Introduction

The Seventh Circuit affirmed a jury verdict finding that Eli Lilly submitted false Average Manufacturer Prices (AMPs) under the Medicaid Drug Rebate Program (MDRP) by excluding so‑called “price increase value” or “price appreciation credits” (commonly called clawbacks) from AMP calculations between 2005 and 2017. Those clawbacks required wholesalers to return to Lilly the value of price increases occurring after initial sale but before resale to pharmacies. The relator, Ronald Streck, alleged that by omitting these clawbacks, Lilly understated AMP, lowering its rebate obligations even as Medicaid’s payments (tied to retail “usual and customary” prices) rose.

At trial, a jury awarded $61,229,217—trebled under the False Claims Act (FCA) to $183,687,651. On appeal, Lilly challenged falsity (arguing ambiguity and “reasonable assumptions”), scienter, and materiality; Streck cross‑appealed on how to count FCA violations. The Seventh Circuit’s opinion delivers three cornerstone holdings:

• As a matter of law, AMP must reflect the price actually realized by the manufacturer; when wholesalers remit value from post‑sale price increases, the “price realized” is the higher post‑increase amount, not the initial invoice price.
• Clawbacks are not bona fide service fees (BFSF) because the increases were passed through to pharmacies and were not payments “by the manufacturer.”
• Scienter and materiality were properly found by the jury; materiality instructions tracking the FCA’s statutory definition sufficed without embedding all Escobar factors.

The ruling underscores a plain‑text, common‑sense approach to MDRP compliance and rejects hypertechnical constructions that divorce AMP from the economic reality of payments received. It also offers practical guidance on FCA litigation after Escobar and SuperValu, and signals caution against using CMS “assumption letters” as a shield.

Summary of the Opinion

• Falsity (de novo review): Lilly’s exclusion of clawbacks from AMP was objectively false under the statute, MDRP agreement, and regulations. The court anchored AMP in the “price paid to the manufacturer,” including subsequent arrangements that adjust “prices actually realized.” Common sense: selling for $10 and later collecting $1 more is a sale for $11.
• Bona fide service fees: Clawbacks failed two core BFSF criteria: (1) they were “passed through” to retail pharmacies, and (2) they were not payments by the manufacturer to the wholesaler. Therefore, they could not be excluded from AMP.
• Scienter (jury verdict sustained): Evidence supported that Lilly at least recklessly disregarded the truth: absence of contemporaneous documentation; middle‑manager discretion over hundreds of millions in clawback revenue; cryptic disclosures when it knew CMS was reading; and use of CMS‑disfavored assumption letters when it knew CMS would not read them.
• Materiality (jury verdict sustained): False AMPs were material because they directly affected the core financial terms of the program—the manufacturer’s rebate liability—while the government’s payments rose with retail prices. Continued payment after partial disclosures did not defeat materiality given the holistic Escobar standard.
• Jury instruction on materiality: The district court properly used the FCA’s statutory definition (“natural tendency to influence” / “capable of influencing”). Escobar factors are non‑dispositive and need not be hard‑wired into the charge.
• Cross‑appeal on counting violations: Dismissed for lack of preservation and because the district court made no reviewable ruling on whether each quarterly AMP line item is a separate FCA violation; the law remains unsettled and was not decided.

