District Court Awards Pharmacy Servicer Attorney’s Fees in “Clearly Frivolous” FCA Suit Based on “Obvious Misreading” of Contracts Between Servicer and its Clients

Posted by Kristin Graham Koehler and Brian P. Morrissey

A federal district court in the Southern District of New York has ordered a qui tam relator to pay attorneys fees to a pharmacy servicer that it accused of defrauding the Medicare program based on a legal theory that had “no reasonable chance of success.” United States ex rel. Fox, Rx, Inc. v. Omnicare, Inc., No. 12-cv-275, 2104 WL 6750277, *4 (S.D.N.Y. Dec. 1, 2014).

Fox Rx, Inc., a sponsor of Medicare Part D prescription drug programs, filed a qui tam action against several pharmacies that provide services to long-term care facilities, and MHA Long Term Care Network (“MHA”), a servicer that contracted with the pharmacies to negotiate reimbursement rates on their behalf and to manage Medicare Part D claims. Id. at *1. Fox alleged that the defendants violated the federal FCA by (1) failing to “substitute generic drugs for brand-name drugs” in states that require such substitution, and by (2) dispensing drugs “after the termination of their national drug codes” in states that prohibit a drug from being dispensed after its “shelf-life expiration date[].” Id. at *1. The Government declined to intervene.

The District Court dismissed the action as to all defendants. United States ex rel. Fox Rx, Inc. v. Omnicare, Inc., No. 12-cv-275, 2014 WL 3928780 (S.D.N.Y. Aug. 12, 2014). After securing that dismissal, MHA, the pharmacy servicer, moved for attorneys fees and costs pursuant to 31 U.S.C. § 3730(d)(4), which authorizes a district court to grant such an award against a qui tam relator if it concludes that the relator’s claim was “clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.”

MHA argued that Fox’s claims against it were “clearly frivolous” because MHA is not a pharmacy, and thus could not have participated in the fraud Fox alleged. As MHA explained, it “does not fill prescriptions,” “does not itself dispense drugs,” and “exercises no control or supervision” over the dispensing practices of its pharmacy clients. Id. at *1–*3.

Fox countered that MHA was nonetheless liable for the pharmacies’ allegedly fraudulent conduct. On behalf of the pharmacies, MHA had entered into contracts with pharmacy benefits managers, who provide claim adjudication services to the pharmacies and submit claims to Medicare and Medicaid for payment. In those contracts, Fox alleged that MHA had agreed to “supervise and ensure” compliance with “with all applicable laws.” Id. *3. In dismissing Fox’s complaint, the District Court rejected that interpretation of the contracts, holding that only the pharmacies had undertaken those duties, not MHA. Id. at *2. In its order granting attorney’s fees, the District Court held that Fox’s misreading of the contract was so “obvious” as to render its allegations against MHA “clearly frivolous.” Id. *4.

Highly relevant to the District Court’s conclusion was the fact that MHA met with Fox before Fox filed the operative complaint in the case. In that meeting, MHA presented Fox with a PowerPoint presentation and supporting documentation demonstrating that Fox’s interpretation of the contracts and its allegations against MHA were untenable. It also provided Fox with a draft motion for sanctions that MHA planned to file if Fox did not withdraw its allegations against the servicer. Id. at *3. But, “[i]nstead of dropping MHA from this action following the January 10, 2014 meeting, Fox concocted a theory of liability . . . based wholly on an obvious misreading of the [contracts].” Id. at *3–*4.

The District Court thus granted MHA’s motion for attorney’s fees and costs incurred since that meeting with Fox. (MHA requested a total of $140,000 in expenses. The Court directed MHA to supply additional supporting evidence of those expenses before deciding the amount of the award.)

The case serves as a reminder that a relator’s objectively unreasonable legal argument—such as an implausible interpretation of a contract—may serve as the basis for an attorney’s fees award in an FCA case. In addition, the case illustrates that, in appropriate circumstances, FCA defendants can be well served by meeting with a relator in advance of litigation in an effort to explain why the relator’s legal theory is not viable, and by documenting all such meetings. Even if the meetings do not result in the resolution of the case, they may support a defendant’s future claim for attorney’s fees, if the relator’s action is later dismissed and can fairly be characterized as “frivolous.”