Posted by Jaime Jones and Jessica Rothenberg
On February 21, 2014, the Fourth Circuit upheld the dismissal of a former employee’s False Claims Act suit against Omnicare, Inc. (“Omnicare”), holding that while the relator alleged violations of certain Food and Drug Administration (“FDA”) regulations by Omnicare’s subsidiary, Heartland Repack, his failure “to allege that the defendants made a false statement or that they acted with the necessary scienter” was fatal to his claim. Relator Barry Rostholder alleged that Heartland Repack violated drug GMP regulations that require penicillin and non-penicillin drugs be packaged in isolation from each other so as to avoid cross-contamination, by repackaging penicillin in facilities also used for non-penicillin drug packaging operations. In his suit, which was first filed in 2007, Rostholder alleged that as a result of this violation, the drugs were adulterated and ineligible for Medicare or Medicaid reimbursement, and that any claims presented to the government for reimbursement were false under the FCA. The government declined to intervene in 2009. The district court granted Omnicare’s motion to dismiss and denied relator’s request to file an amended complaint.
The Fourth Circuit held that whatever Rostholder had alleged, he had not identified any false statement or other fraudulent misrepresentation made by Heartland Repack to the government, as required under the FCA. The court first held that a drug must be merely FDA-approved to qualify for reimbursement, and that the Medicare and Medicaid statutes do not prohibit reimbursement for adulterated drugs and do not require compliance with FDA safety regulations as a precondition to reimbursement. Therefore, “the submission of a reimbursement request for [an FDA-approved] drug cannot constitute a ‘false’ claim under the FCA on the sole basis that the drug has been adulterated . . . in violation of FDA safety regulations.” Because Rostholder failed to plead the existence of any false statement or fraudulent course of conduct, his FCA claims failed. The court summarily dismissed Rostholder’s attempt to proceed under implied certification or worthless services theories of FCA liability. Holding that any amendment would be futile in light of its holding, the Fourth Circuit also upheld the lower court’s decision to deny Rostholder leave to file a third amended complaint.
In arriving at its decision, the Fourth Circuit declined to sanction the use of the False Claims Act as a tool to ensure regulatory compliance, particularly where an agency such as the FDA has the power to enforce its own regulations. As Judge Barbara Milano Keenan, writing for the panel, noted, “[T]he correction of regulatory problems is a worthy goal, but is ‘not actionable under the FCA in the absence of actual fraudulent conduct.'” This case is significant in particular in light of numerous recent statements by various government lawyers signaling DOJ’s intent to pursue FCA actions based on GMP violations, and is sure to be frequently cited in defense of such claims.