By

Jaime L.M. Jones

26 June 2014

Fourth Circuit Dismisses Case Despite Applying Narrow Interpretation of Public Disclosure Bar

Posted by Jaime Jones and Catherine Kim

In a June 23, 2014 opinion, the Fourth Circuit affirmed the dismissal of qui tam claims against suppliers of the National Center for Employment of the Disabled (“NCED”) and the National Industries for the Severely Handicapped (“NISH”) under the FCA’s public disclosure bar, as well as the relator’s failure to satisfy the relevant pleading requirements.

The relator initially filed this qui tam suit on June 20, 2006, alleging that NCED engaged in various schemes to defraud the government, primarily by receiving payments under the Javits-Wagner-O’Day Act (“JWOD”) program despite failing to comply with JWOD regulations. Prior to the filing, however, various newspapers published articles discussing NCED’s lack of compliance with JWOD program requirements. A criminal investigation followed and in 2010, a jury convicted NCED’s former CEO of making false statements and conspiracy to defraud the government.

In light of such events, NISH and the supplier defendants filed motions to dismiss, asserting that the district court lacked subject matter jurisdiction pursuant to the public disclosure bar and that the relator’s first amended complaint suffered from various pleading defects. The district court granted the defendants’ motions, and the relator appealed.

In reviewing the district court’s decision, the Fourth Circuit adopted an interpretation of the FCA’s public disclosure provision that “stands in contrast to the broader tests applied by our sister circuits[.]” Specifically, while other circuits generally assess whether the allegations are “supported by” or “substantially similar” to fraud that has already been publicly disclosed, the Fourth Circuit asked whether the relator’s allegations were “actually derived from the public disclosure itself.”

With respect to the claims against NISH and three supplier defendants, the court held that the district court lacked subject matter jurisdiction over such claims because the relator had apparently relied on and even cited to information appearing in public disclosures and had not demonstrated “direct and independent knowledge” of the alleged fraud. Although the court concluded that the relator was an original source with respect to the claims against Weyerhaeuser Co., it nonetheless dismissed such claims as well due to various pleading defects.

The Fourth Circuit’s narrower reading of the public disclosure provision could present challenges to FCA defendants, depending on how lower courts ultimately apply the “derived from” standard adopted in this case. While it is unclear which interpretation of the public disclosure bar will ultimately prevail among the circuit courts, we will continue to monitor this issue and provide updates on any new developments.

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12 June 2014

Court Holds that Pharmacy Cannot Be Liable Under the FCA for Filling “Off-Label” Prescriptions

Posted by Jaime Jones and Catherine Starks

A federal district court in Georgia recently granted summary judgment in favor of Omnicare, Inc. in a qui tam suit asserting FCA liability against the specialty pharmacy for purportedly dispensing atypical antipsychotics for off-label uses and seeking Medicare Part D reimbursement for those prescriptions. United States ex rel. Fox Rx, Inc. v. Omnicare, Inc., No. 1:11-cv-962-WSD (N.D. Ga. May 23, 2014).

The relator, a Medicare Part D plan sponsor, alleged that Omnicare had actual or constructive knowledge that it was submitting “false” claims for off-label, non-reimbursable, uses because Omnicare’s consultant pharmacists regularly reviewed patient records and recorded diagnosis information in Omnicare’s computer system. In a previous post, we reported that this court earlier ruled that Part D does not cover off-label uses of drugs that are not for “medically accepted indications.” See http://fcablog.sidley.com/blog.aspx?entry=95&fromSearch=true. In ruling on the summary judgment motion, the court rejected the notion that there was evidence that Omnicare acted “knowingly” with respect to the off-label and non-reimbursable nature of the claims, finding that there was no proof that Omnicare’s dispensing pharmacists had actual knowledge of or even access to this patient diagnosis information. The court also held that even if the pharmacists had accessed the diagnosis information, there was still no evidence that they knew the diagnoses were not for medically-accepted indications, and thus not subject to reimbursement by Medicare. Moreover, the court held that there was no duty for Omnicare or its pharmacists to make this determination (such as by reviewing the label for FDA approval of the specific use or referring to Medicare Part D- recognized compendia to determine whether the use was supported and therefore properly reimbursable).

