In the wake of the Yates memo eighteen months ago, DOJ offered an early signal that its commitment to focus more on individual accountability would have bite: alongside a $125 million settlement with Warner Chilcott, DOJ also indicted the former president of the company’s pharmaceutical division for conspiring to violate the Anti-Kickback Statute (discussed here). Since then, the government suffered a speedy loss at his trial, and DOJ’s focus on individuals has not always been so overt. However, two recent settlements highlight the imprint of the Yates memo, and in particular, a new trend of DOJ holding owners of closely held companies personally liable for FCA settlements.
In a recent opinion, the Third Circuit provided new guidance on the application of Escobar’s ”heightened” materiality standard to cases involving healthcare entities. The relator in United States ex rel. Petratos v. Genentech, No. 15-3805 (3d Cir. May 1, 2017) alleged that a pharmaceutical manufacturer ignored safety information about one of its drugs and potentially violated FDA’s adverse event reporting requirements. As a result, the relator contended, physicians submitted Medicare claims for prescriptions that were not “reasonable and necessary.” The Third Circuit concluded that the relator did not meet the “high standard” for pleading materiality post-Escobar because he failed to plead that CMS, the federal agency to which Medicare claims for the drug were submitted, consistently refuses to pay claims like those alleged (and indeed “essentially concedes that CMS would consistently reimburse these claims with full knowledge of the purported noncompliance”). Moreover, the court noted, not only had FDA not taken any enforcement action, but it had actually approved multiple new indications for the drug at issue. The court also observed that DOJ “has taken no action against Genentech and declined to intervene in this suit.” (more…)
Courts have focused their attention post-Escobar primarily on whether plaintiffs have met the heightened standard for pleading the violation of a material statute, regulation, or contractual requirement. Under the implied certification theory claims must also still be false, yet the Supreme Court in Escobar provided less guidance as to the contours of falsity. The Fourth Circuit recently advanced a broad definition that permits plaintiffs to avoid pointing to any specific misrepresentations. See United States ex rel. Badr v. Triple Canopy, Inc., No. 13-2190 (4th Cir. May 16, 2017).
In a variety of matters, DOJ and relators have attempted to base claims under the FCA on alleged violations of the FDCA or FDA regulations, by arguing that such violations constitute “fraud on the FDA,” and that the resulting claims for payment to other agencies for associated products are false. As we have discussed (here, here, and here), so far plaintiffs have had little success with this theory, including in the First and Fourth Circuit Courts of Appeal. Last week, a panel of the Ninth Circuit heard oral arguments in United States ex rel. Campie v. Gilead Sciences, Inc., and the government and the plaintiff’s bar no doubt have pinned their hopes on that court reversing the trend.
The question of when an overpayment becomes “identified” for purposes of False Claims Act liability has generated significant uncertainty, and one district court just added more fodder for debate. See UnitedHealthcare Ins. Co. v. Price, No. 16-cv-157 (D.D.C. Mar. 31, 2017). The Affordable Care Act (“ACA”) requires persons to report and return overpayments from Medicare or Medicaid within 60 days of identification, and the failure to do so can trigger FCA liability. The ACA delegated to CMS the task of defining when an entity has “identified” an overpayment. CMS promulgated two rules (in May 2014 for Medicare Advantage (“MA”) plans and Part D Sponsors and in February 2016 for Medicare Part A/B providers), which equate “identification” to circumstances in which a person “has, or should have through the exercise of reasonable diligence, determined that the person has received an overpayment.” The “should have identified” standard generated concerns that CMS was using a simple negligence standard. The FCA, however, requires proof of at least “reckless disregard,” which courts have equated to gross (not merely simple) negligence.
As we previously discussed here, the government’s continued payment despite knowledge of contractual or regulatory noncompliance has become a powerful defense argument post-Escobar. The Fourth Circuit recently affirmed summary judgment in favor of government contractors after they obtained declarations from responsible government officials that undercut the relator’s theories of liability. See United States ex rel. Searle v. DRS C3 & Aviation Co., No. 15-2442 (4th Cir. Feb. 23, 2017).
The extent to which statistical sampling can be used to establish FCA liability remains a hotly disputed topic among federal courts. In a closely watched case, the Fourth Circuit last week declined to become the first circuit court directly to address the issue. See United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 15-2145 (4th Cir. Feb. 14, 2017).
Historical government payment practices have gained new importance following the Supreme Court’s guidance in Escobar that such practices can preclude a finding that regulatory compliance was material to the payment of an allegedly false claim. Evidence regarding the government’s prior knowledge of regulatory violations and continued payment can also bear on the mens rea element of an FCA claim. Perhaps not surprisingly in light of the importance of this evidence, DOJ recently tried—unsuccessfully—to block a defendant’s efforts to discover information relating to historical payment determinations by CMS Medicare Administrative Contractors (“MACs”). See United States ex rel. Ribik v. HCR ManorCare, Inc., No. 09-cv-13 (E.D. Va. Feb. 3, 2017).
In a recent opinion, the First Circuit significantly constrained the scope of the fraud-on-the-FDA theory of liability, which posits that had the FDA known of the defendant’s alleged violation of the Food, Drug, and Cosmetic Act (“FDCA”), it would not have approved the defendant’s product, such that no claims for that product would have been covered by federal healthcare programs. See United States ex rel. D’Agostino v. ev3, Inc., No. 16-1126 (1st Cir. Dec. 23, 2016). The court imposed a rigorous causation standard on fraud-on-the-FDA claims, requiring relators to show that FDA took “official action” after discovering that a manufacturer had submitted fraudulent information to the agency. This standard mirrors the new materiality standard set forth by the Supreme Court in Escobar, in that both require relators to ground their allegations in how the government reacted to learning of the alleged fraud.
As we reported here, in its ruling in Universal Health Services, Inc. v. United States ex rel. Escobar last June, the Supreme Court affirmed the viability of the implied certification theory of liability under the FCA, but remanded the case to the First Circuit to apply the Court’s newly-articulated framework for analysis of such claims. Last week, the First Circuit ruled that even under the Supreme Court’s demanding test for liability, the relators still stated a cognizable implied certification claim, and therefore reversed the district court’s dismissal of the relators’ complaint. Critical to the First Circuit’s ruling was its view that evidence of the government’s payment practices when faced with similar alleged violations are less important to the analysis than the court’s assessment of the centrality of a regulation to the contractual relationship between the government and the defendant.