Ronald Streck v. Eli Lilly and Company
volume_reporter_page_placeholder (2025)
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Rule of Law:
Under the False Claims Act, a drug manufacturer's exclusion of 'Price Increase Values' (clawbacks) from its Average Manufacturer Price (AMP) calculations constitutes a false claim, as it contradicts the plain language and purpose of the Medicaid Drug Rebate Program, and a jury may reasonably find such conduct satisfies the rigorous scienter and materiality requirements.
Facts:
- Eli Lilly, a drug manufacturer, participated in the Medicaid Drug Rebate Program (MDRP) and was required to pay quarterly rebates to the government based on its reported Average Manufacturer Price (AMP) for covered drugs.
- Before 2005, wholesalers profited when Lilly increased drug prices while the drugs were in wholesaler inventory, but in 2005, Lilly changed to a 'fee-for-services' distribution model.
- Under this new model, Lilly paid wholesalers a 'Distribution Fee' but also implemented a 'Price Increase Value' (or 'clawback') mechanism, which required wholesalers to remit to Lilly any difference if Lilly raised a drug's price while it was still in wholesaler inventory.
- From 2005 to 2017, Lilly excluded these 'Price Increase Values' from its AMP calculations, reporting only the initial sale price to wholesalers, treating them as excludable 'bona fide service fees'.
- Internal documents revealed Lilly consistently recorded these 'clawbacks' as revenue, sometimes approaching $100 million annually.
- Despite regulatory requirements for documentation, Lilly lacked records justifying this exclusion until 2011, and its subsequent explanations to the government in 2011 and 2013 were either sent to unreviewed channels or presented in vague footnotes.
- In 2016, the Centers for Medicare & Medicaid Services (CMS) explicitly clarified that 'price appreciation credits,' like Lilly's clawbacks, would likely not meet the definition of bona fide service fees because they are effectively passed through to pharmacies.
- Lilly began including price increase values in its AMP calculations in December 2017, backdating the practice to April 2016.
Procedural Posture:
- In 2014, Ronald Streck filed a qui tam action against Lilly and 14 other drug manufacturers in the U.S. District Court for the Northern District of Illinois, alleging False Claims Act violations due to falsely lowered AMPs, leading to $61 million in Medicaid underpayments.
- Both Streck and Lilly moved for summary judgment.
- The district court denied Lilly’s motion and granted Streck’s motion in part, ruling that Lilly’s AMP calculations and related certifications were 'factually and legally false' under the FCA.
- The questions of whether Lilly’s statements were material or made with scienter advanced to trial.
- Lilly requested a jury instruction on materiality based on the Supreme Court’s decision in Universal Health Servs., Inc v. United States ('Escobar'), but the district court instead gave a jury instruction directly from the statutory text of the FCA.
- The jury returned a verdict in Streck’s favor of $61,229,217, which was trebled by the FCA to $183,687,651.
- Lilly appealed to the U.S. Court of Appeals for the Seventh Circuit, challenging the district court’s summary judgment ruling on falsity, as well as the jury’s determination on scienter and materiality.
- Streck cross-appealed to the U.S. Court of Appeals for the Seventh Circuit, arguing that the district court incorrectly calculated the number of violations under the FCA.
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Issue:
Does a drug manufacturer's exclusion of subsequent price increases ('clawbacks') received from wholesalers from its Average Manufacturer Price (AMP) calculations, used for Medicaid drug rebates, constitute a false claim, and can a jury reasonably find that such exclusion was made 'knowingly' and was 'material' under the False Claims Act?
Opinions:
Majority - Kolar, Circuit Judge
Yes, a drug manufacturer's exclusion of subsequent price increases ('clawbacks') received from wholesalers from its Average Manufacturer Price (AMP) calculations constitutes a false claim, and a jury could reasonably find that such exclusion was made 'knowingly' and was 'material' under the False Claims Act. The district court's materiality instruction was legally accurate, and the cross-appeal on damages is unpreserved. Lilly's AMP submissions were false as a matter of law because excluding 'Price Increase Values' contradicted the plain text of 42 U.S.C. §1396r-8(k)(1) (defining AMP as 'average price paid to the manufacturer'), Lilly's MDRP agreement (requiring adjustment if 'other arrangements subsequently adjust the prices actually realized'), and CMS regulations. The 'clawbacks' were not bona fide service fees as they were 'passed through to' retail pharmacies and were payments to Lilly, not by Lilly. This interpretation was objectively unreasonable, defied common sense, and undermined the Medicaid program's purpose of sharing drug costs. The jury reasonably found Lilly acted with scienter (deliberate ignorance or reckless disregard). Lilly's interpretation was objectively unreasonable, serving as strong circumstantial evidence. The court noted that Lilly's government pricing specialist could not recall specific discussions for the exclusion, and certifying executives disavowed knowledge. Lilly chose not to invoke an advice-of-counsel defense. Despite internal tracking of hundreds of millions in 'clawback' revenue, Lilly failed to document its methodology until 2011, and then communicated it to CMS via channels known to be unreviewed or through vague footnotes in official audit responses, indicating 'ostrich-like' conduct. The jury also reasonably found the false AMPs material. The misrepresentation involved $61 million in Medicaid underpayments, with Lilly retaining over $600 million from the 'clawbacks.' AMPs are a 'foundational part' of the Medicaid framework, directly impacting government costs. The MDRP agreement explicitly made compliance a condition of payment. While government inaction after 2016 could suggest immateriality, it was not dispositive, given the substantial financial impact and the government's need to avoid prejudicing Medicaid recipients. The district court's materiality instruction, using the statutory language from 31 U.S.C. §3729(b)(4), was legally accurate and did not constitute an abuse of discretion by not including every non-dispositive factor from Escobar. Finally, the court declined to address Streck's cross-appeal regarding whether each individual AMP, rather than each quarterly report, constituted a separate FCA violation. This issue was not adequately preserved in the district court, as Streck's objections were broad, ambiguous, or pertained to evidentiary rulings that did not warrant reversal.
Analysis:
This case significantly clarifies the False Claims Act's application to drug manufacturers' reporting obligations under the Medicaid Drug Rebate Program. It firmly establishes that 'Average Manufacturer Price' calculations must encompass all forms of revenue, including post-sale price adjustments like 'clawbacks,' preventing manufacturers from exploiting perceived ambiguities to deflate reported prices. The decision reinforces that objectively unreasonable interpretations of regulations, coupled with internal knowledge of substantial financial impact and attempts to obfuscate, can meet the rigorous scienter and materiality requirements of the FCA. This ruling serves as a critical warning for companies operating in complex regulatory environments, emphasizing the importance of transparent and well-documented compliance practices to avoid substantial liability.
