Court Opinion

ID: 5138978
Source: CourtListenerOpinion
Date Created: 2021-12-21 15:22:26.146077+00
Date Added: 2024-06-11T08:24:13.481770
License: Public Domain

2019 UT App 31

              THE UTAH COURT OF APPEALS

                   STATE OF UTAH,
                     Appellant,
                          v.
 WATSON PHARMACEUTICALS INC., WATSON LABORATORIES INC.,
              AND WATSON PHARMA INC.,
                     Appellees.

                           Opinion
                      No. 20170545-CA
                   Filed February 28, 2019

          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

    JUDGE JILL M. POHLMAN authored this Opinion, in which
  JUDGES DAVID N. MORTENSEN and DIANA HAGEN concurred.

POHLMAN, Judge:

¶1     After observing a trend of allegedly fraudulent
pharmaceutical prices being submitted to the State Medicaid
program, the State of Utah brought civil actions against a
number of pharmaceutical companies for fraud and alleged
violations of the Utah False Claims Act (the UFCA). Utah
Code Ann. §§ 26-20-1 to -15 (LexisNexis 2013). Watson
Pharmaceuticals Inc. and two of its subsidiaries, Watson
                State v. Watson Pharmaceuticals Inc.

Laboratories Inc. and Watson Pharma Inc. (collectively, the
Watson Defendants), were among the named defendants. 1 The
district court dismissed the claims against the Watson
Defendants because the State failed to plead its claims against
each defendant separately and instead identified them
collectively in the complaint as “Defendant Watson.” We affirm.

                        BACKGROUND 2

¶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.

1. Two of the Watson Defendants have since changed their
names—Watson Pharma Inc. is now known as Actavis Pharma
Inc. and Watson Pharmaceuticals Inc. is now known as Allergan
Finance LLC. We refer to them as they were named below.

2. “On appeal from a motion to dismiss, we must accept the
factual allegations in the complaint as true and view all
reasonable inferences from them in the light most favorable to
the plaintiff.” Pang v. International Document Services, 2015 UT 63,
¶ 3, 356 P.3d 1190 (footnote omitted). We recite the facts
accordingly.

20170545-CA                     2                 2019 UT App 31
                State v. Watson Pharmaceuticals Inc.

¶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 rule 9(c) of the Utah Rules of Civil
Procedure. 3 Id. ¶ 11; see also Utah R. Civ. P. 9(c) (“In alleging
fraud . . . , a party must state with particularity the circumstances
constituting fraud . . . .”). The district court concluded that the
State had “failed to identify each defendant’s allegedly
fraudulent misrepresentations and UFCA violations with
particularity” and instead “offered only broad conjecture of
alleged false or fraudulent statements that the Defendants made
as a group.” Apotex, 2012 UT 36, ¶ 12 (quotation simplified).

¶5     On appeal, the supreme court held that, while rule 9(c)
applied to the State’s UFCA and fraudulent misrepresentation
claims, “a relaxed standard is appropriate where a plaintiff
asserts a widespread fraudulent scheme that involves the
submission of many false claims over a lengthy period.” Id. ¶ 20.
This relaxed standard provides that “if a plaintiff cannot allege

3. Rule 9 of the Utah Rules of Civil Procedure was amended in
2016 and “language previously appearing under rule 9(b) now
appears under rule 9(c).” Armer Tex. Trust v. Brazell, 2017 UT
App 35, ¶ 1 n.2, 397 P.3d 604. The parties’ briefing and the
supreme court’s opinion in State v. Apotex Corp., 2012 UT 36, 282
P.3d 66, refer to rule 9(b), but, for the convenience of the reader,
we refer to rule 9(c) throughout this opinion.

20170545-CA                      3                 2019 UT App 31
                State v. Watson Pharmaceuticals Inc.

the details of an actually submitted false claim, the plaintiff may
nevertheless survive [rule 9(c)] by alleging particular details of a
scheme to submit false claims paired with reliable indicia that
lead to a strong inference that claims were actually submitted by
each defendant.” Id. ¶ 29 (quotation simplified). “[I]n the interest
of justice,” the court remanded the case to the district court to
allow the State an opportunity to meet the new standard. Id.
¶¶ 31, 39.

¶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

4. The State had twice amended its complaint before Apotex was
decided: once as a matter of course pursuant to rule 15(a) of the
Utah Rules of Civil Procedure, and once by order of the court
pursuant to the defendants’ stipulation. After Apotex, the court
granted the State permission to file its third amendment after
receiving no opposition from the defendants.

