Introduction

In a sweeping False Claims Act decision with far-reaching implications for drug pricing and Medicaid rebates, the Seventh Circuit affirmed a jury verdict against Eli Lilly and Company arising from its long-running exclusion of “price increase value” (also called “price appreciation credits” or “clawbacks”) from its Average Manufacturer Price (AMP) calculations. The relator, Ronald J. Streck, alleged that Lilly’s AMP submissions to the government improperly treated these clawbacks as bona fide service fees, thereby understating AMP, underpaying Medicaid rebates, and inflating the net burden on the public fisc. The verdict—$61,229,217 in underpayments, trebled to $183,687,651—was upheld in full.

The panel’s central teaching is crisp: when a manufacturer ultimately realizes higher consideration for a drug because wholesalers remit value reflecting post-sale price increases, that consideration is part of “the price paid to the manufacturer” and must be included in AMP. Attempts to segment the transaction into initial invoice price versus later “credits” do not survive ordinary-text interpretation, the statutory purpose of the Medicaid Drug Rebate Program (MDRP), or common sense.

The court also clarified multiple FCA doctrines:

• Falsity may be decided as a matter of law where the defendant’s interpretation contradicts plain text, structure, and purpose—even in complex regimes.
• Scienter remains a subjective inquiry post-SuperValu; evidence of deliberate ignorance/recklessness, selective disclosures, and lack of documentation supported the jury’s finding.
• Materiality is holistic; the statutory definition suffices for jury instruction, and continued government payments are not dispositive where the misrepresentation strikes at the core of the bargain.
• On the relator’s cross-appeal seeking a larger “unit-of-violation,” the court declined to reach the issue due to preservation problems and an underdeveloped record.

Summary of the Opinion

The Seventh Circuit (Judge Kolar writing, joined by Judges Ripple and Jackson-Akiwumi) affirmed across the board:

• Falsity (de novo review): As a matter of law, Lilly’s AMP methodology was false. The Medicaid statute defines AMP as “the average price paid to the manufacturer … by wholesalers.” Post-sale clawbacks increased the price Lilly realized and thus belonged in AMP. The bona fide service fee exclusion did not apply because the clawbacks were not fees “paid by” the manufacturer and were “passed through” to pharmacies.
• Scienter (deferential review): The jury reasonably found “knowing” misconduct, supported by evidence including the unreasonableness of Lilly’s position, weak internal documentation, selective and nonfunctional communications with CMS, the footnoted audit response, and executives’ certifications untethered to a concrete legal analysis.
• Materiality (deferential review): The misstatements were material; AMP is foundational to rebate amounts, and underreporting deprived the government of tens of millions while Lilly harvested hundreds of millions from price increases. The district court’s jury instruction using the FCA’s statutory materiality definition was correct.
• Relator’s cross-appeal on counting violations: Not preserved. The court declined to determine whether each quarterly report constitutes one violation or whether each drug-specific AMP line within a report is its own violation, noting that the answer could be outcome-determinative but remained unripe on the record.

