By

Jaime L.M. Jones

02 July 2014

Industry Seeks Clarification of Constitutional Limits on Civil Penalties Under the False Claims Act

Posted by Jaime Jones and Brenna Jenny

Three industry advocacy groups recently filed an amicus brief urging the Supreme Court to provide clear measures of proportionality between misconduct and financial liability under the FCA. See Gosselin World Wide Moving, N.V. v. United States ex rel. Bunk, U.S., No. 13–13–99, amicus brief filed 6/23/14. The Pharmaceutical Research and Manufacturers of American (“PhRMA”), the American Hospital Association (“AHA”), and the U.S. Chamber of Commerce are seeking review of a Fourth Circuit decision upholding a $24 million fine against a government contractor. The penalty was premised on the contractor’s one-time filing of a single false statement in a $3.3 million contract, which the contractor performed with no evidence of economic loss to the government. The industry stakeholders expanded on the appellant’s own arguments, which the Fourth Circuit rejected as we reported here, that this fine violates the Eighth Amendment’s Excessive Fines Clause.

The Fourth Circuit adopted a rigid approach to the imposition of penalties under the FCA, applying a separate penalty to each claim for payment that was tainted by the earlier false statement made during the contracting stage. Despite being mechanical, this approach has created great industry uncertainty. As the amici pointed out, healthcare is one of several sectors disproportionately penalized under this approach, due to the small-value, high volume nature of the claims often submitted to the government.

As the brief details, this issue presents a two-fold circuit split: not only have some courts rejected the application of the Excessive Fines Clause to FCA penalties, but those that have acknowledged Eighth Amendment-based limitations on fines have not adhered to Supreme Court precedent requiring penalties to bear a relationship to the extent of the defendant’s “clearly individualized” acts of fraud, the degree of his culpability, and the harm caused to the government.

We will continue to monitor the important developments in this case and under the Eighth Amendment, and provide updates as appropriate.

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30 June 2014

Court Rejects Application of Wartime Tolling to Qui Tam Claims

Posted by Jaime Jones and Amy DeLine

The U.S. District Court for the District of Columbia ruled on June 19, 2014 that the Wartime Suspension of Limitations Act (WSLA) does not apply to the FCA. As a result, the court dismissed Floyd Landis’s non-intervened qui tam claims against his former cycling teammate, Lance Armstrong.

As we have discussed previously on the blog, Lance Armstrong is the defendant in a False Claims Act qui tam case brought by Landis alleging that Armstrong and others defrauded the United States Postal Service of approximately $42 million in sponsorship fees between 1995 and 2004 as a result of Armstrong’s use of performance enhancing drugs and practices. Landis filed suit in 2010 and the Government intervened in part back in February 2013. Landis has continued to press forward with those claims on which the Government has not intervened.

In its order on the defendants’ motion to dismiss, the District Court ruled that Landis’s claims are largely time-barred. Principally, the court held that the tolling provision of the FCA does not apply to Landis. Section 3731(b)(2) of the FCA provides that government has up to three years to bring claims after it knows or has reason to know that a violation of the FCA has occurred, even if this extends beyond the law’s six year statute of limitations (up to a maximum of ten years). Despite his arguments to the contrary, Landis, as a whistleblower and not a government official, is not covered by the provision. All but approximately $68,000 of Landis’s claims are therefore time-barred by the law’s six year statute of limitations, and were accordingly dismissed with prejudice.

In analyzing the statute of limitations arguments, the court addressed the applicability of the WSLA to Landis’s claims. The WSLA, in brief, suspends statutes of limitations for offenses involving fraud against the government during wartime. In recent years, the government often has relied on the law to stop the clock from running, arguing that while the U.S. is still at war in Iraq and Afghanistan, it has nearly unlimited time to bring fraud claims. According to a Wall Street Journal article last year, U.S. Uses Wartime Law to Push Cases Into Overtime (April 15, 2013), the government relied on the WSLA twelve times between 2008 and 2012. That is equal to the number of times the government used the law in the preceding 47 years.

