Court Recommends Dismissal of FCA Claims Against Pharmacy and Private Equity Fund, But Provides Insight Into When Funds May Be Held Responsible For Conduct of Portfolio Companies

As we previously reported, the government has intervened in a qui tam suit against a compounding pharmacy and its private equity fund owner alleging the pharmacy filed claims with Tricare that were rendered false by kickbacks allegedly paid to marketing companies in exchange for patient referrals and directly to patients in the form of co-pay waivers.  The government alleged the pharmacy executed a provider agreement with Tricare’s contracted pharmacy benefits manager in which it agreed to be bound by fraud waste and abuse laws and the provider manual, which also required compliance with the Anti-Kickback Statute and other laws.  Defendants moved to dismiss and on November 30, the Magistrate Judge filed an opinion recommending the FCA claims be dismissed.  U.S. ex rel. Medrano v. Diabetic Care Rx, LLC, Case No. 15-62617-CIV-BLOOM, S.D.Fl.

The Magistrate’s opinion concludes the government adequately has alleged the submission of “legally false” claims before turning to analyze whether it states a claim under the express or implied certification theories of liability.  As to the former, the Magistrate noted that the allegedly false certifications in the provider agreement were made two years before any of the claims at issue were submitted by the pharmacy, and that the government’s complaint failed to allege any false express certification of compliance with the AKS “as part of the claims submission process.”

As to the implied certification theory, the Magistrate similarly found the government’s complaint deficient.  Citing Escobar, the opinion notes an implied certification claim must be supported by allegations that the claim contains “specific representations about the goods or services provided” and of the defendant’s failure to “disclose noncompliance with material statutory, regulatory, or contractual requirements.”  The opinion concludes the government failed to satisfy the first prong by including general descriptions of “representative claims,” but failing to allege the “specific representations” regarding claims for reimbursement made by defendants.  The Magistrate went on, however, to conclude that the Complaint had adequately alleged materiality, in satisfaction of the second prong of the Escobar standard.  Specifically, the opinion cites the government’s allegations that the pharmacy was required to sign a provider agreement that required it to comply with applicable laws in order to receive reimbursements and that the provider manual provided that the agreement would be terminated for failing to comply with the AKS as sufficient “at this stage of the proceedings” to allege materiality.

In the most notable part of the opinion, the Magistrate also analyzed the arguments raised by the pharmacy’s private equity investor that the government failed adequately to allege that it “knew of, directed, or profited from” the alleged fraud.  On this front the Magistrate “split the baby.”  The opinion concludes that an allegation the fund communicated to a pharmacy manager that “routine copayment waivers could violate the AKS” – without more – is insufficient to establish the fund’s intent to violate the FCA.  However, the opinion cites allegations that the fund received legal advice that “paying commissions to marketers could violate the AKS,” that the fund “approved” of the pharmacy’s decision to “use marketers to generate referrals,” knew of the commissions paid to the marketers, and funded commissions paid to marketers as adequate to allege the fund’s knowledge of the submission of false claims.  On this same basis, the Magistrate concluded the Complaint adequately alleged the fund had caused the submission of the claims rendered false by the alleged marketer kickback scheme.  The opinion thus provides further guidance as to the circumstances under which a private equity fund investor may incur False Claims Act liability as a result of its active involvement in a portfolio healthcare company that submits allegedly false claims.

While the Magistrate recommends the FCA claims be dismissed due to the government’s failure adequately to plead a false certification, the recommendation is that the government be granted leave to amend.  Assuming the district court adopts the recommendation the government may be able to cure the pleading deficiencies by pleading additional certifications and details of the claims submitted by the pharmacy.  If that occurs, the Magistrate would allow the case to proceed to discovery against both the pharmacy and the private equity fund investor, in a first-of-its-kind suit.  We will continue to monitor the case for developments.