Analysis

Precedents Cited and Their Influence

• United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739 (2023): Anchors the scienter analysis in defendants’ subjective beliefs. The panel used SuperValu to emphasize that facial ambiguity alone does not defeat scienter; what matters is what Lilly actually believed or recklessly disregarded.
• Universal Health Servs., Inc. v. United States (Escobar), 579 U.S. 176 (2016): Materiality is “demanding” and holistic. The Seventh Circuit applied Escobar’s factors contextually, stressing that AMP’s centrality to rebates means understatements are material, and that continued payment is not dispositive.
• United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013 (7th Cir. 1999): Defendants often invoke Lamers to argue that reasonable regulatory interpretations cannot be “false.” Here, the court distinguished Lamers: Lilly’s interpretation was not reasonable in light of text, structure, purpose, and practical consequences.
• United States ex rel. Yannacopoulos v. General Dynamics, 652 F.3d 818 (7th Cir. 2011): Falsity can be resolved with standard tools of statutory/contract interpretation. The panel relied on this approach to read the MDRP agreement and regulations against the statute’s text and purpose.
• United States ex rel. Heath v. Wisconsin Bell, Inc., 92 F.4th 654 (7th Cir. 2024), aff’d, 145 S. Ct. 498 (2025): Misrepresentations that directly inflate government spending are material. The court analogized AMP to the “lowest-corresponding price” rule—each goes to the “essence” of a cost-limiting program.
• United States ex rel. Durcholz v. FKW Inc., 189 F.3d 542 (7th Cir. 1999): Government knowledge can defeat scienter if the government meaningfully approves or collaborates. Here, the court distinguished mere receipt of an unsolicited letter the agency said it would not read from genuine approval.
• United States v. SAIC, 626 F.3d 1257 (D.C. Cir. 2010); United States ex rel. Spay v. CVS Caremark Corp., 875 F.3d 746 (3d Cir. 2017): Cited to frame “ostrich-like” conduct and the need for explicit or collaborative government approval to negate scienter.
• Regulatory sources: CMS’s 2007 Rule (72 Fed. Reg. 39,142) and 2016 Rule (81 Fed. Reg. 5,170) and ACA amendments (2010) inform the “bona fide service fee” exclusion and support that price appreciation credits are not bona fide service fees.
• Divergence from Third Circuit (unpublished): United States v. Allergan, Inc., 746 F. App’x 101 (3d Cir. 2018) had treated “price” as lacking temporal clarity. The Seventh Circuit expressly rejected that view, holding that ordinary meaning allows price to encompass cumulative consideration realized over time.

Legal Reasoning

1) Plain Text, Structure, and Purpose: AMP is the price realized

The statute defines AMP as “the average price paid to the manufacturer … by wholesalers.” The court reasoned that nothing in the text limits price to the initial invoice amount. Indeed, the MDRP agreement affirmatively requires manufacturers to adjust AMP if “cumulative discounts or other arrangements subsequently adjust the prices actually realized.” CMS’s rules and program releases echo the same principle. When wholesalers remitted value reflecting post-sale price increases before resale to pharmacies, Lilly ultimately realized that higher price and was required to include it in AMP.

Structural context reinforced this conclusion. Medicaid pays pharmacies based on “usual and customary” retail prices; manufacturers pay rebates based on AMP. The regime assumes some correspondence. By excluding clawbacks, Lilly created a gap—Medicaid outlays rose while rebates did not—undermining MDRP’s core purpose of cost containment.

2) Bona fide service fee exclusion does not apply to clawbacks

The bona fide service fee exclusion removes from AMP “fees paid by” manufacturers to wholesalers for itemized services that the manufacturer would otherwise perform, provided they are not “passed through” to pharmacies. The court held clawbacks failed both elements:

• Not paid by the manufacturer: During 2009–2016, Lilly invoiced wholesalers for the clawbacks; even in the offsetting years, the net effect was the wholesaler remitting value to Lilly, not Lilly paying the wholesaler.
• Passed through to pharmacies: The entire mechanism presupposed wholesalers would recoup price increases by charging pharmacies more; that pass-through disqualifies such amounts from the bona fide service fee exclusion.

The court rejected Lilly’s “in-kind compensation” theory (i.e., higher-value inventory as a service fee proxy). Unlike payment with independent-value items, Lilly controlled the price appreciation; treating manufacturer-controlled price hikes as excludable “fees” would invite AMP manipulation (sell low, spike price immediately, claw back the difference, and report only the initial price).

3) Falsity is objective and can be resolved at summary judgment

Against Lilly’s “reasonable assumptions” argument, the court emphasized that “reasonable assumptions” are confined by the statute’s text and purpose. Where the law is clear, there is nothing to assume. The resulting rule is important beyond this case: FCA falsity is an objective inquiry grounded in ordinary tools of construction; resort to “complexity” or generalized ambiguity in a vast program cannot defeat a plain-reading of the specific provision at issue.