20170545-CA                     4                 2019 UT App 31
               State v. Watson Pharmaceuticals Inc.

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 rules 9(c) and 12(b)(6) of the Utah Rules of Civil
Procedure, all of the named defendants, including the Watson
Defendants, filed a joint motion to dismiss the Complaint,
alleging that the State failed to satisfy the Apotex pleading
standard. The district court ruled that the State pleaded its facts
with sufficient particularity except as to the Watson Defendants,
which the court recognized “is not a single defendant, but
instead, is comprised of three distinct entities.” The court noted
that the State was “not required to identify the minutia related to
each alleged bad act,” but that Apotex required that each
defendant must be “individually identified.” It therefore
dismissed the Complaint against the Watson Defendants with
prejudice 5 but allowed the case to proceed against the other
defendants.

¶9     Three months later, the State sought leave under rule
15(a) of the Utah Rules of Civil Procedure to again amend its
complaint. Among other things, the State sought to cure the
defect of grouping the three Watson Defendants together by
providing separate representative examples of fraudulent

5. The district court did not expressly state whether it dismissed
the claims against the Watson Defendants with or without
prejudice, and the issue of whether the dismissal should be with
or without prejudice was not raised in briefing or at oral
argument before the district court. The sole reference to the issue
is found in the caption of the defendants’ reply memorandum
where they added “with prejudice” to the title of their motion to
dismiss. It was only after the State moved for leave to amend its
complaint—and asserted that the dismissal was with prejudice—
that the court labeled it as such.

20170545-CA                     5                2019 UT App 31
               State v. Watson Pharmaceuticals Inc.

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 appeals the dismissal of its claims against the Watson
Defendants.

            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 rule 9(c) of
the Utah Rules of Civil Procedure. “A district court’s grant of a
motion to dismiss based upon the allegations in the plaintiff’s
complaint presents a question of law that we review for
correctness.” America West Bank Members, LC v. State, 2014 UT 49,
¶ 7, 342 P.3d 224 (quotation simplified); see also State v. Apotex
Corp., 2012 UT 36, ¶ 16, 282 P.3d 66. When reviewing such a
dismissal, “we accept the plaintiff’s description of facts alleged
in the complaint to be true, but we need not accept extrinsic facts
not pleaded nor need we accept legal conclusions in

6. The State did not provide representative samples attributable
exclusively to the third Watson Defendant—Watson
Pharmaceuticals Inc. Instead, in its revised Exhibit A, the State
identified Watson Pharmaceuticals Inc. as the parent company to
the named subsidiaries. The State also made allegations against
and provided representative samples for additional subsidiaries
of Watson Pharmaceuticals Inc. not named in earlier versions of
its complaint.

20170545-CA                     6                2019 UT App 31
                State v. Watson Pharmaceuticals Inc.

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 rule 9(c) pleading standard as articulated by the
Utah Supreme Court in State v. Apotex Corp., 2012 UT 36, 282
P.3d 66. It also contends that, even if the Complaint did not
satisfy rule 9(c), the district court erred in dismissing its claims
against the Watson Defendants with prejudice, thereby depriving
the State of the opportunity to cure any deficiency. We hold that
the district court correctly determined that the State’s allegations
against the Watson Defendants did not satisfy the rule 9(c)
standard articulated by the Apotex court. We also hold that the
district court did not abuse its discretion in dismissing the claims
with prejudice.

              I. Rule 9(c) Particularity Requirement

¶14 Rule 9(c) of the Utah Rules of Civil Procedure requires
that fraud be pleaded “with particularity.” In Apotex, the
supreme court relaxed this standard with respect to the UFCA
and related fraud claims like those here, but held that a plaintiff
still must allege “particular details of a scheme to submit false
claims paired with reliable indicia that lead to a strong inference
that claims were actually submitted by each defendant.” Apotex,
2012 UT 36, ¶¶ 20, 29 (quotation simplified). In affording the
State an opportunity to replead its claims to meet the new

20170545-CA                     7                 2019 UT App 31
               State v. Watson Pharmaceuticals Inc.

