STATE OF UTAH, Appellant, v. WATSON PHARMACEUTICALS INC., WATSON LABORATORIES INC., AND WATSON PHARMA INC., Appellees.
No. 20170545-CA
THE UTAH COURT OF APPEALS
February 28, 2019
2019 UT App 31
JUDGE JILL M. POHLMAN authored this Opinion, in which JUDGES DAVID N. MORTENSEN and DIANA HAGEN concurred.
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
¶1 After observing a trend of allegedly fraudulent pharmaceutical prices being submitted to the State Medicaid program, the
BACKGROUND2
¶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
¶5 On appeal, the supreme court held that, while
the details of an actually submitted false claim, the plaintiff may nevertheless survive [
¶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
¶9 Three months later, the State sought leave under
reporting for Watson Pharma Inc. and Watson Laboratories Inc.6 The district court, however, denied the State leave to amend. It characterized its prior ruling as a dismissal with prejudice and concluded that the motion to amend was therefore moot. Alternatively, the court found that, “[u]nder the traditional rules for considering a motion to amend,” the motion was “untimely and unjustified.”
¶10 After several more years of litigation with the remaining defendants, final judgment in the case was entered. The State now
ISSUES AND STANDARDS OF REVIEW
¶11 The State asserts that the district court incorrectly dismissed its claims against the Watson Defendants for failure to plead those claims with the particularity required by
contradiction of the pleaded facts.” America West, 2014 UT 49, ¶ 7 (quotation simplified).
¶12 The State also contends that the district court abused its discretion in dismissing the claims against the Watson Defendants with prejudice. A district court‘s decision to dismiss with prejudice is reviewed for an abuse of discretion. See Bonneville Tower Condo. Mgmt. Comm. v. Thompson Michie Assocs., Inc., 728 P.2d 1017, 1020 (Utah 1986) (per curiam).
ANALYSIS
¶13 The State contends that dismissal of its claims against the Watson Defendants was improper because the Complaint satisfied the
I. Rule 9(c) Particularity Requirement
¶14
standard, the court specifically instructed: “[T]he State must provide reliable indicia that would lead to a strong inference that each Defendant actually made false claims and fraudulent misrepresentations. Whatever the indicia—representative examples, statistical evidence, criminal investigations, etc.—the State must particularize its claims with respect to each Defendant.” Id. ¶ 39 (emphasis in original).
¶15 On appeal, the State contends that the Complaint satisfied the pleading standards of
¶16 We are not persuaded for several reasons. First, while the State contends that each of the three Watson Defendants is specifically identified in the Complaint by its NDC number, it has not demonstrated that to be true. The State did not provide this
¶17 Further, based on a comparison of the representative examples in the State‘s proposed Fourth Amended Complaint and the Third Amended Complaint, it appears that the NDC
numbers identified collectively under “Defendant Watson” do not correspond to the named Watson Defendants. For example, three different labeler codes within the NDC numbers are listed under “Defendant Watson” in the Third Amended Complaint. In its proposed Fourth Amended Complaint, the State links two of those numbers to Watson subsidiaries not named in the Third Amended Complaint and not parties to this appeal. Thus, apart from the State‘s failure to prove its assertion, we question whether the Third Amended Complaint did in fact separately identify claims against the three named Watson Defendants.
