In 2011, Maxim Healthcare entered into a settlement agreement with DOJ under which it paid $121 million plus interest to resolve civil claims arising under the False Claims Act based on allegations that it had fraudulently billed Medicaid and the VA for services not provided or at inflated rates. The company also entered into a deferred prosecution agreement and nine individuals pled guilty to criminal charges related to the same conduct. On October 29, 2012, Maxim filed suit against DOJ under the federal FOIA to obtain the details of how the government apportioned its $121 civil settlement in order to allow Maxim accurately to claim the single damages “compensatory” portion of its settlement payment as a deduction, in accordance with applicable U.S. tax laws. When DOJ enters into FCA settlements it prepares a Civil Fraud Disposition Report, in which it describes how it has calculated single damages and penalties and how it has allocated the settlement funds. As companies that have entered into civil FCA settlements with DOJ know, DOJ routinely refuses to share the specific details of those calculations and allocations with defendants, making it difficult to determine the deductible portion of the settlement for income tax purposes.
Maxim’s complaint alleges that DOJ produced a copy of the Civil Fraud Disposition Report related to its settlement in response to Maxim’s FOIA request that was redacted of the information necessary to determine the amount attributed to compensatory damages, claiming that information was protected by the government’s attorney work product and pre-deliberative process privileges. Maxim argues that the Report was drafted two weeks after the settlement was finalized and is routinely shared with the IRS, preventing the application of the claimed privileges. In response to a separate FOIA request, DOJ produced a copy of a receipt detailing the financial breakdown of one of the 34 separate payments scheduled under the settlement agreement, which Maxim argues further undercuts the government’s privilege claims. If granted, Maxim’s request that DOJ be ordered to disclose the Civil Fraud Disposition Report would significantly assist defendants seeking to fully avail themselves of the tax benefits of future FCA settlements.
The case is pending in the U.S. District Court for the District of Columbia.
As mentioned previously, conduct that gives rise to potential liability under the FCA can also trigger liability under the Foreign Corrupt Practices Act (FCPA). The latest issue of Sidley Austin’s Anti-Corruption Quarterly newsletter, a quarterly publication that provides updates on the latest in FCPA regulatory, enforcement, and compliance trends, is now available. In this edition:
- Congressional FCPA Investigations: Is There Another Sheriff In Town?
- Burden Shifts to DOJ for Proving Facts Used to Increase Penalties
- Global Watch: Mexico Enacts Broad Anti-Corruption Law
- In The Interim
- Compliance Corner: Training and Certification
In a decision released yesterday, Judge Robreno of the Eastern District of Pennsylvania dismissed all FCA claims against nine pharmaceutical manufacturers pursuant to Rule 8(a), finding that relator had failed to plead any evidence they acted knowingly or recklessly in light of regulatory ambiguity. U.S. ex rel. Streck v. Allergan, et al., No. 08-5135 (E.D.P.A. Jul. 3, 2012). Relator’s claims against those defendants were based on allegations that they had improperly calculated Average Manufacturer Price (“AMP”) by including certain price increases that triggered credits owed by wholesalers in the calculation of service fees owed to those wholesalers, which fees were in turn excluded from the manufacturers’ calculation of AMP as “bona fide service fees.” Relying on Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), Robreno held that due to the lack of any statutory or regulatory guidance regarding price appreciation credits and the calculation of AMP, relator was required but had failed to plead facts to show that defendants’ interpretation of those regulations was unreasonable. The court found that the conduct of those manufacturers was “not unreasonable, let alone reckless,” and dismissed all claims against them with prejudice as to the relator.
The court also dismissed in part the claims against another group of four manufacturers. These “discount defendants” were alleged to have included service fees paid to wholesalers as discounts in their calculations of AMP. While the court dismissed all claims against the discount defendants for conduct prior to 2007, it allowed later claims to proceed based on regulatory developments occurring in 2007.
This decision, like the Supreme Court’s decision in Christopher v. SmithKlineBeecham Corp., recently reported on this blog, should give relators’ counsel and the government pause when considering FCA claims based on alleged violations of ambiguous statutes or regulations.
Sidley represented three of the defendants against whom all claims were dismissed in the litigation.
