duty imposed upon one party to a transaction to speak for the information of the other . . . if he does speak with reference to a given point of information, voluntarily or at the other's request, he is bound to speak honestly and to divulge all material facts bearing upon the point that lie within his knowledge. Fragmentary information may be as misleading . . . as active misrepresentation, and half-truths may be as actionable as whole lies."Kannavos v. Annino, 247 N.E.2d 708, 711-12 (Mass. 1969) (quoting FowlerV. Harper et al., The Law of Torts, § 7.14 (date unavailable)).

Regarding reliance, it is well established under Massachusetts law that `failure to investigate the veracity of statements does not, as a matter of law, bar recovery for misrepresentation.' . . . `Only reliance on "preposterous or palpably false" representations vitiates a misrepresentation claim.'Damon, 87 F.3d at 1480 (citations omitted). However, "a person who isconfronted with inconsistent or contradictoryPage 12representations may not reasonably rely on one side of the controversywithout attempting to resolve the inconsistency or contradiction." Mass.Laborers' Health & Welfare Fund v. Philip Morris, Inc.,62 F. Supp. 2d 236, 242-43 (D. Mass. 1999) (holding that as a matterof law plaintiff could not have reasonably relied on defendants'statements that smoking was not harmful) (citing Trifiro v. N.Y. LifeIns. Co., 845 F.2d 30, 33 (1st Cir. 1988)).

The Complaint alleges that Defendants provide WACs through pricingpublication services, and that "defendant manufacturers intend the WAC tobe understood by the state Medicaid agencies as the average price paid bya wholesaler to a manufacturer for a given product." (¶ 30.) TheComplaint alleges that the manufacturers knew that the states wererelying on the WACs to determine the estimated acquisition cost of thedrugs, knew that the states had no other sources of information, andaffirmatively concealed the actual prices charged. (¶¶ 28, 32-33.)

Defendants strenuously argue that they never affirmatively representedWAC to be a net price, and that nothing in the pricing informationpublished by First DataBank has ever stated that WAC is a net price.Massachusetts has submitted documentation (at the request of the Court)to support its allegation that WAC was represented by the publishers thatallegedly act on behalf of manufacturers to reflect actual pricesPage 13paid by wholesalers — that is, true wholesale prices net of discounts, andthat WAC was commonly understood in the industry to reflect actual pricespaid by wholesalers, at least until the 2001 and 2002 reports of theOffice of the Inspector General. For example, in the 1994-1995 FirstDataBank Blue Book, the source for most states' pricing information, theterm Wholesale Net Price or Wholesale Acquisition Cost (WAC) is definedas price to wholesaler or distributor. In the Spring 1994 copy of thepublication "Health Care Financing Review," published by HHS, a table ofdefinitions defines WAC as the "wholesaler's net payment made to purchasea drug product from the manufacturer, net of purchasing allowances anddiscounts." E. Kathleen Adams, Ph.D et al., State Medicaid PharmacyPayments and Their Relation to Estimated Costs, 15 Health Care Fin. R.25, 26 (Spring 1994). Massachusetts also submitted a portion of the 1996version of Medi-Span's Master Drug Database Documentation Manual, whichstates: The WAC is the estimated cost to the wholesaler by the drug manufacturer. . . . Actual values can vary from these estimated values as wholesalers experience discounts through volume purchases or special deals causing variance from their standard costs.When all reasonable inferences are drawn in favor of the nonmoving partyduring the relevant period, the term WAC was understood in the trade tomean a true price, and Defendants were misrepresenting their true pricesto the government.Page 14

