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A Pennsylvania Supreme Court justice, voicing harsh criticisms for the Commonwealth Court and suggesting the state’s hiring of outside counsel on a contingency fee basis lengthened the 10-year litigation, has led a split high court in its decision to remand for reconsideration $80 million in damages assessed against two pharmaceutical companies.

In a strongly worded opinion announcing the judgment of the court, Justice Thomas G. Saylor said the state’s claims against Bristol-Myers Squibb and Johnson & Johnson for allegations the state overpaid for prescription drugs for seniors completely ignored the fact that the drug companies have given more than a billion dollars in rebates to the state over the years.

Saylor also took issue with the Commonwealth Court’s credibility findings in which the lower appellate court disregarded the state’s own witnesses’ testimony that rebates reduced the overall price the state had to pay for its prescription drug reimbursements.

“While we suppose that litigants might always wish to maximize recoveries, it is astonishing that—based upon such insubstantial testimony—the Commonwealth Court would permit the commonwealth to accept a billion dollars in rebates relative to social welfare reimbursements while giving no credit to the payers,” Saylor said.

While the state may have grievances about how complicated prescription drug pricing has become and whether pharmaceutical companies in general manipulate the process, federal and state laws have provided remedies through the rebate programs and the state didn’t show that wasn’t an adequate solution, Saylor said in Commonwealth v. TAP Pharmaceutical Products.

“The Commonwealth Court might have cabined the 10-year course of this litigation by recognizing—earlier on—the significance of rebates to prices, and, failing that, it should have taken good guidance from the jury which was empaneled,” Saylor said.

In the case against Bristol-Myers, which was heard separately from a number of other pharmaceutical companies, some of the state’s claims were heard by a jury while others were heard by the Commonwealth Court in its original jurisdiction. The jury found in favor of Bristol-Myers, but the Commonwealth Court found against the drug company for engaging in unfair and deceptive practices under the Unfair Trade Practices and Consumer Protection Law.

The court awarded more than $27 million in restoration damages to the state, Saylor said. A three-judge panel of the Commonwealth Court affirmed that ruling, relying on the fact that the average wholesale price (AWP) used by the drug industry to set prices was “fictitious.” The trial against J&J resulted in a $51.8 million award to the state, and that was upheld on post-trial motions as well.

In a footnote, Saylor said substantial concerns have been raised in the legal community about public agencies using outside counsel, with personal financial incentives, to lead litigation on the public’s behalf.

“At the very least, close supervision is required in such relationships, and, of course, the state agencies in whose name the cause is pursued bear the ultimate responsibility for the sort of overreaching which we find to have occurred here,” Saylor said.

In an unusual move, the Supreme Court remanded the case despite being evenly split on the issue of where it should go next. Justice Correale F. Stevens did not participate. That left Saylor, Chief Justice Ronald D. Castille and Justice J. Michael Eakin announcing the judgment of the court and Justice Max Baer authoring a concurrence that was joined by Justices Debra M. Todd and Seamus P. McCaffery.

“Although the justices supporting this opinion presently would bring this protracted litigation to a close, upon the response authored by Mr. Justice Baer, three other justices have taken the position that the matter should be remanded to the Commonwealth Court for further consideration in light of our above analysis,” Saylor said. “Notably, this sort of impasse has yielded troubling results in previous cases.”

To avoid such a result, Saylor said he, Castille and Eakin will “accede to the remand.”

At its core, the state argued that the AWP figures published by the pharmaceutical companies and used by the state to set the reimbursements the state made to doctors and pharmacies for drugs given to Medicare patients were inflated.

BMS and J&J argued there was no fraudulent activity on their part, the AWP figures were known throughout the industry to be about a 20 percent markup above the wholesale acquisition cost, and, if damages were awarded against the companies, the companies were entitled to a setoff for the rebates they paid the state.

Dechert partner Robert C. Heim said his client, Bristol-Myers, was very pleased with the court’s ruling. He said it seemed to him that the Supreme Court left for another time the issue of liability regarding whether Bristol-Myers fraudulently set prices because the court focused in on the rebates issue.

“The rebates are substantially larger than the damages that were attributed to the conduct,” Heim said. “So on remand, the Commonwealth Court will have to struggle with that issue, and of course I expect that we will ask the Commonwealth Court, based on the Supreme Court’s opinion, to enter judgment for BMS.”

William F. Cavanaugh Jr. of Patterson Belknap Webb & Tyler in New York argued on behalf of J&J. He didn’t return a call for comment. A J&J spokeswoman said the company was pleased with the court’s ruling.

Donald Haviland of Haviland Hughes and John M. Elliott of Elliott Greenleaf represented the state. Haviland didn’t return a call seeking comment.

Elliott, who entered the case to argue the J&J case before the Supreme Court, said J&J didn’t raise the issue of rebates in its filings and the issue wasn’t raised at all during arguments. He said he thinks that issue was waived and that J&J can’t avoid the damages question on remand. As to the point of the state hiring outside counsel, while Elliott was only in the case for a short time, he said the court’s opinions on that issue are “misplaced.”

“It is well known and well documented that the pharmaceutical industry is very litigious, very muscular and has access to the biggest law firms in the country,” Elliott said, noting state attorneys general don’t have the resources to handle these types of cases without hiring outside counsel.

The case was originally argued in May 2013, but, once Stevens was appointed to the bench, the parties requested the case be resubmitted on the briefs to the full court. That request was granted in April 2014, but Stevens ultimately didn’t participate in the court’s ruling. Saylor and Baer issued Monday their more thorough opinions in the Bristol-Myers case, and adopted those rulings in the shorter opinions issued in the J&J case.

One of the running themes throughout Saylor’s opinion was that the state’s own witnesses admitted that the state knew the AWPs weren’t the actual prices and that the rebates reduced the overall price the state had to pay for these programs. And the justice took issue with the Commonwealth Court’s finding that one of those witnesses appeared to agree with anything any of the attorneys in the trial asked him.

“We have concerns about the Commonwealth Court’s credibility judgments,” Saylor said.

Saylor said in a footnote that the lower court’s “general allusions” to the witness’s demeanor and bias were “abstract” and in “substantial tension with the record.”

Gina Passarella can be contacted at 215-557-2494 or at gpassarella@alm.com. Follow her on Twitter @GPassarellaTLI.

(Copies of the 27-page opinion in Commonwealth v. Tap Pharmaceutical Products (Bristol-Myers Squibb), PICS No. 14-0958, and of the five-page opinion in Commonwealth v. Tap Pharmaceutical Products (Johnson & Johnson), PICS No. 14-0959, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •