Health Law Daily Wrap Up, MEDICAID—D. Md.: FCA rebate stacking case proceeds to discovery despite Allergan Sales’s motion to reconsider dismissal, (Jul 9, 2026)

By Justin Marcus Smith, J.D.

The case was twelve years old, and there had already been interlocutory appeals of two prior dismissal motions.

After two interlocutory appeals on two prior dismissal motions, it was time for a qui tam False Claims Act (FCA) case about Medicaid rebate stacking to go to discovery, held the federal district court in Baltimore, Maryland. On the most recent remand, the U.S. Court of Appeals for the Fourth Circuit had essentially instructed that (1) the question of FCA falsity was objective; and (2) that the district court must make a first instance determination of whether the disputed claims for Medicaid reimbursement were objectively false in light of the objective meaning of the Medicaid Rebate Statute. However, the Fourth Circuit mandate did not say at what stage of the case the district court must make its determination. The district court noted it would have to make the determination as a matter of law, but it had already found the Rebate Statute ambiguous after grappling with it on two prior motions to dismiss. The court resolved to deny reconsideration for the filing of a third motion to dismiss on the basis that the case would benefit from a fuller record after discovery. In denying reconsideration for the filing of a third dismissal motion, the court reviewed how United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739 (2023), held that FCA scienter, like common law fraud scienter, ordinarily depends on a subjective test and culpable state of mind, not what an objectively reasonable person may have known or believed (U.S. ex rel. Sheldon v. Allergan Sales, LLC, No. ELH-14-2535 (D. Md. June 29, 2026)).

Background. A qui tam relator alleged that Allergan Sales, LLC engaged in a fraudulent reporting scheme under the Medicaid Rebate Statute of 1990, 42 U.S.C. § 1396r-8. The Rebate Statute requires drug manufacturers to report rebates and other discounts they provide to private companies to ensure Medicaid pays the lowest prices. A manufacturer’s Rebate Agreement with the Secretary of HHS obligates the manufacturer to adjust the “Best Price” based on rebates and other discounting.

In 2014, the relator sued his former employer, Forest Laboratories, LLC, Forest Pharmaceuticals, Inc., and Allergan, PLC, alleging fraud in calculating Best Price. The relator sued on behalf of the United States as well as numerous states. At the present juncture, the litigation had been going on for almost twelve years largely due to the government’s lengthy investigation. Actavis, PC, now known as Allergan Sales, LLC, acquired Forest Laboratories, LLC in 2014; the relator died in 2017; the Executrix of the relator’s estate substituted for the relator; and the court dismissed Allergan, PLC from the case in 2020 with Allergan Sales, LLC (Allergan) substituted for the Forest entities.

The 2016 amended complaint alleged that Allergan defrauded the government and the qui tam states of more than $680 million between 2005 and 2014 and failed to include certain customer price concessions in its calculation of “Best Price” under 42 U.S.C. §1396r-8(b)(3)(A)(i)(II) and related regulations. According to the relator, Allergan routinely paid rebates to multiple separate entities on the same drugs dispensed to the same patient but failed to aggregate them together to calculate “Best Price.” Instead, Allergan would allegedly only report the highest rebate or other discount. Accordingly, the relator alleged Allergan submitted false claims under the FCA by reporting Best Prices to CMS without stacking the rebates or other discounts provided to multiple entities on the same drug.

In 2019, the government declined to intervene, and the defense filed two motions to dismiss which led to two rulings and multiple appeals. Most recently, Allergan asked the court to reconsider a May 2026 order in which the court denied a request to submit a third motion to dismiss. The court denied the motion for reconsideration on the papers.

In Sheldon I, the district court ruled that Allergan’s interpretation of the Rebate Statute was objectively reasonable, and the relator did not plausibly allege that Allergan acted with requisite scienter. Honest mistakes or incorrect claims submitted through mere negligence are not enough to satisfy the scienter requirement of the FCA, and the FCA did not reach an innocent, good-faith mistake about the meaning of an applicable rule or regulation (see Medicaid rebate statute susceptible to multiple interpretations, Feb. 9, 2021). However, the court rejected Allergan’s argument that the FCA public disclosure bar warranted dismissal. The court did not address the heightened pleading standard of Fed. R. Civ. P. 9(b) because it also concluded the relator failed to plead the existence of a false statement for an FCA claim.

The Fourth Circuit affirmed twice, first by a divided panel in Sheldon II that applied an objective standard for scienter (see Lab did not act knowingly when it failed to aggregate drug discounts, Jan. 26, 2022), and then again after a rehearing en banc in Sheldon III. While the relator’s petition for a writ of certiorari was pending, the Supreme Court decided United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739 (2023). In Schutte, the Supreme Court held that FCA scienter, like common law fraud scienter, ordinarily depends on a subjective test and culpable state of mind, not what an objectively reasonable person may have known or believed.

Less than a month after Schutte, the Supreme Court granted certiorari in Sheldon II, vacated dismissal, remanded to the Fourth Circuit for further consideration in light of Schutte in Sheldon IV, and the Fourth Circuit quickly remanded to the district court to do the same in Sheldon V.