Defendants next argue that Massachusetts knew or should have known thatWAC was not a net price, and so Massachusetts could not have reasonablyrelied on it as a true price. Defendants point out that Massachusettscould have used the URA data from the Best Prices program to calculatethe AMP of a drug, generally by dividing the URA by .11, thus learningthat WACs exceeded reported AMPs. Defendants point to several nationaland state reports discussing whether WAC is an appropriate basis forreimbursement, and to a 2002 report from the Massachusetts Division ofHealth Care Finance and Policy ("DHCFP") discussing WAC inflation, asevidence that Massachusetts was on notice that WAC was not an accurateprice. Defendants also note that Massachusetts still reimburses based onWAC. The Complaint alleges: At all times relevant to this action, neither DMA [the Massachusetts Division of Medical Assistance] nor knew the actual prices each of the defendants charged its customers for its products. Rather, DMA obtained pricing information from FDB [First Data Bank], and DMA and DHCFP reasonably relied on this information in determining the Medicaid reimbursement levels for the products of each of the defendant manufacturers.(¶ 34.) The ability to make a mathematical calculation based on URAsdoes not necessarily demonstrate as a matter of law that Massachusettscould not have reasonably relied on the reported WACs, for "underMassachusetts law . . . `failure to investigate the veracity ofstatements does not, as a matter of law, bar recovery formisrepresentation.'" Damon, 87 F.3d at 1480. ThePage 15government reports, together with this opportunity to performreverse-calculations, raise the issue of when Massachusetts became orshould have become aware of the alleged WAC inflation, but finding outthe true price of a drug is no easy matter because drug pricing terms areprotean. The First Circuit pointed out that Massachusetts attempted toobtain accurate pricing data following the 2002 report, but pharmaciesrefused to provide any data, leaving Massachusetts to attempt to tinkerwith the WAC-based system. Long Term Care Pharm. Alliance v. Ferguson,362 F.3d 50, 52, 59 (1st Cir. 2004). The reasonableness of any relianceis best left to a summary judgment record.

Finally, Defendants argue that for those instances in whichMassachusetts reimbursed above the FUL, Massachusetts cannot prove thatthe WACs affected the reimbursement. Massachusetts argues that theseinstances are isolated administrative errors.8 Massachusetts arguesthat if the error consisted solely of a failure to take into accountFULs, but a true WAC would have been lower than whatever basis was used,then the correct FUL would limit damages but would not absolve Defendantsof liability. This is a complicated factual issue the resolution of whichwill have to await the more detailed record available at summaryPage 16judgment.

B. Unjust Enrichment (Count II)

Massachusetts brings the unjust enrichment claim to recover Defendants'"increased sales and market share" that were "a result of theCommonwealth's excessive payments to its Medicaid pharmacy providers."(Compl. at ¶ 60.) Defendants move to dismiss Massachusetts's unjustenrichment count, arguing that Massachusetts has an adequate remedy atlaw against providers, that there is no direct benefit to theDefendants, that there is no proof that the spread led to increasedmarket share, and that it is impossible to have an increased market sharein the multiple-source arena.

"A person who has been unjustly enriched at the expense of another isrequired to make restitution to the other." Nat'l Shawmut Bank of Bostonv. Fidelity Mut. Life Ins. Co., 61 N.E.2d 18, 20 (Mass. 1945) (quotingRestatement (First) of Restitution § 1 (1951)). "A person obtainsrestitution when he is restored to the position he formerly occupiedeither by the return of something which he formerly had or by the receiptof its equivalent in money." Restatement § 1 comment (a). Unjustenrichment "does not require any contractual or fiduciary relationshipbetween the parties." Greenwald v. Chase Manhattan Mortgage Corp.,241 F.3d 76, 78 n. 1 (1st Cir. 2001). Unjust enrichment does not requirethat a defendant receive directPage 17payments from a plaintiff. Id. at 81. "Under the doctrine of unjustenrichment, a plaintiff seeks restitution of a benefit conferred onanother whose retention of the benefit at plaintiff's expense would beunconscionable." See In re Lupron® Mktg. & Sales Practices Litig.,295 F. Supp. 2d 148, 182 (D. Mass. 2003) (Stearns, J.) (citing othercases).

To satisfy the elements of unjust enrichment, a plaintiff must show:(1) an enrichment; (2) an impoverishment; (3) a relation between theenrichment and the impoverishment; (4) an absence of justification and(5) the absence of a remedy provided by law. Id. Liability in unjustenrichment involves a showing that wealth is "in one persons's hands whenit should be in another's." Id. (citing Guyana Tel. & Tel. Co. v.Melbourne Int'l, 329 F.3d 1241, 1245 n. 3 (11th Cir. 2003)).

Unjust enrichment is an equitable remedy, and "[i]t is a basic doctrineof equity jurisprudence that courts of equity should not act . . . whenthe moving party has an adequate remedy at law." Mort v. United States,86 F.3d 890, 892 (9th Cir. 1996) (quoting Morales v. Trans WorldAirlines, Inc., 504 U.S. 374, 381 (1992)). However, "[a] remedy at lawcannot be considered adequate so as to prevent equitable relief, unlessit covers the entire case made by the bill in equity." Hillsborough Tp.,Somerset County, N.J. v. Cromwell, 326 U.S. 620, 629 (1946) (citationomitted). "[A] suit in equity will lie where the remedyPage 18at law is not clear or as adequate and complete as that which equity canafford." G.E. Co. v. Callahan, 294 F.2d 60, 64 (1st Cir. 1961).