4) Scienter: subjective knowledge, deliberate ignorance, or reckless disregard

Applying SuperValu’s subjective standard (actual knowledge, deliberate ignorance, or reckless disregard), the court upheld the jury’s finding that Lilly acted knowingly:

• Unreasonable interpretation: The sheer implausibility of the legal position is probative of awareness of risk.
• Documentation lapses: Despite a contractual duty to “keep records” from which AMP was derived, Lilly had no contemporaneous documentation justifying its AMP approach (2005–2011).
• Selective disclosures: Lilly sent an unsolicited 2011 letter (after Streck’s suit against other manufacturers) articulating its position—via a channel CMS had told manufacturers it would not review—yet in a 2013 CMS audit response that CMS would read, Lilly consigned the clawback treatment to a vague footnote, merely reciting the law’s test and eliding why clawbacks supposedly satisfied it.
• Executive certifications without substance: Certifying executives did not recall reading the MDRP agreement or the reasoning for the exclusion; a mid-level specialist performed the work without documented legal analysis, despite the hundreds of millions at stake.
• Revenue recognition vs. AMP reporting: Internally, Lilly treated clawbacks as revenue; externally, it excluded them from AMP.

The court reaffirmed that “government knowledge” requires meaningful awareness and approval. An unreviewed assumptions letter is not approval; a vague audit footnote is not full disclosure; and a 2016 meeting changed behavior only prospectively (Lilly backdated inclusion to April 2016).

5) Materiality: core to the bargain; statutory instruction adequate

The court applied Escobar holistically, holding the misstatements were material because:

• AMPs are “a foundational part” of the MDRP; underreporting directly reduces manufacturer rebates and increases government spend.
• The magnitude was substantial (over $60 million in underpaid rebates; over $600 million realized from price increases).
• Certification and contractual terms expressly conditioned participation on compliance with the MDRP statute and rules.

Continued payments after 2016 were not dispositive, given the practical need to avoid harming beneficiaries, the timing of disclosure, and uncertainty whether CMS had actual knowledge of the financial impact. The jury instruction tracking the FCA’s statutory definition of materiality (“natural tendency to influence” or “capable of influencing”) was legally correct; Escobar did not require listing its non-dispositive factors in the charge. The court endorsed a “less is more” approach to avoid confusing juries with factor lists.

6) Cross-appeal on counting violations: not preserved; open legal question

Streck sought to count each drug-specific AMP line as a separate violation (as opposed to treating each quarterly submission as one violation). The Seventh Circuit declined to reach the issue, faulting preservation and recognizing an unsettled landscape about whether “records or statements” line-items can be separate violations under §§ 3729(a)(1)(B) and (G). The court flagged an apparent split among circuits and stressed that resolution should await an appropriate record and briefing.

Impact

Immediate doctrinal consequences

• AMP must include clawbacks: In the Seventh Circuit, manufacturers must include price appreciation credits/clawbacks in AMP; attempts to treat them as bona fide service fees are legally untenable because they are (i) not paid by the manufacturer and (ii) passed through to pharmacies.
• Falsity can be resolved on the papers: Courts may grant summary judgment on falsity if the defendant’s construction conflicts with the text, structure, and purpose—even in complex regimes.
• Materiality instructions: District courts may safely instruct juries using the FCA’s statutory definition of materiality without enumerating Escobar’s factors.
• Government-knowledge defense narrowed in practice: Unsolicited “reasonable assumptions” letters that agencies say they will not read, and vague audit disclosures, will not establish governmental approval.

Compliance and enforcement

• Pricing models and contracts: Manufacturers using fee-for-service distribution must treat price appreciation clawbacks as part of AMP. Contract architectures designed to net out price hikes against service fees are high risk.
• Documentation discipline: MDRP agreements require maintaining records of AMP calculations and assumptions. The absence of contemporaneous, substantive analysis is itself evidence supporting scienter.
• Regulatory engagement: Use channels the agency will actually review (meetings, audit responses) and make fulsome, accurate disclosures. Reliance on non-reviewed letters will not shield liability.
• Executive certifications: Certifiers must ensure a real basis for their attestations; “rubber-stamping” lower-level interpretations in high-stakes programs invites FCA risk.
• Alignment of accounting and reporting: Treating clawbacks as revenue internally but excluding them from AMP externally is a red flag that demands legal reconciliation and documentation.
• Litigation posture: Expect relators and the government to press similar claims against clawback-excluding AMP methodologies. The opinion supplies a roadmap for proving falsity, scienter, and materiality.

