# United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 9 , 2019 Decided December 3 , 2019

No. 1 8

- 5299

I PSEN B IOPHARMACEUTICALS
, I NC

. ,

A PPELLANT

v.

A LEX M ICHAEL A ZAR
, II

, IN HIS OFFICIAL CAPACITY AS S ECRETARY OF THE U NITED S TATES D EPARTMENT OF H EALTH

AND H UMAN S ERVICES
, ET AL

. , A PPELLEE S

Appeal from the United States District Court for the District of Columbia (No. 1:16

- cv

- 02372 )

Jeffrey S. Buch oltz argued the cause for appellant. With him on the briefs were John D. Shakow and Nikesh Jindal

.

Ruthanne M. Deutsch

, Hyland Hunt

, R. Craig Kitchen

, Daryl L. Joseffer , and Michael B. Schon were on the brief for
amicus curiae the Chamber of Commerce of the United States of America in support of plaintiff

- appellant.

Matthew J. Glover , Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief was Abby C. Wright , Attorney. Alisa B. Klein , Atto rney, and R. Craig Lawrence , Assistant U.S. Attorney, entered appearances.2

Before: H ENDERSON
, M ILLETT and W ILKINS
, Circuit Judges

.
Opinion for the Court filed by Circuit Judge H ENDERSON

.

K AREN L E C RAFT H ENDERSON
, Circuit Judge :

This appeal arises out of Ipsen Biop harmaceuticals , Inc.’s challenge to the designation by Centers for Medicare and Medicaid Services (CMS)

— a part of the United States Department of Health and Human Services

— of the pricing information Ipsen must report to CMS for a drug that it manufactures. The sole issue on appeal is whether a s eries of letters CMS sent Ipsen constitute s final agency action under the Administrative Procedure Act ( APA ), 5 U.S.C. § 704

. As explained infra , we believe Ipsen has plausibly argued that receipt of the letters significantly increased its risk of a statut ory civil penalt y being levied for “knowingly provid[ ing ] false information.” 42 U.S.C. § 1396r

- 8(b)(3)(C) (ii). Th is increased risk is a “legal consequence” sufficient to make the agency action final under the second prong of the test enunciated by the United States Supreme Court in Bennett v. Spear , 520 U.S. 154, 177

– 78 (1997)

. Accordingly , we reverse the judgment of the district court and remand the case for further proceedings.

I. B ACKGROUND

Ipsen’s appeal implicates the details of the self

- rep orting scheme contained in the Medicaid drug

- rebate program. Medicaid is a co

- operative federal and state program, the federal side of which is administered by CMS. See 42 U.S.C. § 1396 et seq

. In order to participate in the Medicaid program, a d rug manuf

acturer is obligated to enter into an agreement with C M S to provide rebates to states that elect to pay for outpatient prescription drugs. The rebate a manufacturer must provide is3
calculated in two parts. Both parts use the average price (the AMP) that the manufacturer charges a wholesaler for the drug. The base rebate is the greater of 1.) the difference between the drug’s AMP and the lowest price offered during the most recent past quarter and 2.) 23.1 % of the AMP. The additional rebate, paid on top of the base rebate, is calculated by subtracting the inflation

- adjusted AMP for each dosage form and strength of the drug when it was first sold to wholesalers (described by Ipsen as the “base date AMP”) from the AMP for the same dosage and strength during the quarter in which the rebate is calculated. The manufacturer calculates the total per

- unit rebate and reports it to the participating state s , which then use the information to prepare invoice s sent to and paid by the manufacturer. The statute provides for civil penalties for manufacturers that “knowingly provide [] false information” related to the rebate calculation

, including a civil penalty of up to $100,000 for each item of false information

. See 42 U.S.C. § 1396r

– 8(b)(3)(B)

– (C). J udicial review of a rebate calculation is limited to review of enforcement proceeding s brought by CMS

. See 42 U.S.C. § 1320a

– 7a(e); see generally 42 U.S.C. § 1396r

– 8.