Courts have been flexible regarding when in the trial they require theplaintiff to choose its avenue of recovery. See In re Lupron®,295 F. Supp. 2d at 182 n. 39 (dismissing unjust enrichment claim whereplaintiffs had adequate RICO remedy, but noting that it was open toplaintiffs to elect to proceed under unjust enrichment theory); SentinelProds. Corp. v. Mobile Chem. Co., 2001 WL 92272, at *22 n. 15 (D. Mass.Jan. 17, 2001) (allowing plaintiff to choose avenue of recovery at thetrial stage).

Defendants argue that Massachusetts has an adequate remedy at law torecover overpayments. Plaintiff responds that any remedies at law againstproviders would leave Defendants in possession of the fruits of theiralleged fraud in the form of profits from increased sales and marketshare. The Restatement of Restitution sets forth some circumstances inwhich a plaintiff has been permitted to recover the enrichment of anotherin excess of his impoverishment under the doctrine of unjust enrichment.See Restatement of Restitution, § 1 at comment e.9 However,Page 19Plaintiff cites no caselaw directly supporting its broad claim toDefendants' profits and their market share.

Defendants argue that under the Commonwealth's reimbursementprocedures, it is impossible for manufacturers of non-innovator multiplesource drugs to increase sales or market shares by inflating their WACsbecause all competing, generally equivalent drugs are reimbursed at thesame rate. Plaintiff disagrees, stating that the reimbursement rates forgenerically equivalent drugs vary based on the manufacturer's reportedprices. The Court need not resolve these issues at this stage of theproceeding, since Massachusetts may have to elect only one theory ofrecovery eventually, and will not force Plaintiff to choose its remedy atthis stage of the litigation.

C. Massachusetts Statutes

Defendants also seek to dismiss the claims under the MassachusettsFalse Claims Act, Mass. Gen. L. Ann. ch. 12, § 5B (West 2004) and theMassachusetts Medicaid False Claims Act, Mass. Gen. L. Ann. ch. 118E, §§40 and 41 (2004) (Counts III and IV). Because the grounds are essentiallythe same as those argued in support of dismissing the fraud claim, theCourt denies the motion.Page 20

In their reply brief, Defendants argue that the antikickbackprovision, Mass. Gen. Laws Ann. ch. 118E, § 41, is preempted. Accordingto Defendants, the lack of a scienter requirement means that certainbehavior legal under the federal statute would be illegal under theMassachusetts statute, leading to inevitable conflict. In support,Defendants cite State v. Harden, 873 So. 2d 352, 355 (Fla.Dist.Ct.App.2004) (holding Florida anti-kickback statute, which punished negligentconduct, preempted by federal anti-kickback statute, which requires"knowing and willful" conduct, both because of difference in scienter andbecause of lack of safe harbor provisions in Florida statute).

Plaintiff points out that while the Massachusetts statute does notcontain an explicit "knowing and willful" requirement, the First Circuithas held that the requirement that an amount be paid "to induce"another, found in the analogous federal statute, "imposes a second andstronger scienter requirement [than the knowing and willfulrequirement]." United States v. Bay State Ambulance & Hosp. RentalServ., Inc., 874 F.2d 20, 33 (1st Cir. 1989). The case is evolving on thescienter requirement. Commonwealth v. Kobrin, No. 9873CR438A-N, slip 4 (Mass. Sup. Ct. June 29, 2001) (noting that "[l]anguage similar tothat in G.L. c. 118E, § 41, in the federal Medicaid and MedicareAnti-Kickback statutes has been held to contain an intent element" andPage 21holding statute not unconstitutional for lack of a specific statement ofscienter). But see Boman v. S.E. Med. Servs. Group, 1998 WL 1182063, at*10 (Mass. Sup. Ct. Jan. 7, 1998) ("The primary difference between thefederal anti-kickback statute and the state provisions is that theMassachusetts statutes do not require the action or practice to beknowing and willful.").

In light of the fact that this argument was raised late in thebriefing, and the interpretation of the law is evolving, the Court willdefer ruling.