Broader programmatic significance

• Purpose alignment: The decision reasserts MDRP’s core purpose—rebates should rise with prices realized—closing a loophole that would otherwise sever AMP from retail prices.
• Circuit dynamics: The Seventh Circuit’s express disagreement with a Third Circuit unpublished order (Allergan 2018) heightens the salience of this issue for inter-circuit harmony. District courts (even within the Third Circuit) have trended toward including price appreciation in AMP.
• Jury instructions trend: The court’s endorsement of statutory-text instructions for materiality may influence pattern instructions and reduce Escobar factor-lists in FCA trials.
• Unit-of-violation uncertainty persists: The court flagged but did not resolve whether individual line items can be separate “false records or statements,” preserving space for future cases to develop the law.

Complex Concepts Simplified

• Average Manufacturer Price (AMP): A quarterly average of the prices wholesalers pay manufacturers for a drug. Higher AMP usually means higher rebates the manufacturer must pay to Medicaid.
• Price appreciation credits / clawbacks: If a manufacturer raises a drug’s price after selling it to a wholesaler but before the wholesaler resells to a pharmacy, the wholesaler must remit value reflecting the increase back to the manufacturer. This increases the total price the manufacturer “realizes.”
• Bona fide service fee: A true fee paid by the manufacturer to a wholesaler for services (like storage or distribution) that the manufacturer would otherwise need to perform, and that is not passed through to pharmacies. These fees are excluded from AMP. Clawbacks fail both conditions.
• FCA falsity: A claim or certification is false if it contradicts law, regulation, or contract. In this case, AMP certifications were false because they omitted components of the price actually realized.
• Scienter (“knowingly”): The FCA reaches actual knowledge, deliberate ignorance (conscious avoidance), and reckless disregard (failure to make reasonable inquiry when faced with a risk of falsity). Innocent mistakes or negligence are not enough.
• Materiality: Whether the misstatement has a natural tendency to influence the government’s payment decisions. Core features of the program and large dollar impacts weigh heavily in favor of materiality.

Conclusion

The Seventh Circuit’s opinion delivers a clear and consequential rule: AMP is the price realized by the manufacturer, and price appreciation clawbacks from wholesalers must be included. Attempts to recharacterize these amounts as bona fide service fees fail both textually and functionally. That holding restores alignment between Medicaid reimbursements (based on retail prices) and manufacturer rebates (based on AMP), closing a potentially costly loophole.

On FCA doctrine, the court reinforces a coherent framework: falsity is an objective, law-governed determination; scienter is subjective and can be shown through deliberate indifference and inadequate inquiry; and materiality is a holistic, program-centered analysis that does not require enumerating Escobar’s factors in jury instructions. The government-knowledge defense remains available but only where the government meaningfully understands and approves the relevant conduct—a bar not met by sending letters the agency says it will not review or by cursory audit footnotes.

For manufacturers and counsel, the opinion is both cautionary and instructive. Robust documentation of legal reasoning, forthright engagement with regulators, alignment between internal accounting and external reporting, and careful stewardship of executive certifications are not optional in high-dollar public programs. For courts and enforcers, the decision provides a principled, text-first roadmap to evaluate similarly engineered pricing mechanisms. And while the court declined to decide the “unit-of-violation” question, it flagged the stakes and the need for clean preservation and full development—signaling fertile ground for future litigation.

The bottom line: common-sense readings of text, tethered to statutory purpose and practical economics, will govern complex pricing disputes. Overcomplicated constructions that sever AMD’s meaning from realized price will not withstand scrutiny under the FCA.