The Supreme Court this morning announced that the so-called “individual mandate,” the centerpiece of the Patient Protection and Affordable Care Act (PPACA), which requires most individuals to maintain a minimum level of health insurance, is a constitutional exercise of Congress’s power to tax. Separately, the Court held that a provision of PPACA that would penalize States that elected not to participate in the expansion of the Medicaid program by withdrawing their existing federal Medicaid funding is unconstitutional. However, the Court concluded that this violation can be cured by severing this provision from the rest of the law, leaving the remainder of PPACA standing.
Thus, those False Claims Act and Anti-Kickback Statute-related amendments enacted as part of PPACA, briefly listed here, remain standing: (1) the amendment to the AKS establishing that claims “resulting from” AKS violations that are submitted to the federal healthcare programs give rise to FCA liability (PPACA § 4204(f)(1)); (2) the further AKS amendment, clarifying that knowledge of and specific intent to violate the AKS are not necessary to establish a violation (PPACA § 6402(f)(2)); (3) amendments to the FCA’s “public disclosure bar” provision that convert it from a jurisdictional bar to an affirmative defense that can be raised by a defendant in a motion to dismiss but rejected by the government, precluding judicial resolution of the issue, and significantly limiting the types of disclosures that can give rise to the defense (PPACA § 10104(j)(2)); (4) requiring recipients of “overpayments” to report and return them, and making the failure to do so the basis of a “reverse false claim” cause of action under the FCA (PPACA § 6402(a)); and (5) creating additional civil monetary penalties that may be applied to conduct that violates the FCA (PPACA §§ 6402(d)(2), 6408(a)).
The opinion is available at http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf
Last week, the United States District Court for the Northern District of Illinois denied a motion to dismiss an FCA suit brought by the government against the president of MDR Mortgage Corp., a HUD and FHA loan correspondent. U.S. v. Luce, 2012 U.S. Dist. LEXIS 85095 (N.D. Ill. Jun. 20, 2012). The court held that the government may pursue its claims based on allegations that the defendant falsely certified in HUD residential loan applications (Form 92900-A) and annual verification reports that he had not previously been charged with “making false statements,” a crime for which he was indicted in 2005. In reaching this holding, the court held that the government had alleged that at least some of the loans connected to the false statements had defaulted, causing the government to pay money on the loan insurance policies, and was not required to specify the amount of damages at the pleadings stage. Notably, however, the court rejected the government’s contention that the defendant would be subject to statutory penalties for each of the loans for which false statements were submitted; rather, the court held that the government could only recover penalties as to those loans that resulted in a “claim” on the loan insurance.
On June 18, the Supreme Court ruled for GlaxoSmithKline that the Fair Labor Standard Act’s outside sales exemption applies to pharmaceutical sales representatives, who are therefore not entitled to overtime wages. Christopher v. SmithKlineBeecham Corp., No. 11-204. In analyzing the issue, both the majority and the dissenting justices determined that the deference generally granted by courts to agency interpretations of ambiguous regulations was not warranted with respect to the Department of Labor’s position set forth in its Amicus Curiae brief. The Court held that the position adopted by the Department in its brief – that a “sale” for purposes of the “outside sales” exemption is only made if the salesman transfers title to the property at issue – was not clearly set forth in the statute or regulations, and had not been previously articulated by the Department. In this connection, the Court noted as conspicuous the absence of any enforcement activity premised on the Department’s reading of the outside sales exemption, and characterized the agency’s position as creating an “unfair surprise” for the industry. The Court recognized that extending deference to agency interpretations of ambiguous regulations “creates a risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit, thereby ‘frustrating the notice and predictability purposes of rulemaking.'”
The Christopher decision thus suggests that courts should decline to extend deference to agency interpretations of vague regulations that may result in significant liability, such as under the FCA, absent evidence that the agency has provided clear guidance consistent with those interpretations in advance of the litigation. Courts frequently are confronted with this issue in FCA cases premised on alleged regulatory violations by defendants in highly regulated industries such as the healthcare industry, and we expect defendants in those cases to rely on the decision to push back on attempts by the government to advance for the first time in litigation interpretations of ambiguous regulations.