Analysis

A. Precedents and Authorities Driving the Decision

• Statutory text and MDRP agreement: 42 U.S.C. § 1396r‑8(k)(1) defines AMP as “the average price paid to the manufacturer,” and the 1991 MDRP agreement requires adjusting AMP where “cumulative discounts or other arrangements subsequently adjust the prices actually realized.” The Seventh Circuit treats this “price realized” concept as decisive.
• CMS Rules and Guidance:
  • 2007 Rule (72 Fed. Reg. 39,142): Permits exclusion of bona fide service fees to wholesalers but excludes from BFSF any fees “passed on” to customers. Clarifies AMP adjustments for subsequent arrangements affecting price actually realized.
  • ACA Amendments (2010): Codify BFSF exclusion and include in AMP any “discounts, rebates, payments, or other financial transactions” received by or passed through to retail community pharmacies. 42 U.S.C. § 1396r‑8(k)(1)(B)(i)(II), (ii).
  • 2016 Final Rule (81 Fed. Reg. 5,170): Confirms “price appreciation credits” (clawbacks) are not BFSF because they are not payment for services but adjustments to the purchase price when a manufacturer raises list price while product sits in wholesaler inventory.
• Universal Health Services v. Escobar, 579 U.S. 176 (2016): Establishes a demanding, holistic materiality inquiry and allows FCA liability for regulatory noncompliance when tied to affirmative misrepresentations material to payment. The Seventh Circuit uses Escobar to validate the jury’s materiality finding and the district court’s streamlined instruction.
• United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739 (2023): Scienter is judged by a defendant’s actual, subjective beliefs; “objective reasonableness” is not a safe harbor where the defendant believed or suspected falsity. The Seventh Circuit reads SuperValu to foreclose using post hoc “reasonable interpretation” arguments to negate scienter—and, importantly here, explains that falsity is an objective, black‑and‑white question.
• Seventh Circuit FCA line:
  • Lamers (1999): FCA requires more than disputed legal interpretations; but “reasonableness” cannot rescue a reading that contravenes text and purpose.
  • Yannacopoulos (2011): Falsity turns on whether representations contradict contractual terms; ordinary tools of interpretation govern.
  • Molina (2021), Luce (2017): Where misstatements drive significant payment differentials or touch program fundamentals, materiality is strong.
  • Heath v. Wisconsin Bell, 92 F.4th 654 (7th Cir. 2024), aff’d, 145 S. Ct. 498 (2025): When the misrepresentation goes to the “very essence of the bargain” and directly controls the amount paid, materiality is satisfied notwithstanding government inertia.
• Other notable references:
  • Abraham Lincoln Memorial Hospital (7th Cir. 2012) and Rehab. Ass’n of Va. (4th Cir. 1994): Medicaid is complex, but complexity writ large does not create ambiguity on a specific point.
  • Durcholz (7th Cir. 1999) and Spay (3d Cir. 2017): Government knowledge can negate scienter if there is explicit approval or collaborative problem‑solving; mere receipt of information is not enough.
  • Unpublished Allergan (3d Cir. 2018): Suggested “price” lacked temporal limitations; the Seventh Circuit expressly parts ways, holding the ordinary meaning of price encompasses cumulative consideration paid.

B. The Court’s Legal Reasoning

1) “Price realized” governs AMP: clawbacks must be included

The Seventh Circuit hews to text, purpose, and common sense. AMP is the “average price paid to the manufacturer,” and the MDRP agreement requires an adjustment where “other arrangements” later change the “prices actually realized.” On the facts, Lilly sold Drug A to a wholesaler at $10, later raised the list price to $11 before the wholesaler’s resale, and contractually required the wholesaler to remit the $1 increase (through offsets against distribution fees or direct invoicing). The manufacturer’s realized price is therefore $11, not $10.

The court rejects as absurd any theory that “price” must be frozen at the moment of initial invoice, noting that real‑world transactions routinely contemplate payment over time. A contrary rule would allow manufacturers to set nominal invoice prices and recover the true price through post‑sale adjustments while reporting artificially low AMPs—precisely the “egregious exploitation” the MDRP is designed to prevent.

2) Clawbacks are not bona fide service fees and cannot be excluded

The court identifies two fatal defects under the BFSF framework:

• Pass‑through: The value of the price increase was passed through to pharmacies, which paid more at retail; BFSF excludes fees “passed on” to a client or customer.
• Who pays: Clawbacks were not payments “by the manufacturer” to the wholesaler for services; they were payments by the wholesaler back to the manufacturer to true up the acquisition price when the list price rose. From 2009–2016, Lilly even invoiced wholesalers in cash for the clawbacks while separately paying distribution fees—underscoring the non‑BFSF character.

The court emphasizes that treating a manufacturer‑controlled price increase as an “in‑kind” service fee would open a gaping loophole—allowing unilateral manipulation of AMP and defeating the MDRP’s central cost‑sharing mechanism.

3) Falsity is objective; “reasonable assumptions” cannot override the law

Although CMS permits “reasonable assumptions” in areas lacking guidance, the court holds that Lilly’s assumption was unreasonable because it contradicted statutory text, the MDRP agreement, and CMS’s rules. Complexity in the Medicaid code does not make this point ambiguous. Moreover, following SuperValu, “objective reasonableness” is not a safe harbor when the defendant’s own beliefs or conduct indicate awareness of a substantial risk of falsity.

