Last week, the U.S. Securities and Exchange Commission reached at $265,000 settlement with BlueLinx Holdings Inc. The SEC alleged that BlueLinx violated federal securities law by using severance agreements that required outgoing employees to waive their rights to SEC whistleblower awards. As we previously reported here, the SEC has taken action against other employment agreements that arguably impair whistleblowing activity in the past.
In a recent opinion by Judge Wilkins, the D.C. Circuit affirmed the dismissal of a qui tam action against Phillip Morris, United States ex rel Oliver v. Phillip Morris USA, Inc., No. 15-7049 (D.C. Cir. June 21, 2016), with two key holdings that will help FCA defendants in future cases. Specifically, the Court adopted an expansive reading of the FCA’s public disclosure bar and a stringent “original source” requirement.
Pressure continues to build for the Department of Justice to hold corporate executives criminally responsible for corporate misconduct. As previously discussed here and here, Deputy Attorney General Sally Yates recently announced new guidance that the DOJ will focus increasingly on prosecuting high level executives for corporate wrongdoing. Two United States Senators, Richard Blumenthal (D-Connecticut) and Robert Casey (D-Pennsylvania), have also taken up this cause, and have introduced the “Hide No Harm Act of 2015.” The Hide No Harm Act, if passed, would make it a crime for “any responsible corporate officer” with “actual knowledge of a serious danger associated with” any covered product, service, or business practice not to “verbally inform an appropriate Federal agency” within 24 hours and not to warn possibly affected individuals “as soon as practical.” The failure to do so would be punishable by up to five years in prison.
One of the key components of the proposed bill is an anti-retaliation provision that prohibits companies from taking adverse employment action against any employee that “informed a Federal agency, warned employees, or informed other individuals of a serious danger of a covered product.” This provision provides broad protection for whistleblowers in this context.
We will closely monitor the progress of this bill and provide updates as they become available.
Posted by Jonathan Cohn, Paul Ray and Ben Mundel
A recent decision by a federal district court highlights some of the dangers of qui tam suits under the False Claims Act brought by a company against one of its competitors capitalizing on a patent dispute victory.
Needless to say, qui tam suits are typically brought by former officers or employees of a defendant corporation, because these persons are most likely to have access to the type of non-public information generally necessary for a successful qui tam action. See 31 U.S.C. § 3730(e)(4). But, in Amphastar Pharmaceuticals Inc. v. Aventis Pharma SA, EDVC-09-0023 MJG (C.D. Cal.), one pharmaceutical company has brought a qui tam action against one of its competitors. Amphastar, a drug manufacturer, is suing competitor Sanofi (formerly Aventis), alleging that Sanofi fraudulently inflated the price of one of its drugs (Lovenox) over which Sanofi claimed (ultimately unenforceable, as determined in litigation with Amphastar) patent rights and thus overcharged the federal government, as well as several state governments, for the drug. The case is important, because it could mark a new species of False Claims Act case involving corporate qui tam plaintiffs suing their competitors after prevailing in prior patent litigation.
The United States District Court for the Central District of California denied Sanofi’s motion to dismiss Amphastar’s amended complaint on April 19. (Coverage of an earlier order dismissing Amphastar’s original complaint with leave to replead can be found here.) Under Ninth Circuit precedent, the submission of false claims is often pleaded by describing representative examples of particular false claims that have been submitted. Because Amphastar is a competitor of Sanofi rather than a former officer or employee of the company, it did not have ready access to Sanofi’s internal information that might have helped Amphastar detail particular false claims in its complaint. Instead, it pleaded more broadly that Sanofi held the exclusive right to sell Lovenox, that as a result of its fraudulently obtained patent, Sanofi was able to inflate Lovenox’s price, and that the federal government bought certain quantities of Lovenox from Sanofi or its distributors. Sanofi argued that Amphastar’s complaint failed to plead with the particularity required by Federal Rule of Civil Procedure 9(b) that Sanofi had submitted false claims for Lovenox, as necessary for a claim under the False Claims Act. See 31 U.S.C. § 3729(a).
The court disagreed. It acknowledged that “Amphastar has not provided a detailed account of Aventis’s claims submission process, nor specifics regarding how government reimbursement programs work, both of which could be helpful to evaluate the presence of reliable indicia of claims submission.” Nevertheless, it concluded that “[s]uch detail … is not necessary,” because Amphastar “present[ed] a plausible contention that every claim for reimbursement at the inflated price was an actionable false claim.” Accordingly, the court found that Amphastar had pleaded its qui tam claim with adequate particularity under Rule 9(b), and denied Sanofi’s motion to dismiss.
This is an important case that may unfortunately increase the scope of FCA liability. The theory of liability in this case is novel and raises serious risks for pharmaceutical companies. Claims of fraud are a staple in patent litigation. If FCA liability can be predicated on the invalidation of the underlying patents of branded drugs after those patents have been invalidated by competitors on grounds of fraud, then pharmaceutical companies may face new and substantial FCA liability as a consequence of being defeated in patent litigation.
Posted by Jonathan Cohn and Benjamin Mundel
On Monday, the United States Supreme Court granted certiorari in Lawson v. FMR LLC, No. 12-3 (certiorari granted May 20, 2013). The issue presented is whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A. The statute prohibits retaliation by a public company—or an officer, employee, contractor, subcontractor, or agent of a public company—against “an employee” who reports fraud or a violation of securities regulations. This is an important case that may interpret the scope of Sarbanes-Oxley’s whistleblower protection provisions.
The two plaintiffs, former employees of subsidiaries of publicly traded Fidelity mutual funds, brought suit in federal district court after allegedly suffering adverse employment action as a result of their whistleblowing. The first plaintiff allegedly blew the whistle on the fund for improperly attributing expenses to increase fees. The second plaintiff raised an issue regarding the categorization of a particular fund which he alleged led to the fund improperly charging a management fee. Fidelity filed a motion to dismiss on the grounds that the plaintiffs, who were not employees of a publicly traded company, were not “employees” within the meaning of statute. The district court denied Fidelity’s motion to dismiss. Relying on legislative history, the district court held that the statute protected employees of contractors. Fidelity filed an interlocutory appeal.
The First Circuit reversed in a 2-1 decision, holding that the term “employee” in the statute covers only those at publicly traded companies. The panel refused to grant any deference to the Department of Labor and SEC’s position and instead relied on the title of the statute and caption that reads: “employees of publicly traded companies.”
Before granting certiorari, the Supreme Court first called for the views of the Solicitor General. On behalf of the United States, the Solicitor General asked the court to deny certiorari even though he believed that the First Circuit’s interpretation was erroneous. As to the merits, the Solicitor General argued that the plaintiffs were covered under the plain terms of the act and the legislative history supported a broad reading. Furthermore, the Solicitor General argued that, if the statute were vague, the Department of Labor’s decision in Spinner v. David Landau & Assocs., LLC, ARB Case NOS. 10-111; 10-115 was entitled to Chevron deference. Regardless, the Solicitor General concluded that certiorari was not appropriate at this time because there was no disagreement in the circuits on the question, the issue has arisen infrequently, and no circuit had the opportunity to consider the Department of Labor’s recent Spinner decision.
Nevertheless the Supreme Court granted certiorari and will hear the case next term. This case will likely resolve the disagreement between the First Circuit and the Department of Labor regarding the scope of the term “employee” under Section 806 of the Sarbanes-Oxley Act. If the Supreme Court reverses the First Circuit, there may be increased exposure for companies because employees of privately held companies that contract with public companies will be entitled to whistleblower protections under SOX.