Posted by Jaime L.M. Jones and Brad Robertson
Echoing a fact pattern often found in False Claims Act matters (see related post here), a recent motion filed in an unfair competition suit pending in the Southern District of Florida seeks sanctions for the inappropriate collection and use of confidential information from the opposing party’s former employees. In Millennium Laboratories, Inc. v. Aegis Sciences Corporation, consolidated cases No. 11-cv-20451 and 11-cv-22815, Millennium Laboratories claims that counsel for Aegis Sciences Corporation initiated numerous inappropriate ex parte communications with two of Millennium’s former employees and collected over 5,000 pages of Millennium’s documents—many of which were clearly marked as containing proprietary, confidential and/or attorney-client privileged information—and used the documents as the foundation of a counterclaim against Millennium. The motion further alleges that the former employees’ non-disclosure and confidentiality agreements with Millennium protected these materials and that documents in the production put counsel for Aegis on notice of the agreements. When faced with responding to discovery requests asking for the basis of its counterclaims, the motion asserts that counsel for Aegis allegedly attempted to cover up the circumstances of its receipt of these documents by returning them to the former employees and re-collecting them via a “friendly” third party subpoena before serving its responses.
Millennium seeks dismissal of the defendant’s counterclaims, monetary sanctions, and disqualification of counsel based on Federal Rule of Civil Procedure 37 and violation of the Florida Rules of Professional Conduct. While Aegis will almost certainly oppose the motion, it serves as another reminder that relators (and their counsel) may face significant legal risk when they rely on improperly obtained or retained internal company documents to bring an FCA claim.
Posted by Jaime L.M. Jones and Nirav Shah
Citing the failure to plead claims with particularity, a federal court in the District of Massachusetts recently dismissed a qui tam action brought against Infomedics, Inc. and GlaxoSmithKline. United States ex rel. Arlene Tessitore v. Infomedics, Inc., GlaxoSmithKline, PLC, and GlaxoSmithKline, LLC., No. 08-11775-NMG (D. Mass. Mar. 12, 2012). The case highlights the difficulty in connecting allegations of “fraud on the FDA” to FCA violations.
Tessitore concerns GSK’s antidepressant drug, Paxil, FDA-approved labeling which includes an indication for the treatment of social anxiety disorder (“SAD”). Among other claims, the relator alleged that GSK and its vendor, Infomedics, concealed from FDA information related to certain adverse events that was received through an informational Paxil hotline operated by Infomedics. Relator alleged violations of the FCA based on two theories: (1) that GSK represented in its application to FDA for Paxil that it would report adverse events to the Agency; and (2) that had GSK reported the adverse events to FDA in a timely fashion, FDA would have ordered the company to issue enhanced warnings sooner. Under both theories, relator claimed that the concealment rendered subsequent claims for reimbursement of Paxil false.
With respect to the first theory, Judge Nathaniel Gorton held that relator’s complaint was simply devoid of specifics, including when a misrepresentation to FDA was made, to whom it was made, and why the statements were false. As for the second theory of liability, Judge Gorton found that it failed under Rule 9(b) “because it presumes, without factual support, that submitting the 7,000 adverse reports would have hastened the FDA’s decision to require warnings and that, had such warnings been implemented sooner, physicians would have prescribed Paxil less often between 1999 and 2002.” Id. But, as the government itself pointed out, FDA was aware of the adverse events and did not take any steps to add enhanced warnings. And absent evidence of alternative treatments available at the time, the inference that physicians would have prescribed other treatments is unsupportable. Thus, this decision highlights the difficulty of adequately pleading the causation element of FCA liability when trying to advance qui tam claims based on the theory of “fraud on the FDA.”
Posted by Jaime L.M. Jones and Nirav Shah
In a report released last month, the federal government announced that it had recovered nearly $4.1 billion last fiscal year as a result of its escalated fight against health care fraud. Spearheaded by the Department of Health and Human Services and the Department of Justice, the government recouped approximately $2.4 billion in civil health care fraud via the False Claims Act as well as $1.3 billion in criminal fines and forfeitures under the Federal Food, Drug and Cosmetic Act. The number of new cases also rose, with the DOJ opening more than 1,100 new criminal health care fraud cases in addition to the more than 1,800 already pending. The number of civil cases is growing, too, with nearly 1,000 new cases being filed on top of over 1,000 existing actions.
