In January 2005, Alabama filed suit against 73 pharmaceutical manufacturers, alleging that they misrepresented the cost of their drugs to an independent pricing clearinghouse and that the State, in alleged reliance on those prices, over-reimbursed Alabama pharmacists and physicians who dispensed the drugs to Medicaid patients. Central to the case is a benchmark called Average Wholesale Price (“AWP”), which has been used for decades as a means of determining the estimated acquisition cost of drugs for Medicaid purposes.
In February 2008, a jury awarded $40 million in compensatory damages and $175 million in punitive damages against AstraZeneca for fraudulent misrepresentation and suppression of drug cost information, with the court subsequently reducing the punitive damage award to $120 million.
The NAM filed an amicus brief 12/15/2008 urging the Alabama Supreme Court to reverse this decision, based on two primary arguments.
First, we argued that the alleged price misrepresentation in AWP was actually based on longstanding industry practice, consistent with federal regulation, and well known by state regulators and thus could not be considered fraud. Numerous government publications dating back to 1975 clearly show that regulators understood AWP to mean the list price of pharmaceutical products, exclusive of discounts, rebates, or special offers, with other evidence proving that regulators knew that the AWPs reported to independent price clearinghouses were significantly higher than the actual or average acquisition costs paid by pharmacies.
Second, we argued that the $120 million punitive damages award violated the Due Process Clause of the U.S. Constitution and Article I, Section 13 of the Alabama Constitution, as it was based on conduct that was common industry practice for decades and well known to government regulators and thus did not reach the level of reprehensibility necessary to satisfy due process.
Our brief warned that this case had implications far beyond the pharmaceutical industry, as it is part of a growing trend by an alliance of state governments and plaintiffs’ lawyers to regulate entire industries through litigation, when legislators and regulators have made a policy decision to permit the practice at issue.
On October 16, the Alabama Supreme Court reversed, finding that the state government could not both know that AWPs represented actual, discounted transaction prices while at the same time claiming in its lawsuit that it was deceived about that. The state could not claim that it relied on a price representation it knew to be false. The jury verdicts were overturned by the ruling.