This case has important implications for specialty pharmacies and similarly situated parties that are implicated in cases alleging the submission of claims for off-label use of drugs, and supports the argument that dispensing pharmacists do not have a duty to evaluate whether a drug has been prescribed for an on-label or otherwise medically accepted indication prior to submitting a claim for reimbursement to the federal healthcare programs.

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31 March 2014

Supreme Court Denies Certiorari In Nathan

Posted by Jaime Jones and Nirav Shah

Today, the Supreme Court denied certiorari in U.S., ex rel. Nathan v. Takeda Pharmaceuticals, et al. As we previously reported, this case involved the pleading requirements for qui tam cases brought under the FCA. Earlier this month, the Solicitor General filed a brief urging the Court not to grant certiorari.

At issue is whether Rule 9(b) requires a complaint to “allege with particularity” that certain claims false claims were submitted for payment. Circuits are split on the issue, with the Fourth, Sixth, Eight, and Eleventh Circuits requiring stricter pleading while the First, Fifth, Seven, and Ninth adopting a more permissive approach. The Court’s denial of certiorari means that the Fourth Circuit’s ruling that the relator’s complaint “failed to plausibly allege that any false claims had been presented to the government for payment” will stand.

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06 March 2014

Solicitor General Weighs In On Pleading Requirements For FCA Cases

We previously reported on the Supreme Court’s invitation to the Solicitor General to weigh in on whether the Court should grant certiorari in an important case involving the pleading standards in FCA cases. U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., et al., Dkt. No. 12-1349 (Oct. 7, 2013). In a recent brief, the Solicitor General argued that since the issue of whether a relator must identify specific false claims in order to meet the pleading requirements of 9(b) is still being considered by various lower courts, the Court should decline to grant certiorari at this time.

The brief sheds light on the government’s view of the overarching role of 9(b) and the FCA. The government’s central position is that adoption of a per se rule that a relator must plead the details of particular false claims—rather than plead allegations supporting a “plausible inference” that false claims were submitted—could undercut the FCA’s role as a fraud-fighting tool. The Solicitor General argued that asking relators to identify specific claims is neither plausible or useful, conceding that many relators may not be aware of specific claims. Rather, the Solicitor General argued, the role of a relator is properly to “bring[] to light other information that shows those claims to be false.”

Thus, the government’s position appears to be 9(b) should be construed so as to aid the government’s fraud-fighting efforts. This approach is difficult to square with the longstanding view of 9(b) as a means to provide notice to defendants of potential fraud claims and prevent frivolous or vexatious litigation. We will continue to monitor this important case.

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26 February 2014

4th Circuit Affirms Dismissal of FCA Suit Premised on Alleged Violations of FDA GMP Regulations

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.

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24 February 2014

Losing Defendant in FCA Suit Accuses Relator’s Counsel and Relator of Conspiracy to Misappropriate Trade Secrets in Furtherance of Qui Tam Lawsuit

Posted by Jaime Jones and Catherine Starks

On February 10, 2014, following a recent jury finding that pipemaker J-M Manufacturing (“J-M”) was liable for damages in a False Claims Act suit initiated by former employee John Hendrix, J-M filed a complaint in the Superior Court of New Jersey, Middlesex County, alleging that the whistleblower and his counsel, Phillips & Cohen LLP (“P&C”), conspired to misappropriate confidential, proprietary, and trade secret information in furtherance of the qui tam lawsuit. The complaint specifically alleges that P&C repeatedly directed Hendrix to use his employee status to obtain information to support his FCA claims, in violation of his confidentiality agreement with J-M. According to the complaint, J-M did not discover the theft of the information until after the qui tam complaint was unsealed and the discovery process unfolded in 2013, more than five years after the qui tam complaint was filed. J-M alleges that P&C used the misappropriated information to develop Hendrix’s own lawsuit and to recruit additional whistleblowers. In doing so, J-M asserts that P&C exceeded its role as counsel “by actively directing and engaging in Hendrix’s illegal scheme to steal J-M’s confidential and proprietary information.” J-M alleges that this represents a “pattern of misconduct” by P&C, citing the 2012 decision in which P&C was disqualified and ordered to pay sanctions related to its acquisition of documents from IASIS Healthcare Corp., a defendant in another qui tam suit.