4) Scienter: evidence supported at least reckless disregard

Applying 31 U.S.C. § 3729(b)(1)(A), the court affirms that the jury could find actual knowledge, deliberate ignorance, or reckless disregard. Key facts:

• No contemporaneous records from 2005–2011 explaining the exclusion—despite a contractual duty to maintain them.
• Executives who certified AMPs did not know why clawbacks were excluded and relied on a mid‑level manager.
• Lilly tracked clawbacks as revenue and presented nine‑figure clawback totals to senior leadership—underscoring their materiality.
• When Streck’s 2011 suit raised the very issue, Lilly chose a CMS “assumption letter” medium that CMS had warned it would not read, and later used a vague footnote in the 2013 audit response (when it knew CMS would read it), eliding the key legal assertion.

The court labels this pattern “ostrich‑like” avoidance inconsistent with the “scrupulous regard for the requirements of law” expected when dealing with public funds (citing Heckler).

5) Materiality: ties to the “essence of the bargain” sustain the verdict

Materiality under § 3729(b)(4) focuses on whether the misstatement had a natural tendency to influence payment. False AMPs directly reduced rebate obligations while Medicaid outlays rose with higher pharmacy prices, striking at the heart of the MDRP’s cost‑sharing design. The court analogizes to Heath v. Wisconsin Bell: where a price‑governing rule directly affects payment amounts in a subsidy framework, materiality is strong; continued payment does not defeat materiality per se.

The district court’s jury instruction tracked the statute; Escobar’s non‑dispositive factors need not be recited to the jury. Pattern instructions across circuits similarly define materiality by the “natural tendency to influence” standard.

6) Counting violations: the legal question remains open here

Streck’s cross‑appeal (seeking to count each individual AMP line item as a separate violation) failed procedurally. The court notes that monthly AMPs are irrelevant to rebate payments; quarterly AMPs are relevant, but the district court never issued a reviewable ruling on whether each line‑item quarterly AMP is a separate “record or statement” violation under § 3729(a)(1)(B) or whether each quarterly submission is a single violation. The panel flagged a circuit split but declined to reach the issue.

C. Impact and Forward‑Looking Implications

1) MDRP compliance: AMP must reflect post‑sale price appreciation

• Manufacturers must include the value of post‑sale list price increases recaptured from wholesalers—regardless of the mechanism (offsets, credits, or cash invoices)—in AMP.
• Attempts to characterize those amounts as BFSF will fail where the increases are passed through to pharmacies and are not payments by the manufacturer for enumerated services.
• “Reasonable assumptions” cannot justify deviations that contradict the MDRP statute, CMS rules, or the MDRP agreement’s “price realized” requirement.

2) FCA litigation after Escobar and SuperValu

• Falsity vs. scienter: The Seventh Circuit treats falsity as an objective legal question and reserves “ambiguity,” “assumption,” and “reasonableness” arguments for scienter. Defendants should not expect “objective reasonableness” to defeat FCA claims where text and purpose run the other way.
• Materiality instructions: Statutory definition suffices; district courts need not enumerate Escobar’s factors so long as the instruction captures the “natural tendency to influence” standard.
• Government knowledge: Continued payments and agency silence are relevant but not dispositive. Without explicit approval or collaborative engagement, “we sent a letter” is weak medicine—especially where the agency warned it would not read such letters.

3) Distribution contracts and BFSF structuring

• “Fee‑for‑service” models that claw back interim price appreciation will likely require AMP inclusion of those amounts, regardless of form.
• To qualify as BFSF, payments must be: (a) bona fide, itemized compensation for services the manufacturer would otherwise perform or procure, (b) paid by the manufacturer, and (c) not passed through to pharmacies or customers.

4) Recordkeeping and executive certifications

• Manufacturers must maintain contemporaneous documentation of AMP methodologies and assumptions; the absence of such records can be powerful scienter evidence.
• Executive certifiers should be informed and engaged. Reliance on a mid‑level employee without documented legal analysis invites “reckless disregard” findings.

5) Inter‑circuit dynamics

• This decision expressly diverges from an unpublished Third Circuit order (Allergan 2018) and aligns with district‑court decisions in the Third Circuit (Streck v. Bristol‑Myers Squibb, 2019) and CMS’s 2016 rulemaking.
• Expect increased alignment around inclusion of price appreciation credits in AMP, particularly within the Seventh Circuit and potentially beyond.

6) Open questions: counting violations and penalties

• The Seventh Circuit left unresolved whether each quarterly AMP line item is a separate “record or statement” violation under § 3729(a)(1)(B), as opposed to one violation per quarterly submission. Defendants and relators should brief and preserve this issue carefully; exposure can swing dramatically.

