Posted by Jaime Jones and Bevin Seifert
On May 12, 2015, Maryland Governor Larry Hogan signed into law Senate Bill 374, an expansion of the Maryland False Claims Act (“MFCA”), which took effect on June 1, 2015. The prior version of the MFCA was limited to Medicaid and healthcare-related fraud, whereas the new law covers any claims made to the state or to local government.
Sidley lawyers Jack Pirozzolo, Jaime Jones, and Brenna Jenny recently published an article titled “Drug and Device Enforcement Trends to Watch” in the May 4, 2015 issue of BNA’s Pharmaceutical Law & Industry Report. A copy of the article can be downloaded here.
Posted by Jaime L.M. Jones and Brenna Jenny
A court in the Eastern District of Pennsylvania recently ruled that, despite a relator’s publication during an employment retaliation suit of allegations relating to the defendant’s alleged off-label promotion and payment of kickbacks, such allegations were not publicly disclosed, nor was the relator’s execution of a release of liability effective. U.S. ex rel. Gohil v. Sanofi-Aventis U.S. Inc., No. 02-cv-02964 (E.D. Pa. Mar. 30, 2015). This case demonstrates the way policy arguments regarding a perceived congressional intent in favor of private enforcement of the FCA can impact legal arguments in FCA litigation.
The court first considered whether the relator’s claims had previously been publicly disclosed. The relator, a former sales representative employed by the defendant, filed a qui tam suit a month before resigning his position with the defendant in June 2002. Upon resigning, he filed a wrongful termination action pursuant to New Jersey’s Conscientious Employee Protection Act (“CEPA”). While the government weighed whether to intervene, the parties in the CEPA action engaged in discovery. They ultimately settled—with the relator signing a broad release of liability—and the qui tam suit was subsequently unsealed, with the government declining to intervene. The defendant argued that the relator’s Statement of Facts (“SoF”) in the CEPA action constituted disclosure through a “civil hearing,” thereby triggering application of the public disclosure bar. The court ruled that although the SoF “exhaustively details” the alleged off-label promotion of defendant’s cancer drug Taxotere, and corresponding payment of kickbacks, the SoF was not “substantially similar” to the relator’s complaint because the SoF did not state that any provider had submitted a claim to a federal healthcare program (“FHCP”). Accordingly, the court reasoned that the allegedly fraudulent transactions were not previously disclosed, and inferring the allegation of fraud “would impermissibly broaden the scope of the public disclosure bar and restrict private enforcement of the FCA.” The defendant has since filed a motion for reconsideration, arguing that where submission of false claims to the government is a “logical and obvious consequence” of an alleged scheme, all essential elements of the FCA claim are publicly disclosed.
The court next determined whether the relator had nonetheless waived his right to prosecute the qui tam suit through his settlement and release of liability in the CEPA action. Although the Third Circuit Court of Appeals has yet to rule on whether relators can unilaterally settle a qui tam suit post-filing, all of the courts of appeal to consider the issue have held that, based on the statutory language of the FCA, the government’s written consent is a prerequisite. In contrast, several courts of appeal have held that a pre-filing release can wipe out a would-be relator’s attempt to file a later qui tam suit, so long as the release covers the allegations in the suit and there are no countervailing public policy considerations. Consistent with the prevailing approach to post-filing releases, the Gohil court ruled that the relator’s release had no effect on the litigation. The defendant responded by suggesting that the release be effective as to the relator, but that the claims be dismissed without prejudice to the government’s ability to intervene. The court declined to adopt this approach, again invoking the “clear congressional intent of encouraging private enforcement of the FCA.”
As to the merits of the relator’s claims, the court first ruled that, even under the Third Circuit’s more lenient “reliable indicia” standard to the submission of false claims—in place of pleading the details of particular false claims submitted—the off-label promotion allegations did not meet Rule 9(b)’s requirements. This was so because all of the off-label uses related to medically accepted indications, which would have been eligible for government reimbursement. However, the court denied the defendant’s motion to dismiss the kickback allegations, holding that certifying compliance with the AKS is a precondition to payment by the FHCPs and that the relator had provided sufficient examples of kickbacks allegedly offered to providers. Finally, the court refused to dismiss the relator’s conspiracy count, ruling that a conspiracy between the defendant and providers could easily be inferred from examples of kickbacks supposedly paid by the defendant, followed by the recipient physician’s increase in Taxotere prescriptions.
A copy of the court’s opinion can be found here.
Posted by Jaime L.M. Jones and Brenna Jenny
On March 4, 2015, the Central District of Illinois granted a defendant hospital’s motion to dismiss FCA claims based on “upcoding” allegations, holding the relator was not an original source of certain allegations and finding his remaining allegations insufficient to satisfy the requirements of Rule 9(b). U.S. ex rel. Gravett v. The Methodist Med. Ctr of Ill., No. 12-1008 (C.D. Ill. Mar. 4, 2015). In reaching its decision the court rejected relator’s argument that he could be the original source of allegations based on conduct that occurred after he left defendant’s employ, breaking with recent precedent out of the Eastern District of Pennsylvania. See U.S. ex rel Galmines v. Novartis Pharma. Corp., No. 06-cv-03213 (Feb. 27, 2015).
The relator in U.S. ex rel Gravett worked as an emergency room physician at Methodist Medical Center until January 1, 2007. According to his allegations, Methodist Medical Center employed coding software that it knew had a tendency to inflate the otherwise applicable CPT codes for physician and hospital services to codes associated with higher reimbursement. As a result, the relator alleged the submission of false claims for patients treated during the period 2006-2011. The defendant moved to dismiss relator’s claims under the public disclosure bar, arguing that it had disclosed the essential elements of the alleged fraud to the U.S. Attorney’s Office in the course of a government investigation beginning in 2010. Following Seventh Circuit precedent, the court held that relator’s allegations were publicly disclosed before proceeding to assess whether the relator qualified as an original source of those allegations. The court held that relator could not have direct knowledge of any alleged upcoding that occurred after his employment ended. As such, he could not be an original source of those allegations, which were barred.