Ipsen first introduced Somatuline Depot Injection in 2007 and, accordingly, calculated a base date AMP for th e drug at that time

. In 2014 Ipsen sought and obtained a new FDA approval for Somatuline E D, an outpatient prescription drug , it asserts, that is entitled to calculation of its own base date AMP. 1 Ipsen by letter notified CMS to this effect. Before receiving a response, Ipsen reported the new base date AMP to CMS . CMS responded to Ipse n’s letter several months later, indicat ing that Ipsen was not entitled to calculate a new base

1 The record does not allow us to determine the precise impact of Ipsen’s preferred calculation. Presumably, Ipsen’s base date AMP is higher, resulting in a lower additional rebate owed to the states.4

date AMP. The letter further instructed Ipsen that “the baseline data for [Somatuline ED] must be changed to reflect the original baseline data of Somatuline Depot.” Ipsen sent a second letter, iterating its position and requesting a meeting. The letter prompted a response by CMS’s Director of the Division of Pharmacy r epeat ing CMS’s view that a new base date AMP was not warranted because Somatuline ED had received FDA approval under a supplemental new drug application number based on the new drug application number of Somatuline Depot

. The Director’s letter expressly stated that it was not “a final agency action or even an initial determination on a reimbursement claim.”

Ipsen responded to the second letter by filing suit. CMS moved for summary judgment, arguing that it had taken no final agency ac tion to trigger judicial review under the APA

. See 5 U.S.C. § 704 (“Agency action made reviewable by statute and final agency action for which there is no other adequate remedy in a court are subject to judicial review.”) . The district court agreed and gra nted summary judgment to CMS. Ipsen timely appeals pursuant to 28 U.S.C. § 1291

.

II. A NALYSIS

We review the district court’s grant of summary judgment de novo. See Grunewald v. Jarvis , 776 F.3d 893, 898 (D.C. Cir. 2015). The APA permits judicial review of “final agency action” only. See 5 U.S.C. § 704. “ A gency actions are final if two independent conditions are met: (1) the action marks the consummation of the agency’s decisionmaking process . . . and (2) it is an action by which rights or obligat ions have been determined, or from which legal consequences will flow.” Soundboard Ass’n v. FTC , 888 F.3d 1261, 1267 (D.C. Cir. 2018) (internal alterations and quotation marks omitted)5
(quoting Bennett v. Spear , 520 U.S. 154, 177

– 78 (1997)). 2 The parties a gree that only the second condition is in dispute.

The Supreme Court has indicated that determining whether “legal consequences will flow” from an agency action is a “pragmatic” inquiry. U.S. Army Corps of Eng’rs v. Hawkes Co ., 136 S. Ct

. 1807, 1815 (2016) (citing Abbott Lab s. v. Gardner , 387 U.S. 136, 149 (1967)). We recently clarified that “[i]n chara cterizing the inquiry as pragmatic, we do not take the Court to be encouraging some sort of common

- sense approach” but rather “[w]e take it as counseling lower courts to make Bennett prong

- two determinations based on the concrete consequences an agency act ion has or does not have as a result of the specific statutes and regulations that govern it.” Cal. Comtys. Against Toxics v. EPA , 934 F.3d 627, 637 (D.C. Cir. 2019)

.

I n Sackett v. EPA , t he Supreme Court delineated one way an agency action could interact with a statutory scheme to

cause a legal consequence

. 566 U.S. 120 (2012). There, the Court considered whether an EPA administrative compliance order issued to landowners was a “final agency action.” The compliance order recited the EPA’s decision that the landowners’ property contained wetlands and that the landowners had violated the Clean Water Act , 33 U.S.C. § 1311, by discharging fill material into those wetlands. It commanded the landowners to “immediately . . . undertake activities to restore the Site.” Sackett , 566 U.S . at 125. The order was not self

- executing

— the EPA had to initiate a separate enforcement action in order to penalize the

2 Although Ipsen argu es that the Bennett conditions are properly viewed as disjunctive, not conjunctive

, i t acknowledges that our Circuit precedent settles this issue. See Soundboard , 888 F.3d at 1267 ( Bennett conditions are conjunctive).6
landowners for violating the statute. Nonetheless, the Court held that “legal consequences

. . . flow[ed]” from the order because, inter alia

, issuance of the order meant that the landowners faced higher penalties in a future enforcement proceeding th an they would have had the EPA not issued the order. Id . at 126.

We recently applied Sackett in Rhea Lana, Inc. v. DOL

, a case in which the Department of Labor twice notified a company that one of its practices violated the Fair Labor Standards Act. 824 F .3d 1023 (D.C. Cir. 2016)

. The second letter noted that the statute provided for a civil penalty for any “repeated or willful violations of” the statute and warned that “[i]f at any time in the future [the company] is found to have violated [the relevant p rovisions], it will be subject to such penalties.” Id

. at 1026. We held that the warning met Sackett ’s articulation of “legal consequences” resu lting therefrom

. Id . at 1032.