On remand after Sheldon V, Allergan filed its second motion to dismiss, and in Sheldon VI, the district court again dismissed for failure to state a claim after applying the Schutte subjective standard for scienter (see Drug manufacturer not guilty of making fraudulent ‘Best Price’ reports to Medicaid, Jul. 31, 2024). The court based the Sheldon VI dismissal on a finding of ambiguity in the “Best Price” provisions of the Rebate Statute and Rebate Agreement. In light of that ambiguity, there was not enough under Schutte to ascribe a facial culpable mental state to Allergan. On the question of falsity, ambiguity in the “Best Price” definitions precluded a finding that Allergan should have aggregated price concessions to different entities in the distribution chain. In the absence of scienter or falsity, the court did not address R. 9(b), and the relator appealed again.

In Sheldon VII, the Fourth Circuit reversed and remanded with instructions on the FCA scienter standard. Specifically, the Fourth Circuit instructed that legal ambiguity is not dispositive of subjective intent and instructed on R. 9(b) pleading requirements for scienter and other considerations. The Fourth Circuit determined the relator plausibly alleged that Allergan was subjectively aware of a risk that the CMS interpretation of the Rebate Statute would require stacking of discounts; that Allergan acted with reckless disregard in using its own interpretation to not stack them; and that the relator cleared the pleading hurdle for scienter. As for falsity, the Fourth Circuit said the district court must determine whether the disputed claims were objectively false in light of the statute.

The parties then submitted a joint status report. The relator argued the case should go to discovery, but Allergan wanted to file a third motion to dismiss on the basis that the Fourth Circuit remanded to make a threshold determination about the pleading of falsity and to adjudicate the unresolved argument that the relator failed to satisfy R. 9(b).

The court declined to entertain a third motion to dismiss, and the relator began serving discovery requests. However, Allergan filed a R. 54(b) motion to reconsider the filing of a third dismissal motion limited to whether the complaint failed to allege falsity as a matter of law and whether it complied with R. 9(b).

Allergan argued it would be manifestly unjust, in light of potentially punitive FCA liability, for it to be forced to undertake discovery because the Fourth Circuit directed the court to determine, as a matter of law, whether the Rebate Statute obligates a manufacturer to report stacked discounts to multiple entities. Allergan urged that the court had to decide what the Rebate Statute means and R. 9(b) compliance before permitting discovery. Allergan also expressed concern that it should not be penalized for prior delay that was not its fault, but the court rejected the idea that the parties could brief and have the court determine the falsity and R. 9(b) issues quickly.

The relator posited that the Fourth Circuit concluded the amended complaint plausibly pleaded FCA claims; that the court had the discretion to decide how and when to consider the Rebate Statute; that Allergan could raise the statutory interpretation issue at the summary judgment stage; that the case could not turn on an abstract legal question in a third round of dismissal briefing; and that the court should not delay discovery to reconsider R. 9(b) arguments after the Fourth Circuit had already determined the FCA claims survived dismissal.

Discussion. The court analyzed how the Fourth Circuit instructed that the question of falsity was objective and the district court must determine whether the claims were objectively false by interpreting the objective meaning of the Rebate Statute. In a footnote, the Fourth Circuit clarified that the district court must determine, in the first instance, whether reporting Best Price without aggregation or stacking of discounts was false as a matter of law.

Of import here, the Fourth Circuit did not dictate at what stage of the litigation the court must address any unresolved questions. The district court did not see reason to resolve the meaning of the Rebate Statute before proceeding to discovery. On remand, the aptly named mandate rule required resolution of the issues the Fourth Circuit identified; however, the Fourth Circuit did not require resolution by way of a third motion to dismiss. The Fourth Circuit only instructed the court to decide the meaning of the Rebate Statute in the first instance. The court saw that Allergan could have that decided at the summary judgment stage. After all, courts regularly resolve pure questions of law at the summary judgment stage.

The court decided a third motion to dismiss would only delay and prolong the case, whereas going to discovery would bring the benefit of a fuller record. The court had already found the meaning of the Rebate Statute ambiguous in two earlier opinions in the instant matter. The Fourth Circuit had acknowledged the complexity of the Rebate Statute, and it also observed how the district court had already considered several voluminous documents beyond the amended complaint, a foray better suited to summary judgment.

The court continued that Sheldon VII already addressed R. 9(b) and did not direct the district court to consider it on remand. The court said it would also benefit from a fuller record after discovery on the question of whether the relator cannot or did not establish fraud. For all of the above reasons, the court denied Allergan’s motion for reconsideration to file a third motion to dismiss.

The case is No. ELH-14-2535.

Judge: Hollander, E.

Attorneys: Joel D. Hesch (The Hesch Firm LLC) for Deborah Sheldon. Jeffrey Handwerker (Arnold & Porter LLP) for Allergan Sales, LLC.

Companies: Allergan Sales, LLC

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