D. Implied Cause of Action under 42 U.S.C. § 1396r-8 (Count VII)

Massachusetts claims a right to a private cause of action under42 U.S.C. § 1396r-8, and argues that Defendants' reporting of falseinformation was in violation of this statute. The Supreme Court set forththe standards for implying a cause of action in Alexander v. Sandoval,532 U.S. 275 (2001). It held: Like substantive federal law itself, private causes of action to enforce federal law must be created by Congress. The judicial task is to interpret the statute Congress has passed to determine whether it displays an intent to create not just a private right but also a private remedy. Statutory intent on this latter point is determinative.Id. at 286-87 (citations omitted). The Court addressed a similar argumentin Pharm. VI, 339 F. Supp. 2d at 177, rejecting the County of Suffolk'sclaims that it possessed a right of action because "[w]hile Suffolkarguably falls within a class of entities for whose benefit the BestPrices Statute was enacted,Page 22as a governmental entity obliged to pay for prescription drugs, Suffolkdoes not point to any provisions demonstrating a Congressional intent tocreate a remedy." Id.

Massachusetts differs from Suffolk in that it is clearly within theclass of entities for whose benefit the Best Prices Statute was enacted.However, it too fails to point to any provisions demonstrating aCongressional intent to create a private remedy for the state which wouldallow the state to obtain penalties for the provision of falseinformation or to require the Secretary to terminate the RebateAgreement. As the Supreme Court stated in Sandoval, [t]he express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others. Sometimes the suggestion is so strong that it precludes a finding of Congressional intent to create a private right of action, even though other aspects of the statute (such as language making the would be plaintiff a member of the class for whose benefit the statute was enacted) suggest the contrary.523 U.S. at 290. Here, because the statute unambiguously gives theSecretary the power to terminate the Rebate Agreement, renew it andimpose federal penalties for false or untimely filings, I conclude thatthe states do not have a remedy under the statute. This is not the end ofthe analysis, however, because the statute also requires the Secretary toenter into the Rebate Agreement on behalf of the state and is silent onthe scope of the available contractual remedies. This will be discussedin the next section.

Accordingly, the Court dismisses Count VII.Page 23

F. Third-Party Beneficiary of the Rebate Agreements (Count V)

Massachusetts brings a claim as a third-party beneficiary of the BestPrices Rebate Agreements, which are signed by the manufacturers and theSecretary of Health and Human Services. A court applying federal commonlaw may look to the Restatement of Contracts for guidance regarding whena third-party beneficiary may sue. Almond v. Capital Props., Inc.,212 F.3d 20, 24 (1st Cir. 2000); Davis v. United Airlines, Inc.,575 F. Supp. 677, 679-680 (E.D.N.Y. 1983). The Restatement (Second)of Contracts § 302 provides: Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to perform in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the benefit of the promised performance. An incidental beneficiary is a beneficiary who is not an intended beneficiary."Only intended beneficiaries, not incidental beneficiaries, can enforce acontract." Harvard Law Sch. Coalition for Civil Rights v. President &Fellows of Harvard Coll., 595 N.E.2d 316, 319 (Mass. 1992) (applyingMassachusetts law). The crux in third-party beneficiary analysis is theintent of the parties. In re Pharm. Indus. Average Wholesale PriceLitig., 339 F. Supp. 2d 165, 178 (D. Mass. 2004) (quoting McCarthyv. Azure, 22 F.3d 351,Page 24356 (1st Cir. 1994). The law requires "special clarity" to support afinding that the contracting parties intended to confer a benefit on athird party. Id. The intended party need not be specifically orindividually identified in the contract, but must fall within a classclearly intended by the parties to benefit from the contract. McCarthy,22 F.3d at 362.

The Court addressed a similar claim in Pharm. VI,339 F. Supp. 2d at 177-79, and found that Suffolk was not a third-partybeneficiary because "[t]here is no `clear indication' that counties (asopposed to states) were in the class of intended beneficiaries from thevantage point of either the pharmaceutical manufacturers or the federalgovernment or in the text of the [Rebate Agreements]." Id. at 179.