Ipsen analogizes the consequences of the CMS letters it received to the consequences of the agency communications in Sackett and Rhea Lana

. It emphasizes that the Medicaid statute provides for penalties against manufacturers that “knowingly provide [] false information

. ” See 42 U.S.C. § 1396r

8(b)(3)(C) (ii)

. Ipsen argues that “ legal consequences . . . flow[ed]” from the letters because they increase d the probability that in the future it could be found to have “knowingly” suppl ied false information

.
We agree

. Within the framework of the “specific” statutory and regulatory scheme involved here, California Communities , 934 F.3d at 637, and in view of the character of the agency action at issue, that increased risk of prosecution and penalties constitutes a “legal consequence” u n d e r Bennett for f o u r reasons.7

First, the letter refutes any colorable argument Ipsen might have in a n enforcement action that it was acting without knowledge of C M S ’s position. Under the relevant statute, “knowingly” mean s that “ a person, with respect to an act, has actual knowledge of the act, acts in deliber ate ignorance of the act, or acts in reckless disregard of the act, and no proof of specific intent to defraud is required.” 42 C.F.R. § 1003.110. Here, C M S take s the position that the CMS l etter would be “relevant evidence” in a future determination regar ding whether Ipsen would be subject to enhanced penalties for a “knowing” or “willful” violation of the Social Security Act. See Tr. of Oral Arg. at 41

– 47

, Ipsen Biopharmaceuticals v. Azar

, No. 18

- 5299 (D.C. Cir. Sept. 9, 2019)

. 3 C M S also conceded that it has brought an enforcement action against another drug manufacturer under 42 U.S.C. § 1396r

- 8(b)(3)(C)(ii) for “knowingly provid[ing] false information” when that company allegedly “misrepresented the Average Sales Price of at least one of its products to CMS.” Govt 9/13/2019 Ltr at 1

- 2.

Perhaps C M S believed its position would not constitute

“ legal consequences ” under Bennett because of our dictum in Soundboard , indicating that an FTC staff attorney letter, even if “could be [used as] evidence of willfulness,” would not satisfy Bennett ’s second prong. See 888 F.3d at 1273. But this case differs from Soundboard in one critical respect. In

3 CMS draw s our attention to the fact that in district court Ipsen argued that it could not be found to have “knowingly provid[ed] false information,” notwithstanding receipt of the letter s because “its position reflects . . . a reasonable, good

- faith interpretation on a novel issue.” This statement, CMS suggest s , undermines Ipsen’s argument that the letters produced legal consequence s because it concedes that the letters did not automatically subject Ipsen to civil penalties

. Although Ipsen conceded that the letters would not automatically result in penalties, it nonetheless maintains that the letters “increased its risk of facing penalties.”8

Soundboard , the FTC staf f attorney letter did not meet Bennett’s first prong because it was not the consummation of the agency’s decision

- making. Id

. at 1269

- 71. As a result, the Soundboard letter was not an authoritative statement of the agency’s views

. T he Supreme Court has indicated that such informal advice is insufficient, as a matter of law, to establish a “knowing” or “willful” violation of a statute or regulation pursuant to a theory that the regulated party should have been “warned away from the vi ew that it took.” See Safeco Ins. Co. of America v. Burr , 551 U.S. 47, 69

- 70 & n.19 (2007). Following Safeco , we have held, in the False Claims Act context, that “knowledge” of falsity was not established where the government could point to “informal guida nce” only, not “the necessary ‘authoritative guidance,’” as evidence “to warn a regulated defendant away from an otherwise reasonable interpretation it adopted.” U.S. ex rel. Purcell v. MWI Corp

., 807 F.3d 281, 289 (D.C. Cir. 2015) (quoting Safeco , 551 U.S

. at 70 & n.19). At the same time , we noted that even if a regulated party adopts a “reasonable” interpretation of an “ambiguous” statute, it can nonetheless be deemed liable for knowingly making a false statement if it “had been warned away from that inte rpretation” by authoritative agency guidance. Purcell

, 807 F.3d at 288.

When further pressed about the permissible use of the l etter at oral argument, C M S asserted that using the l etter as “relevant evidence” against Ipsen did not result in a legal consequence because

, unlike in Rhea Lana , there is no “regulation on the books,” see 824 F.3d at 18 n.3, that announces that any future action contrary to the agency’s position will be deemed willful by the agency. Tr. of Oral Arg. at 54

– 58. But that is a distinction without a difference. In Rhea
Lana , we held that

, if the regulation was “capable of a reading rendering the l etter a stand

- alone trigger for willfulness penalties,” it “render[ed] Rhea Lana a candidate for civil9
penalties

. ” T herefore the agenc y’s letter was final agency action because it “establish[ed] legal consequences.” 824 F.3d at 21. The outcome in Rhea Lana turned on the legal consequence of the letter in that case and C M S cannot avoid the legal consequence of the letter in this case by a rguing that here the legal consequence does n o t count because it results from the application of settled caselaw rather than from a published regulation

. The CMS l etter could be potentially dispositive proof in an enforcement action, consistent with Safeco and US ex rel Purcell , because “knowingly” mean s “that a person, with respect to an act, has actual knowledge of the act, acts in deliberate ignorance of the act, or acts in reckless disregard of the act, and no proof of specific intent to defraud is required,” and that is of legal consequence under Bennett

. See 42 C.F.R. § 1003.110

.

T he consequences Ipsen claims to face in the future are not

as certain as those in Rhea Lana or Sackett

. W e in Rhea Lana and the Supreme Court in Sackett accepted that the agency action alone was enough to subject the regulated parties to additional penalties in the event of an enforcement action

. B y contrast, Ipsen claims that the l etters increase its risk of incurring penalties in a future enforcement proceeding

— granted, a less certain consequence

. Nonetheless, Ipsen does claim that its receipt of the l etters will be a factor, if not the factor, in assessing penalties against i t in a future enforcement proceeding. CMS conceded as much before us. See Tr

. of Oral Arg

. at 42 (“Well, again, the letter here would be evidence, or could be used as evidence in that adjudication

. . . .”).

Second , the self

- reporting nature of the regulatory scheme gave the letter’s command immediate and direct legal force. The regulatory scheme requires Ipsen to self

- report pricing information to CMS each quarter as a condition of its participation in the Medicaid Rebate program. See 42 C.F.R.10

§ 447.510; see also 42 U.S.C. § 1396r

- 8(b)(3). A s soon as the letter issued, each and every one of the repeat submissions exposed Ipsen to potential civil penalties for each quarter. See 42 U.S.C. § 1396r

- 8(b)(3)(C) (a manufa cturer “is subject to a civil penalty in an amount not to exceed $100,000 for each item of false information”). No further or intervening agency action is needed for the penalty risk and amount to start accumulating

— t he trigger is the issuance of the lette r.

Third , as CMS itself acknowledges, there is no further agency action for Ipsen to invoke or to exhaust to plead its

cause. A ppeal is un available and there is no avenue for Ipsen to affirmatively seek relief. As CMS concedes, the agency’s decisionmaking process is at the end. CMS has made its final decision and has told Ipsen that its rebate computations “must be changed,” as the prior rebate amount is the only one that Ipsen (in CMS’s view) can lawfully implement. The only potential next step is an agency enforcement action. See Tr. of Oral Arg. at 36

– 37 (Counsel for CMS: “[S]ometimes in self

reporting regimes it may be difficult for a regulated entity, like Ipsen, to get a final agency action short of CMS telling them please change this.”).

As a result, the only thing standing between Ipsen and CMS’s prosecution of it for financial penalties, and a possible expulsion from participation in the Medic aid Rebate program,

see 42 U.S.C. § 1396r

- 8(b)(3)(C), (4)(B)(i), is the agency’s exercise of prosecutorial discretion. 4 The regulatory scheme thus leaves Ipsen in a quandary : Either accept CMS’s interpretation to avert civil penalties and the risk of exclu sion

4 See Tr. of Oral Arg. at 41 (Q: “[I]s there anything standing between [Ipsen] * * * and an enforcement action, other than prosecutorial discretion?” CMS Counsel: “No[.]”).11
from the Medicaid Rebate program o r proceed in defiance of that risk, with penalties growing each quarter.

Fourth , agencies often communicate their interpretations of governing statutory and regulatory obligations or prohibitions to interested parties in letters and they do so without taking final agency action. In this case, however , the nature of the agency’s letter went beyond si mply announcing its interpretation of relevant statutory and regulatory language. The letter expressly applied CMS’s interpretation of the governing law to the specific facts of Ipsen’s case. See J.A. 45 (stating that the new factors Ipsen highlighted “do not meet the criteria for the establishment of new base date AMPs”)

. 5 In that respect, the agency action at issue here closely resembles an individual adjudication, which is a well

- recognized form of final agency action. See Southwest Airlines Co. v. United States Dep’t of Transp. , 832 F.3d 270, 276 (D.C. Cir. 2016).

For the foregoing reasons, the judgment of the district

court is reversed and the case is remand ed for further proceedings consistent with this opinion.

So ordered

.

5 S ee also Tr. of Oral Arg. at 52 (CMS counsel stating that the letter “laid out our view of the law” and how it applied “to the facts provided”).