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 rule 9(c) and Apotex, and it takes issue
with the district court’s conclusion that the State failed to
individually identify representative examples for each of the
Watson Defendants. While the State must concede that it
collectively accuses the Watson Defendants of fraud, it contends
that each Watson Defendant was “specifically identified” in the
Complaint because the NDC numbers in the embedded chart
and Exhibit A contain a “labeler code” unique to each of the
three entities. Thus, according to the State, the purpose of rule
9(c) was satisfied because the Watson Defendants were “aware
of the allegations against each [entity] specifically” based on the
NDC numbers and “[f]urther detail was unnecessary.”

¶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 court with the Watson Defendants’ labeler codes, nor did it
provide a way for us to test its unpleaded assertion that the
NDC numbers identified in the Complaint belong to the Watson
Defendants. The State suggested for the first time in oral
argument that this court could consult the “FDA records” to
confirm which identifier codes relate to which defendants, but
the State has not identified which records to consult or, more
importantly, argued that it would be appropriate for us to do so.

¶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

20170545-CA                     8                2019 UT App 31
                State v. Watson Pharmaceuticals Inc.

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.”
2012 UT 36, ¶ 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

7. The State maintained at oral argument that it had no
opportunity to inform the district court about the significance of
the NDC numbers. Not only could the State have drafted such
detail into the Complaint, but if the State thought that the district
                                                     (continued…)

20170545-CA                      9                 2019 UT App 31
                State v. Watson Pharmaceuticals Inc.

¶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.

¶20 In reaching our conclusion, we recognize that the State’s
fraud-based claims were pleaded in the Complaint with much

(…continued)
court’s decision resulted from a failure to understand the
significance of the NDC numbers, the State could have asked the
district court to reconsider on that basis. See Osguthorpe v. Wolf
Mountain Resorts, LC, 2010 UT 29, ¶ 15, 232 P.3d 999 (noting that
a court “remains free to revisit its rulings” while the case is
ongoing); see also True v. Utah Dep’t of Transp., 2018 UT App 86,
¶ 39, 427 P.3d 338 (explaining that rule 54(b) of the Utah Rules of
Civil Procedure provides a “procedural mechanism” for parties
to ask the district court to revisit issues before a final judgment).

20170545-CA                     10                 2019 UT App 31
                State v. Watson Pharmaceuticals Inc.

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 rule 9(c) and Apotex. Yet the district
court declined to excuse a lack of particularity among the
Watson Defendants simply because they are related entities.
Given the clear instructions articulated by the supreme court in
Apotex, see id. ¶ 39, coupled with well-established principles
regarding corporate separateness, we discern no error in that
approach, see Institutional Laundry, Inc. v. Utah State Tax Comm’n,
706 P.2d 1066, 1067 (Utah 1985) (per curiam) (“A corporation, be
it parent or subsidiary, has its own legal identity and existence.
Common ownership or control does not automatically destroy
that separate identity.”).

¶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 rule 9(c) and Apotex,
and the district court correctly dismissed the claims against
them.

                 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

20170545-CA                     11                2019 UT App 31
                State v. Watson Pharmaceuticals Inc.

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,

8. The State in fact filed a motion for leave to amend in the
district court, which the district court denied. Although the
State’s brief challenges the basis for that denial, it does not
appeal from the decision. The State’s notice of appeal designated
only the district court’s order dismissing its claims against the
Watson Defendants as the decision appealed from—it did not
list the court’s denial of its motion for leave to amend. Utah R.
App. P. 3(d) (“The notice of appeal shall . . . designate the
judgment or order, or part thereof, appealed from . . . .”). Also,
during oral argument, the State twice disclaimed any intention
of appealing the court’s order denying amendment. Thus, we do
not consider the merits of that order.

20170545-CA                     12                2019 UT App 31
               State v. Watson Pharmaceuticals Inc.

the State had specific instructions from the supreme court on
how to remedy its pleadings and satisfy rule 9(c). State v. Apotex
Corp., 2012 UT 36, ¶ 39, 282 P.3d 66; see also supra Part I. In
opposing the motion to dismiss the State never suggested that it
should be given yet another opportunity to replead in the event
the Complaint was still insufficient. Neither did it argue that
such an opportunity would be warranted in this case.

¶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 rule 9(c)’s
pleading standard and the district court correctly dismissed the
State’s claims against the Watson Defendants. We also conclude
that the district court did not abuse its discretion in dismissing
those claims with prejudice. Accordingly, we affirm.

9. We are skeptical that even the Fourth Amended Complaint
remedied all the district court’s concerns. See supra ¶ 9 & n.6.

20170545-CA                    13                2019 UT App 31