By contrast, the Rebate Agreement begins with the statement: "TheSecretary, on behalf of the Department of Health and Human Services andall States and the District of Columbia." (emphasis added). It goes on toprovide that participating manufacturers must pay rebates directly to thestates based on the states' payments for the manufacturers' drugs. Asnoted in Pharm. VI, the primary benefit of the Rebate Agreements inuresto the states, which also bear some responsibilities.339 F. Supp. 2d at 178. These indications show a clear intent on thepart of the signatories to confer a special benefit on a discrete classthat includes Massachusetts. Id.Page 25

Defendants' primary argument is that where the court has already foundthat there is no implied right of action under the statute establishing agovernment contract, a plaintiff may not seek third-party beneficiarystatus, as this would be an end-run around the holding that there was noCongressional intent to confer a private cause of action. The key case onpoint is Grochowki v. Phoenix Constr., 318 F.3d 80, 86 (2d Cir. 2003).Relying on the canon of statutory construction that where a statuteexpressly provides a remedy courts should be loathe to provide additionalremedies, the Second Circuit rejected a state law claim for breach ofcontract as a third-party beneficiary, finding it to be an indirectattempt at privately enforcing the prevailing federal wage statute. Itheld: To allow a third-party private contract action aimed at enforcing those wage schedules would be `inconsistent with the underlying purpose of the legislative scheme and would interfere with the implementation of that scheme to the same extent as would a cause of action directly under the statute.'Id. (citations omitted). "Although whether the plaintiff has a privateright of action under the statute is conceptually distinct from whetherthe plaintiff may sue as a third-party beneficiary of the contractmandated by the statute, the same considerations largely determine bothissues." Davis v. United Air Lines, Inc., 575 F. Supp. 677, 680(E.D.N.Y. 1983) (Weinstein, J.) ("[A]llowing him to sue here under thecontract would be allowing him to make an `end-run' around a statutewhichPage 26the Court of Appeals has held did not allow him to sue."). In Davis, akey factor was that Congress had set up a "comprehensive administrativescheme" to remedy violations of the federal rights of the handicapped.Id. at 680. Cf. Am. Hosp. Assoc. v. Schweiker, 721 F.2d 170, 182-84 (7thCir. 1983) (holding that obligations of hospitals receiving federal moneyin exchange for caring for indigent persons stemmed not from contractprinciples applied to agreements to participate in program, but ratherfrom interpretation of statutes and regulations, because government hadright to alter expectations and obligations of private participants);Rendleman v. Bowen, 860 F.2d 1537, 1541-42 (9th Cir. 1988) (in a federalscholarship program, holding that principles of statutory interpretationrather than contract law governed where parties' obligations stemmed froma statute, not a negotiated agreement, contract contained no terms thatwere not in the statute, and statute contained obligations beyondcontract terms).

Weighing against the Defendants' argument are the wellestablishedpropositions that "[w]hen the United States enters into contractrelations, its rights and duties therein are governed generally by thelaw applicable to contracts between private individuals," Mobil OilExploration & Producing S.E., Inc. v. United States, 530 U.S. 604, 607(2000), and that

when Congress uses language with a settled meaning at common law, Congress `presumably knows and adopts thePage 27 cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken and the meaning its use will convey to the judicial mind unless otherwise instructed. In such case, absence of contrary direction may be taken as satisfaction with widely accepted definitions, not as a departure from them.'

Beck v. Prupis, 529 U.S. 494, 500-01 (2000) (quoting Morissette v. UnitedStates, 342 U.S. 246, 263 (1952)). See also Roedler v. Dep't of Energy,255 F.3d 1347, 1352-53 (Fed. Cir. 2001) (examining contract and thestatute it implemented for evidence of intent to create third-partybeneficiary status); Busby Sch. of the N. Cheyenne Tribe v. UnitedStates, 8 Cl.Ct. 596, 602 (1985) (upholding third-party beneficiary claimon motion to dismiss where contracts "incorporated therein the substanceand intendment of these statutes").

These two lines of case law together establish the rule that abeneficiary to a federal contract has the right to enforce an agreementimposing duties on a person contracting with the government so long asthis is consistent with the statutory scheme, and not an end-run on it.See Miree v. DeKalb County, 433 U.S. 25, 29 (1977) (permitting athird-party beneficiary claim under state law with respect to a contractbetween a federal agency and a municipality); cf. Boyle v. UnitedTechnologies Corp., 487 U.S. 508-509 (1988) (observing that the privateplaintiffs in Miree were "not seeking to impose upon the personcontracting with the Government a duty contrary to thePage 28duty imposed by the Government contract . . . [but][r]ather, it was thecontractual duty itself that the private plaintiff (as third-partybeneficiary) sought to enforce.") (emphasis in original). See alsoFalzarano v. United States, 607 F.2d 506, 511 (1st Cir. 1979) (decliningto find third-party beneficiary status where the contract did notdemonstrate an intent to benefit the plaintiffs except as incidentalbeneficiaries).