D. Complex Concepts Simplified

• MDRP (Medicaid Drug Rebate Program): To have their drugs covered by Medicaid, manufacturers must sign rebate agreements and pay quarterly rebates tied to AMP; this offsets Medicaid spending.
• AMP (Average Manufacturer Price): The average price paid to the manufacturer by wholesalers for drugs distributed to retail pharmacies during the quarter. It reflects the price actually realized, including later adjustments like clawbacks.
• Price Increase Value / Clawbacks / Price Appreciation Credits: Amounts wholesalers must remit to a manufacturer when the manufacturer raises list price after the wholesaler’s purchase but before the wholesaler resells to a pharmacy.
• Bona Fide Service Fees (BFSF): Itemized payments by the manufacturer to wholesalers for services (e.g., storage, distribution) that the manufacturer would otherwise perform or procure. Excludable from AMP only if not passed through to pharmacies and actually paid by the manufacturer as compensation for services.
• “Usual and Customary” Price: The retail price charged to the public; Medicaid generally reimburses pharmacies based on this figure plus a dispensing fee. As retail prices increase, Medicaid’s outlays increase.
• Falsity (FCA): A statement is false when it contradicts reality or asserts compliance inconsistently with governing legal or contractual requirements; here, reporting AMPs that ignore clawbacks contradicts the “price realized” mandate.
• Scienter (FCA): Liability requires actual knowledge, deliberate ignorance, or reckless disregard. Post‑hoc “reasonable interpretations” cannot negate scienter where the defendant suspected falsity or avoided confirming it.
• Materiality (FCA): A misstatement is material if it naturally tends to influence payment decisions. When a misstatement directly affects the amount the government pays or recovers, materiality is typically strong.

Practice Pointers and Compliance Takeaways

• Re‑evaluate AMP methodologies to ensure inclusion of any post‑sale, pre‑resale price appreciation captured from intermediaries, regardless of form (offset, netting, cash invoice).
• Audit BFSF arrangements: confirm payments are manufacturer‑paid, itemized compensation for bona fide services, and not passed through to pharmacies.
• Document “reasonable assumptions” contemporaneously; align them with statutory text, CMS rulemaking, and the MDRP agreement.
• Ensure executive certifiers are briefed on the legal bases for AMP treatments; consider formalized “advice of counsel” procedures where novel issues arise.
• Engage CMS transparently through recognized channels (meetings, calls, formal inquiries). Do not rely on assumption letters CMS has disclaimed reviewing.
• Anticipate that “government knowledge” defenses will be closely scrutinized: explicit approval or collaborative engagement matters; silence and continued payment are not dispositive.
• Preserve litigation positions on penalty counting with precise, consistent objections at motions in limine and charge conferences; identify whether each line item or each submission is the unit of violation under §§ 3729(a)(1)(A) and (B).

What the Court Did Not Decide

• Whether each quarterly AMP line item constitutes a separate FCA violation (as a “record or statement”) versus one violation per quarterly submission; the issue remains open in the Seventh Circuit.
• Whether government knowledge always negates materiality; the court reaffirmed a holistic analysis and declined any categorical rule.
• Any safe harbor based on CMS’s 2012 audit outcome; the audit’s generic “generally consistent” language did not address clawbacks, and the scienter/materiality conclusions did not hinge on it.
• Broader questions about monthly AMPs (irrelevant to rebate liability) or the treatment of other classes of trade beyond retail pharmacies.

Conclusion

This opinion cements a straightforward, economically coherent rule for AMP in the Seventh Circuit: price realized means price paid. When a manufacturer recovers value from post‑sale price increases as inventory moves through wholesalers to pharmacies, that recovered value must be included in AMP. Attempts to disguise price appreciation as “service fees” will fail where the increases are passed downstream and funds flow back to the manufacturer to true up the acquisition price.

On the FCA front, the court draws a crisp line between falsity (objective, text‑driven) and scienter (subjective, SuperValu‑guided), and it endorses the statutory materiality instruction without importing all Escobar factors. The verdict stands because Lilly’s approach contradicted the law’s text and purpose, the evidence permitted a finding of at least reckless disregard, and the misstatements bore directly on core financial terms of a cost‑sharing program.

Beyond this case, the ruling advances MDRP integrity, warns against over‑lawyered strategies untethered from statutory purpose, and offers a practical roadmap for FCA litigation and compliance. It also flags unresolved penalty‑counting issues for future cases. For industry actors, the message is unambiguous: document assumptions, align them with the statute and CMS rules, ensure executive‑level understanding, and report AMPs that reflect the full economic value received.