Until this month, the wartime law has been invoked with almost complete success in FCA cases. The Landis court, however, found that the WSLA does not apply to the FCA. According to the court, the WSLA only suspends statutes of limitation when the offense at issue requires proof of specific intent to defraud the government. The FCA does not and has not since its amendment in 1986. Therefore, the court found that Landis cannot rely on the WSLA to bring his otherwise stale claims. While other courts have previously limited the reach of the WSLA (e.g., to FCA cases in which the government has intervened; to cases regarding war-related contracts), the District Court is the first to completely reject its applicability to the FCA.

The court’s motion to dismiss order in United States ex rel. Floyd Landis v. Tailwind Sports Corporation, et al., No. 10-cv-976 (RLW) can be found here.

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30 June 2014

Third Circuit Dismisses Qui Tam Claims For Lack of Intent Due to Ambiguity in a Government Contract

A. Brian Albritton at the False Claims Act and Qui Tam Law blog recently posted “Defendant’s Breach of Ambiguous Government Contract Prevents Court from Finding the Defendant Knowingly Submitted a False Claim for Payment.”  In the post, he analyzes the recent Third Circuit opinion in U.S. Department of Transportation ex rel Arnold v. CMC Engineering, Inc., et al., __ Fed. Appx.__, 2014 WL 2442945 (3rd Cir. June 2, 2014). In that case, the court dismissed an FCA action after holding that the contract defendant allegedly violated was so ambiguous that any violation could not have been “knowing.” The holding in this case is consistent with those on which we have previously reported (here and here) in which courts have held that ambiguity in allegedly violated regulations precludes a finding of a “knowing” submission of a false claim.

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27 June 2014

Ex-Employee’s Threat to Bring Qui Tam Is Extortion, According to California Appeals Court

Posted by Jaime Jones and Nicole Brown

Recently, the California Court of Appeals held that an individual who threatens a whistleblower action in an attempt to drive a settlement of unrelated employment claims may be held liable for extortion. Stenehjem v. Sareen, No. H038324 (Cal. Ct. App. Jun. 13, 2014). The matter resolved a counterclaim against Jerry Stenehjem, who had sued his former employer, Akon, Inc., and Surya Sareen, Akon’s CEO, for defamation and wrongful termination. Prior to trial of those claims, Stenehjem and his attorney made several unsuccessful attempts to initiate settlement discussions with Akon and Sareen. The last of these attempts was an e-mail from Stenehjem to Sareen’s attorney, extending “one last opportunity to settle,” which Stenehjem suggested would trigger “the Qui Tam option,” if rejected.

In response to Stenehjem’s e-mail, which included several other inflammatory statements and accusations of fraudulent business practices, Sareen countersued Stenehjem for extortion. Stenehjem moved to strike Sareen’s counterclaim under California’s anti-SLAPP statute, a law permitting dismissal of lawsuits that seek to chill or punish a party’s constitutional free speech. The trial court granted Stenehjem’s motion to strike, and Sareen appealed, claiming that Stenehjem’s e-mail was not protected by the anti-SLAPP statute because it was extortion.

The Court of Appeals agreed that Stenehjem’s threat to alert federal authorities to the alleged fraud and FCA exposure met the legal definition of extortion. Notably, the court held that the veracity of the allegations in Stenehjem’s e-mail was irrelevant to deciding this question. More importantly, the court held that Stenehjem’s statements could not be considered pre-litigation communications, protected under the anti-SLAPP statute, because the “qui tam action was entirely unrelated to any alleged injury suffered by Stenehjem as alleged in his demotion and wrongful termination claims.” Thus, the court signaled that in the future similar statements may be treated differently if there is an established nexus between the pending litigation and threatened FCA suit. Nonetheless, FCA defendants will be sure to focus on the outcome in this case and consider such counterclaims where appropriate.

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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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