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Litigator of the Week: Eli Lilly Turns to Kirkland’s O’Quinn to Block New Dispute Resolution Procedure Over Drug Discount Program

Kirkland partner John O'Quinn earned the title of The Am Law Litigation Daily's "Litigator of the Week" for his win on behalf of client Eli Lilly. A federal judge in Indianapolis granted O’Quinn’s motion for a preliminary injunction finding that the government’s messaging about the new program to resolve disputes over the 340B drug pricing program were “ambiguous, confusing, duplicitous, and misleading."

Our Litigator of the Week this week is John O’Quinn of Kirkland & Ellis. On Tuesday, O’Quinn secured a preliminary injunction for Eli Lilly barring the U.S. Department of Health & Human Services from implementing a new “administrative dispute resolution” procedure to decide disputes between pharmaceutical companies and so-called “covered entities” under the 340B Drug Pricing Program.

The 340B program has been the source of considerable controversy of late. The program forces drug makers to offer steep discounts to certain health care providers that serve low-income, at-risk patients, in order to participate in Medicare and Medicaid. Pharmaceutical companies, however, contend that for-profit pharmacies have acted as middlemen in the program and pocketed billions in discounts meant for low-income consumers.

Last year, Lilly decided to limit the number of pharmacies it would treat as “covered entities” under the program, leading to an initial wave of lawsuits. In response, HHS issued several new rules, including reviving a previously sidelined proposal for an “administrative dispute resolution” procedure where providers could directly challenge the drug makers’ decisions. On Tuesday, U.S. District Judge Sarah Evans Barker in Indianapolis found that the government’s messaging concerning the ADR program “was ambiguous, confusing, duplicitous, and misleading—the antithesis of fair notice under the [Administrative Procedures Act.]”

Litigation Daily: Who is your client and what was at stake?  

John O’Quinn: Our client is Eli Lilly, one of the leading pharmaceutical manufacturers in the world. What was at stake was Lilly’s ability (and, indeed, most manufacturers’ ability) to get a fair hearing in a fair forum.  The government had adopted an “administrative dispute resolution” procedure in which the HHS would adjudicate certain disputes between pharmaceutical manufacturers and so-called “covered entities” under the 340B program. But those procedures are decidedly one-sided, constitutionally flawed, and were improperly adopted. The procedures stacked the deck, while giving “ADR” panels the power to decide claims with hundreds of millions of dollars at stake.

Who all was on your team and how did you divvy up the work?  

Andrew Kassof and I put together a fantastic team that worked seamlessly across offices. Matt Owen and Matthew Rowen, incredibly talented young partners who each clerked for multiple jurists, helped lead the work in the PI briefing, with tremendous support from associates in both DC and Chicago, including Evelyn Blacklock, Grace Brier, Andrea Butler, Christian Daniel, Patrick Weeks, and Laura Wolk. And that team also worked with trial litigators like Diana Watral and Karl Stampfl to build out the factual points in our complaint. It was a real team effort.

What were Eli Lilly’s problems with how these administrative dispute resolution proceedings were set to be structured?  

Where to begin? HHS’s ADR rule creates an adjudicatory system that is, respectfully, the worst of all worlds–it is neither impartial nor politically accountable. The decision-makers are not neutral deciders like ALJs (much less Article III judges), and they certainly weren’t appointed in the way required for officials who exercise the kind of power that they have been given. Some of these flaws may be the product of hurried decision-making by a sun-setting Administration that rushed to force something out the door. In the process, they relied on a long-outdated rulemaking proceeding that they had expressly abandoned years earlier, but then tried to resurrect at the eleventh hour.

Other companies and industry groups also filed suits challenging these new procedures, but only Lilly sought a preliminary injunction claiming the ADR process violated the Administrative Procedure Act. Why did your client decide to go that route?   

The constitutional issues here are unquestionably really important, but when Matt, Mathew, and I were framing out the arguments, we kept coming back to just how irregular it was for an agency to issue a final rule the way HHS did in this case. It seems pretty clear that the previous Administration had no intention of issuing an ADR rule—they told the world it had been withdrawn, and they told the press they didn’t think HHS had the authority that would be needed to do these kinds of adjudications. But then, when someone else sued the government for failing to set up an ADR adjudicatory system, rather than follow the proper procedures by proposing a new rule and soliciting notice and comment on that, they acted like the proposal had never been withdrawn while jamming through a new rule that was markedly different. The argument also provided a path that did not require deciding the constitutional issues now, instead giving HHS the opportunity to go back and re-do this the right way while (hopefully) addressing the serious constitutional concerns we raised.

How did Judge Barker handle the injunction hearing and what did you glean from arguments?  

This was the first in-person hearing I had been at in almost a year—and it was great to be back in court. Judge Barker and her staff did a fantastic job of making sure the courtroom was set up for us to be able to be there safely, and also provided the option to participate via Zoom, which DOJ did. That was very thoughtful and accommodating. As for the hearing itself, which lasted over two-and-a-half hours, Judge Barker was meticulously prepared. It was not only clear that she had read everything the parties had submitted, but had also done a deep dive into the underlying materials both sides cited.

Judge Barker wrote that “the agency’s message regarding the ongoing rulemaking related to the ADR Rule was ambiguous, confusing, duplicitous, and misleading.” How so?  

I don’t want to speculate about the court’s reasoning, but to me the way the agency went about this rulemaking felt like an unfair surprise. The agency sat on this for over six years before even issuing a proposal in 2016. And then it said it was withdrawing that proposal from consideration in 2017. But then it turned around and promulgated a final rule in December 2020 without any additional opportunity to comment on it. And the agency’s explanation for what it had done simply didn’t match up with the timeline. The whole process was highly irregular, from beginning to end. When the government says it’s withdrawing a proposed rule, the public should be able to rely on that.

Do you have an idea of how many agency proceedings against Lilly and its competitors this ruling puts a halt to? And what potential impact will this decision have on other pending litigation concerning the drugmakers’ decisions to cut off 340B discounts to contract pharmacies?  

There are several pending ADR proceedings against a number of manufacturers, brought by entities that purportedly represent over three hundred separate covered entities. It remains to be seen what effect this decision will have in other pending litigation.

What’s next in this particular case?  

This was obviously a preliminary injunction, and so for us the next step is to ask the court to decide the merits—and not just on the ADR rule, but also on the contract pharmacy issue itself. A key question that remains is whether 340B discounts must be offered by drug manufacturers to all off-site (and for-profit) pharmacies contracting with the covered entities, which has far-reaching implications, because the number of such pharmacies has exponentially proliferated in recent years, but discounts are not being passed along to the patients that the program was ultimately intended to benefit. Everyone with an interest here should want to have that issue decided promptly by the courts.

What will you remember most about this matter?  

The seamless partnership between the phenomenal internal legal team at Lilly and the Kirkland litigation team. We have worked together like clockwork (and around the clock) over many months in this and related cases. It was particularly exciting to be able to see our client team in person at the courthouse three weeks ago. For all of us it had been a year since we had been in a courtroom, and it was great to finally be able to be there again, working together on this important matter.