¶18 Second, even assuming the relevant NDC numbers uniquely correspond to each named Watson Defendant, that assertion is absent from the pleading, and the State did not otherwise advise the district court that the individual Watson Defendants could be separately identified by the labeler codes in the NDC numbers. In Apotex, the supreme court specifically instructed the State to “provide an adequate basis for a court to infer that each defendant submitted false claims or made fraudulent misrepresentations as part of a fraudulent scheme.” Id. ¶ 35 (emphases added); see also America West Bank Members, LC v. State, 2014 UT 49, ¶ 7, 342 P.3d 224 (noting that a court “need not accept extrinsic facts not pleaded” (quotation simplified)). Thus, it is not enough for the State to simply claim that the Watson Defendants were “aware of the allegations against each [entity] specifically.” Rather, the district court was tasked with discerning whether the State had particularized its claims with respect to each defendant. And we can hardly fault the district court for not recognizing this alleged particularity when the State pleaded in code and did not give the district court the key.7
¶19 Finally, even if we were inclined to excuse the State‘s failure to alert the district court to the secret for unlocking the substance of the Complaint, the State‘s fraud-based allegations against the Watson Defendants were still pleaded in the collective. The State expressly alleged that the Watson Defendants, collectively, were responsible for reporting fraudulent AWP prices related to all of the drugs listed in the “Defendant Watson” chart. In other words, even if each drug could be linked to a particular Watson Defendant based on the drug‘s NDC number, the State still alleged collective responsibility for the alleged fraudulent reporting relating to those drugs. And while the State‘s amended pleading certainly narrowed the association in comparison to what the State had alleged pre-Apotex, insofar as it related to the Watson Defendants, the State continued to rely on the “guilt-by-association” theory renounced by the Apotex court. See Apotex, 2012 UT 36, ¶ 28. There, the court repeatedly emphasized the importance of particularizing the claims “with respect to each Defendant,” id. ¶¶ 29, 35, 39, explaining that alleging guilt by association “provides no particularity supporting claims of fraud and the submission of false claims by any given defendant,” id. ¶ 36. So too here.
more specificity than they had been previously. And the district court recognized as much. With regard to the other defendants named in the Complaint, the court denied their motion to dismiss, concluding that the State‘s allegations of representative examples of fraud, “set forth in chart format identifying particular drugs manufactured by specific Defendants,” were sufficient to satisfy
¶21 All in all, the State has not convinced us that the NDC labeler codes in the Complaint adequately identify the Watson Defendants. And even if true in theory, the State never informed the district court of the significance of the labeler codes. Instead of pleading with particularity, the State continued to plead guilt by association. The State has therefore not met its pleading burden as to the Watson Defendants under
II. The Dismissal with Prejudice
¶22 Alternatively, the State contends that even if the district court did not err in dismissing its claims against the Watson Defendants, it abused its discretion in dismissing those claims with prejudice. It maintains that dismissal with prejudice was a harsh remedy that prevented the State from presenting its case on the merits. Specifically, it asserts that it was harmed because
dismissal with prejudice denied it “the opportunity to amend its Complaint.”8 Had dismissal been without prejudice, and amendment allowed, the State asserts that “the real controversy” could have been decided. (Quotation simplified.)
¶23 Generally, “a failure to plead [a] claim at an adequate level of detail” should result in dismissal “without prejudice.” America West Bank Members, LC v. State, 2014 UT 49, ¶ 37, 342 P.3d 224; see also Alvarez v. Galetka, 933 P.2d 987, 991 (Utah 1997) (“Amendment should be refused only if it appears to a certainty that plaintiff cannot state a claim.” (quotation simplified)). But “[a]t some point, the failure to plead a claim at a sufficient level of detail” can warrant dismissal with prejudice, such as when “the plaintiff has had multiple opportunities to amend and has continually failed to state a claim.” America West, 2014 UT 49, ¶ 41 n.1; see also 5B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (3d ed. 2004) (noting that a “court has considerable leeway . . . in deciding when a complaint is formally insufficient and whether to permit leave to replead“).
¶24 Here, the State had been given multiple opportunities—three—to amend its complaint and “continually failed to state a claim.” See America West, 2014 UT 49, ¶ 41 n.1. And after Apotex,
the State had specific instructions from the supreme court on how to remedy its pleadings and satisfy
¶25 Even on appeal, the State merely asserts that “the trial court committed an abuse of discretion” because the State “demonstrated it could easily cure the court‘s concerns.”9 But as the district court noted in its order denying leave to amend, the State had “already been granted leave to file three prior amended complaints” and “had the opportunity to identify the correct Defendants at a much earlier date.” And even with a detailed roadmap from the supreme court in hand, the State still failed to state a claim with the requisite particularity against each of the Watson Defendants. Thus, while focusing on the general rule, the State neglects the discretion afforded to the district court to dismiss with prejudice under the circumstances of this case. We therefore discern no abuse of discretion in the district court‘s dismissal with prejudice of the claims against the Watson Defendants.
CONCLUSION
¶26 We conclude that the State did not meet