When this test is applied to the Rebate Agreements and the Statute,there are strong arguments on both sides of the ledger. On the one hand,the Best Prices Statute and the Rebate Agreement demonstrate a clearlyexpressed intent on behalf of the signatories to benefit the states byproviding them with rebates. Medicaid is a unique "system of cooperativefederalism," Harris v. McRae, 448 U.S. 297, 301 (1980), where "the twogovernments are pursuing common purposes." Pharm. Research & Mfrs. ofAm. v. Walsh, 538 U.S. 644, 666 (2003).

On the other hand, as Defendants point out, the methods delineated inthe Statute and the Rebate Agreement for handling disputes do notexpressly provide a contract remedy to a state. The Secretary — but notthe state — may terminate a contract for violation of the contract orother good cause after hearing, and may seek penalties. In situationswhere Defendants accuse states of providing incorrect information, theRebate Agreement provides a remedy, requiring alternative disputeresolution andPage 29then a state hearing. Absent in the statute and contract is a parallelright for the state to seek contractual damages against a manufacturerwhen it provides false information to the state or federal government.Section V(f) of the Rebate Agreement seems to contemplate a stateenforcement action against manufacturers through the Medicaid hearingmechanisms, providing: "The State hearing mechanism is not binding on theSecretary for purposes of his authority to implement the civil moneypenalty provisions of the statute or this agreement." The Rebate Agreementalso mentions the State's ability to request that CMS take action tocorrect inaccuracies in Best Prices and AMPs, stating that "[a] requestfor compliance action may also occur when the Manufacturer shows apattern or history of inaccuracy in Medicaid Utilization Information."Rebate Agreement at VI(a).

While this is an issue of first impression and the contract isambiguous regarding remedies available to states for breach of contract,the Rebate Agreement instructs the Court to construe it in a manner which"best effectuates" the statutory scheme. Permitting the states to sue asthird-party intended beneficiary would advance congressional objectivesof reducing Medicaid drug costs. As the Secretary of HHS stated in thecontext of the implied preemption analysis in the pharmaceuticalmultidistrict litigation, to the "extent that a state sues a drugmanufacturer that failed to calculate its best price obligations inaccordancePage 30with the Rebate Agreement or CMS guidance — but does not seek to imposeany additional or contrary obligations — the state is merely enforcingthe existing rebate program responsibilities and does not inject any morevariation than if the Department of Justice brought suit." (Brief of theUnited States as Amicus Curiae at 17.) Here, the scheme, as reflected inthe Statute and Rebate Agreement, involves close cooperation between thefederal government and the state, each of which foots half the bill forMedicaid. This relationship differentiates those cases which decline tofind third-party beneficiary status in private individuals because thefederal government was deemed the sole enforcer of the laws or there wereother remedies provided for the beneficiaries. Indeed, in its amicusbrief, HHS stated that it would invite the states to join as plaintiffsin any litigation involving breach of contract.10 Accordingly, I denythe motion to dismiss Count V and Count VI.

G. Miscellaneous

1. Filed Rate Doctrine

Defendants claim that Massachusetts' Best Prices claims are barred bythe Filed Rate doctrine, which "limits attacks outside the regulatoryprocess on rates filed with federal regulatoryPage 31agencies." Pharm. I, 263 F. Supp. 2d at 192 (citing Town of Norwood v.New England Power Co., 202 F.3d 408, 415 (1st Cir. 2000)). The doctrine"forbids a regulated entity to charge rates for its services other thanthose properly filed with the appropriate federal regulatory authority."Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577 (1981). "The considerationsunderlying the doctrine . . . are preservation of the agency's primaryjurisdiction over reasonableness of rates and the need to ensure thatregulated companies charge only those rates of which the agency has beenmade cognizant." Id. at 578 (citations omitted).

Defendants' Best Prices data submissions do not constitute "rates" or"tariffs," so this doctrine is inapplicable. The reported data do notcontrol the rates which Defendants can charge customers, as a tariffwould. The fact that rebates affect the net cost of the drugs toMassachusetts does not transform the data into tariffs. While Defendantshave a duty to report accurate data for prices previously charged, thisdata does not control, or even affect, prospective prices, as a tariffwould.