The issue of whistleblowers taking confidential business information and trade secrets in support of potential qui tam actions, and, increasingly, whistleblower counsel’s solicitation of such information, is one confronted by many FCA defendants. In recent years a number, like J-M, have sought damages and protections from such misappropriation. Several courts have been receptive to such claims, rejecting arguments from whistleblowers that the public policy served by the FCA justifies confidentiality and other breaches in gathering evidence of fraud. We will monitor the outcome of the J-M case, and provide an update as it is available.

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30 December 2013

Fourth Circuit Avoids Excessive Fines Clause By Allowing Relator To Select An Alternative FCA Penalty

As we previously reported, a federal court in Virginia last year held that the minimum statutory civil FCA penalties were unconstitutionally excessive in light of the facts before it, and refused to impose any penalties. U.S. ex rel. Bunk v. Birkard Globistics GMBH (E.D. Va. Feb. 14, 2012). On December 19, the Fourth Circuit reversed and remanded the district court’s decision to enter no penalties with an instruction to award the plaintiff $24 million – the amount relator Bunk previously had expressed a willingness to accept. United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., No. 12-1369, slip op. 30 (4th Cir. Dec. 19, 2013).

At trial, the jury found defendants liable under the FCA for conspiring with subcontractors to fix prices in advance of a bid for a government contract and submitting a false Certificate of Independent Pricing. The Relator did not seek damages, but only penalties based on the parties’ stipulation that the defendant had filed 9,136 invoices under the fraudulently obtained contract. While Relator proposed a $24 million civil penalty, the court calculated the mandatory minimum penalty as no less than $50,248,000 ($5,500 x 9,136). The court determined that this penalty violated the Excessive Fines Clause of the Eighth Amendment in light of the relator’s failure to establish that the defendant’s fraud caused any economic harm to the government. As such, the district court concluded “that [it] must simply refuse to enforce the mandated penalty . . . and not substitute its own fashioned penalty.”

The Fourth Circuit reversed, rejecting the district court’s determination that it was unable to craft an alternative penalty. The court held that the government – or a relator standing in the government’s shoes – has “unbounded” discretion to pursue a lesser judgment than that to which it may be entitled and, by exercising that discretion, may avoid the application of the Excessive Fines Clause. In reaching this conclusion, the court noted that the dilemma under the Excessive Fines Clause was the result of the court’s own precedent construing the FCA penalty provisions broadly to impose penalties on each false or fraudulent claim submitted, rather than narrowly to attach only to an underlying fraud. By concluding that a relator may simply select an alternative penalty without regard to the FCA’s requirements, the Fourth Circuit avoided the Constitutional dilemma created by the law’s draconian penalty provisions and the court’s precedent. The court then concluded – without analysis – that the alternative penalty proposed by the relator was not unconstitutionally excessive in light of the “gravity” of defendant’s misconduct and the “necessary and appropriate deterrent effect” served by the FCA’s penalties provision.

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24 October 2013

Recent Report Finds That The Government Significantly Underestimates the Benefits of its Health Care Fraud Recoveries

Posted by Jaime JonesDonielle McCutcheon and Brenna Jenny

The Taxpayers Against Fraud (“TAF”) Education Fund recently reported that the Department of Justice’s (“DOJ’s”) False Claims Act data dramatically underestimates the amount of money actually recovered to the government. In fact, according to TAF, the federal government’s return on investment (“ROI”) related to federal FCA enforcement from fiscal years 2008 through 2012 exceeds 20:1, up significantly from the 16:1 ROI calculated by DOJ. TAF explains that this discrepancy is due to the fact that DOJ’s figures do not include criminal fines associated with federal FCA recoveries or any state FCA recoveries, which together account for almost an additional $9 billion above the approximately $9.4 billion figure attributable to civil net recoveries during the 2008-2012 period. In light of this, TAF views the DOJ as significantly underestimating the benefits of its own investment in health care fraud enforcement.