In a blog post announcing the report, HHS Secretary Kathleen Sebelius credits recent tools, including the Affordable Care Act’s $350 million funding of the Health Care Fraud and Abuse Control Program, to help in the fight against fraud. A government fact sheet released on the same day also highlights these efforts, with particular focus on Health Care Fraud Prevention and Enforcement Action Teams (“HEAT”). These teams, created in 2009, are designed to encourage coordination and intelligence sharing among HHS and DOJ. The report also praises the work of the Medicare Strike Force, an “interagency team of analysts, investigators, and prosecutors who can target emerging or migrating fraud schemes, including fraud by criminals masquerading as health care providers or suppliers.” Secretary Sebelius cites these specialized anti-fraud teams and notes that, before their creation, “a fraudster could swindle Medicare for millions of dollars in Florida, close up shop, move to Detroit, and attempt to reestablish the same scheme without ever being noticed. Now, CMS and Department of Justice officials are tracking fraud scams as they move across the country, so that criminals are spotted when they try to re-enroll into Medicare or Medicaid.”
Administration officials noted that the recovery figures are nearly double the $2.14 billion recouped in 2008. Likewise, the number of fraud prosecutions increased 75 percent during the same period. Secretary Sebelius and Attorney General Holder both credited the Obama Administration’s revamped efforts at fighting fraud for these statistics.
In a groundbreaking decision announced last week, a federal court in Virginia held that the minimum statutory civil FCA penalties were unconstitutionally excessive in light of the facts before it, and refused to impose any penalties. This case is the first in which a federal court has determined that it does not have the authority to fashion an alternative penalty under the FCA where the statutory penalty is grossly disproportionate to the government’s loss or defendant’s gain arising from fraudulent conduct. Judge Anthony Trenga’s decision in U.S. ex rel. Bunk v. Birkard Globistics GMBH (E.D. Va. Feb. 14, 2012) should give pause to those pursuing claims under the FCA when they allege the number of “false claims.”
A jury this past summer found the Bunk 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, apparently unable to obtain the necessary evidence from the government, but only penalties under the FCA 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, under the FCA’s mandatory penalty provisions the court calculated the required penalty as no less than $50,248,000 ($5,500 x 9,136).
To determine whether the mandatory minimum penalty violated the Excessive Fines Clause of the Eighth Amendment, the court considered the harm – economic and non-economic – to the government. Based in part on evidence that the defendant’s charges to the government under the fraudulently obtained contract were substantially the same as charges under other contracts as to which there had been no fraud established, and not higher than what the government had paid other contractors in prior years, the court concluded that the Relator failed to establish that the defendant’s fraud caused any economic harm to the government. Significantly with respect to the lack of evidence of non-economic harm, the court relied on evidence that the government twice renewed the defendant’s contract, even after it had received the Relator’s allegations of fraud. Noting that this evidence “does not constitute ‘government knowledge’ sufficient to preclude or estop the government from pursuing claims against the Defendants,” the court did find it probative of the value received by the government. Thus, in light of the lack of evidence of harm to the government, the court deemed the mandatory minimum penalties in excess of $50 million unconstitutionally excessive.
While other courts have concluded that FCA penalties are constitutionally excessive in certain circumstances, what sets Judge Trenga’s decision in Bunk apart is his conclusion “that [the court] must simply refuse to enforce the mandated penalty . . . and not substitute its own fashioned penalty.” The government, with Relator having elected not to seek damages, is thus left with nothing on the claim at issue.
Interestingly, Judge Trenga went on to discuss potential alternative penalties in the event that the Fourth Circuit determines the lower courts do have discretion to fashion alternative penalties under the FCA. He first considered imposing only one penalty for the submission of the false certification. Second, he considered a penalty equal to treble the amount of defendant’s financial gain, totaling approximately $1.5 million. Finally, he considered an alternative amount sufficient to sanction defendant and deter future wrongdoing, and concluded $500,000 would be an alternative penalty. Judge Trenga’s opinion suggests that if ordered to select an alternative penalty, he would impose one $11,000 penalty under the first alternative methodology.
This opinion should be a strong warning to the government and relators’ counsel carefully to consider the calculation of claims and avoid seeking the imposition of penalties that significantly exceed any measure of harm to the government.