2. Preemption

Defendants' claims of conflict preemption are the same as thoseasserted against Montana and Nevada, and so the Court holds thatMassachusetts' Best Prices claims are not preempted for the reasons givenin Pharm. V, 321 F. Supp. 2d at 197-201.Page 32

3. Individual Motions

Defendants assert individual motions to dismiss under Fed.R.Civ.P. 9(b)that will be addressed separately.


Defendants' motion to dismiss Count VII, asserting an implied right ofaction under the Best Prices Statute, is ALLOWED. The Court DENIES theremainder of the motion.

1. Massachusetts names the following Defendants: Mylan Laboratories,Inc.; Barr Laboratories, Inc.; Duramed Pharmaceuticals, Inc.; IvaxCorporation; Warrick Pharmaceuticals Corporation; WatsonPharmaceuticals, Inc.; Schein Pharmaceutical, Inc.; Teva PharmaceuticalsUSA, Inc.; Par Pharmaceutical, Inc.; Dey, Inc.; Ethex Corporation;Purepac Pharmaceutical Co.; and Roxane Laboratories, Inc.

2. The parties submitted to the Court a "model rebate agreement"issued by HHS, and do not discuss any differences relevant to thisdecision between the model and the actual agreements. The Court'sdiscussion, therefore, is based on this model, termed the "RebateAgreement."

3. The Complaint alleges patterns of pricing fraud involving averagewholesale price substantially similar to those at issue in complaintsfiled in a separate multi-district litigation before this Court. See,e.g., In re Pharm. Indus. Average Wholesale Price Litig.,263 F. Supp. 2d 172 (D. Mass. May 13, 2003) (Saris, J.) ("Pharm. I");In re Pharm. Indus. Average Wholesale Price Litig., 309 F. Supp. 2d 165(D. Mass. Jan. 9, 2004) (Saris, J.) ("Pharm. II"); In re Pharm. Indus.Average Wholesale Price Litig., 307 F. Supp. 2d 190 (D. Mass. Jan. 9,2004) (Saris, J.) ("Pharm. III"); In re Pharm. Indus. Average WholesalePrice Litig., 307 F. Supp. 2d 196 (D. Mass. Feb. 24, 2004) (Saris, J.)("Pharm. IV"); In re Pharm. Indus. Average Wholesale Price Litig.,321 F. Supp. 2d 187 (D. Mass. June 10, 2004) (Saris, J.) ("Pharm. V");In re Pharm. Indus. Average Wholesale Price Litig., 339 F. Supp. 2d 165(D. Mass. Sept. 30, 2004) (Saris, J.) ("Pharm. VI"). Summaries of thefactual background are found in Pharm. I, 263 F. Supp. 2d at 178-80(describing alleged Average Wholesale Price ("AWP") scheme), and Pharm.V, 307 F. Supp. 2d at 195-97 (describing alleged Best Prices scheme).

4. Many of the background facts about the statute and regulatoryprogram are cloned from the Brief of Amicus Curiae United States, In RePharm. Indus. Average Wholesale Price Litigation, 263 F.Supp.2d 172(D. Mass. 2003), related litigation.

5. "The term `average manufacturer price' means, with respect to acovered outpatient drug of a manufacturer for a rebate period, theaverage price paid to the manufacturer for the drug in the United Statesby wholesalers for drugs distributed to the retail pharmacy class oftrade, after deducting customary prompt pay discounts."42 U.S.C. § 1396r-8(k)(1).

6. The Rebate Agreement provides a dispute resolution mechanism in theevent there is a disagreement between a state and a manufacturerregarding the state's Medicaid utilization information. Rebate Agreementat § V.

7. Reimbursement for single-source pharmaceutical products, which aretypically brand-name drugs or drugs specifically requested by a doctor,is limited to the lower of (a) the EAC of the drug plus a dispensingfee, or (b) the pharmacy's usual and customary charge. (Compl. ¶ 28;Mass. Regs. Code tit. 114.3, § 31.04.)

8. Massachusetts filed an amended exhibit list claiming to correctcertain of these errors.

9. Comment e provides, in part: In other situations, a benefit has been received by the defendant but the plaintiff has not suffered a corresponding loss or, in some cases, any loss, but nevertheless the enrichment of the defendant would be unjust. In such cases, the defendant may be under a duty to give to the plaintiff the amount by which he has been enriched.

10. The Secretary of Health and Human Services is invited to file anamicus brief on the issue and urge reconsideration if he disagrees withthis conclusion.Page 1

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