Other notable statistics cited in the TAF report include the following:

  • From 1987 to 1992, a total of 62 new health care qui tam matters were filed, while in 2011 and 2012, respectively, there were 417 and 412 new matters.
  • In 2012, whistleblowers received $284 million of the more than $2.5 billion in health care qui tam settlements and judgments.
  • From 2008 to 2012, the federal government poured almost $575 million of funding into U.S. Attorney’s offices, the Office of Inspector General, and the DOJ to facilitate the investigation and prosecution of health care fraud.
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22 October 2013

Whistleblower Complaint Dismissed For Failure To Identify Actual False Claims

Posted by Jaime Jones and Brenna Jenny

An Eastern District of New York judge recently declined to apply a relaxed pleading standard to qui tam claims, dismissing an FCA suit based on alleged violations of the Anti-Kickback Statute for relator’s failure to plead facts sufficient to identify false claims that were actually submitted to the government. In United States ex rel. Moore v. GlaxoSmithKline PLC, No. 1:06-cv-06047 (E.D.N.Y. Oct. 18, 2013), a former employee of GlaxoSmithKline (“GSK”) alleged that GSK induced doctors to prescribe its HIV drugs by offering honoraria and educational grants. The relator urged the district court to relax the Rule 9(b) pleading standard and require merely “an adequate basis for the Court to reasonably infer that false claims were submitted.” Slip op. at 7. The relator alleged the submission of false claims could be inferred from the fact that many patients who use GSK’s HIV products are federal healthcare program beneficiaries and allegations of one doctor’s supposed awareness of the alleged scheme.

In declining to relax the requirements of Rule 9(b), the District Court noted that the Second Circuit Court of Appeals has not yet weighed in on the issue, which has led to a Circuit split. However, the district court observed that the majority of lower courts in the circuit have rejected relators’ attempts to utilize a lower pleading standard. Siding with those courts, the Moore court required both the underlying scheme and the submission of a false claim to be pled with the particularity required by Rule 9(b). With respect to the latter, the court noted that it is not enough to portray the submission of a false claim as “merely conceivable or even likely.” Id. at 8. Instead, relators must allege with particularity “details of either a specific claim for payment that was submitted to the Government by either a medical provider or a pharmacist, or the specific details of an actual Medicaid/Medicare provider certification form signed by a particular physician.” Id. The court dismissed the claims because the relator failed to establish a connection between any alleged kickback and any actual claims for reimbursement.

As we recently reported, the Supreme Court recently expressed an interest (see related post here) in the government’s view of the pleading requirements for FCA claims. The Moore decision emphasizes not only the significance of the ongoing Circuit split on the issue, but the critical importance of Rule 9(b)—at least in some Circuits—to the pleading and defense of whistleblower FCA actions.

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22 October 2013

Medical Device Manufacturer Pays $30 Million to Resolve FCA Claims

DOJ has announced a settlement agreement with medical device manufacturer Boston Scientific, alleging that its Guidant division caused the submission of false claims for two of its implantable cardiac defibrillators. The agreement, pursuant to which Boston Scientific will pay $30 million, resolves qui tam claims brought by a relator who was implanted with one of the devices. The government and relator alleged that the defendant knew of defects in the devices but failed to disclose the issues to physicians, patients, or the FDA. The case is one of an increasing enforcement trend in which the government pursues FCA claims based on allegations that the failure accurately to disclose safety or risk information regarding drugs or devices renders claims for reimbursement false.

This settlement follows the resolution in 2010 of criminal charges stemming from Guidant’s alleged failure to disclose information related to its implantable defibrillators. At that time Guidant pled guilty to two misdemeanor charges for filing a false report with FDA and failing to notify FDA about a safety correction made to one device, and agreed to pay $296 million.

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