The Central District of Illinois’ refusal to consider allegations of misconduct occurring after the relator’s employment was terminated stands in contrast to a recent order by the Eastern District of Pennsylvania in U.S. ex rel Galmines v. Novartis Pharma. Corp. Under an earlier ruling, the relator’s allegations—that during the time of his employment at Novartis, the company engaged in off-label marketing and entered into kickback arrangements with respect to the drug Elidel—had been deemed publicly disclosed. Nonetheless, the court concluded that the relator was an original source of those allegations. The relator subsequently moved to amend his complaint to extend the time period of the alleged misconduct past the termination of his employment. The court granted the motion, ruling that relators may “pursue the entire fraudulent scheme for which they have direct and independent knowledge of the operative substantive facts,” without limitation to the “specific time periods for which they have direct and independent knowledge.” The court viewed this conclusion as mandated by how the public disclosure and first-to-file rules have been interpreted. In particular, the court was concerned that constraining a relator to the time period of his direct involvement could create situations in which no relator could bring a lawsuit for a particular time period of a fraud. For example, this could arise where an original source who was the first to file lacked direct knowledge of a later portion of the scheme, but would-be relators with direct knowledge as to this later period would be barred from filing a suit under the first-to-file rule. The Galmines court further ruled that because the relator had sufficiently alleged a course of conduct continuing past his misconduct, he could amend his complaint and obtain discovery for conduct occurring after he filed earlier iterations of his complaint.
In contrast to the claims arising from conduct after his termination, the Gravett court held the relator was the original source of allegations related to upcoding he observed during his employment. As to that alleged upcoding, the court ruled that despite his direct knowledge relator failed to include any particulars regarding the false claims, such as invoices or requests for payment to a federal healthcare program that resulted from the alleged upcoding. Under well-established precedent, relators advancing upcoding allegations are only entitled to a relaxation of Rule 9(b)’s requirement to plead specific information of at least one submitted false claim if they are “in a special position of personal knowledge or involvement in the billing practices of the defendant that affords some indicia of reliability to the allegations.” The Gravett court determined that as a former emergency room physician, the relator was only involved in the delivery of care, and he lacked “first hand knowledge of Defendants’ actual billing practices, submission of claims for payment, or receipt of payments from the Government payors.” Absent actual involvement in claims or billing practices, the relator was effectively relying on “rumor or innuendo.” Thus, the court dismissed relator’s remaining claims pursuant to Rule 9(b).
A copy of the opinion in U.S. ex rel. Gravett v. The Methodist Med. Ctr of Ill., No. 12-1008 (C.D. Ill. Mar. 4, 2015) can be found here.
A copy of the opinion in U.S. ex rel Galmines v. Novartis Pharma. Corp., No. 06-cv-03213 (Feb. 27, 2015) can be found here.
Posted by Jaime L.M. Jones and Bevin Seifert
The Fifth Circuit recently sent a summary judgment ruling back to the Southern District of Texas for the second time for the lower court’s failure to apply the Circuit’s construction of the public disclosure bar. United States ex rel. Little v. Shell Exploration, No. 14-20156 (5th Cir. Feb. 23, 2015). Remarkably, the court also ordered that the case be assigned to a new judge because the lower court’s five-page “broad” and “conclusory” opinion failed to follow instructions for remand and was devoid of appropriate citations to the record or relevant law.
The relators, two auditors within a division of the United States Department of the Interior, filed the case in 2006, alleging that Shell Exploration and subsidiaries (“Shell”) defrauded the government of $19 million by improperly deducting expenses relating to offshore drilling. The government declined to intervene. In April 2011, the district court granted summary judgment for Shell finding, in part, that the allegations were barred under the public disclosure doctrine, U.S.C. § 3730(e)(4).
In 2012, the Fifth Circuit reversed and remanded for redetermination, concluding that the district court applied an “overly broad definition” of public disclosure to determine that the previous disclosures barred relators’ allegations. Specifically, the lower court held that the allegations need not be “identical” to the public disclosures, but rather “parallel,” i.e. that the “public disclosure must have been sufficient for the government to find related frauds, even though the circumstances of the transactions may differ.” The Fifth Circuit instructed the district court, to instead apply more narrow standards to determine whether the allegations had been publicly disclosed. Citing its decision in United States ex rel. Jamison v. McKesson Corp., 649 F.3d 322 (5th Cir. 2011), the court instructed that on summary judgment, the opposing party must (1) identify “public documents that could plausibly contain allegations or transactions upon which the relator’s action is based,” and then (2) if such disclosures are identified, the relator must put forth “evidence sufficient to show that there is a genuine issue of material fact as to whether his action was based on those disclosures.” The court further explained that publicly disclosed allegations need only be as broad or as detailed as those in the relator’s complaint, noting that “[w]here specifics are alleged, it is crucial to consider whether the disclosures correspond in scope and breadth.” Also prior disclosures need not name the defendant as long as the defendant’s misconduct would be readily identifiable from them. But, at a minimum, the court required that “disclosures [must] furnish evidence of the fraudulent scheme alleged.” The Fifth Circuit specifically instructed the lower court to determine if the public disclosures revealed either that (1) Shell was deducting expenses prohibited by program regulations; or (2) this type of fraud was so pervasive in the industry that the company’s scheme, as alleged, would have been easily identified.
On remand, Shell renewed its motion for summary judgment and, a year later, the Southern District of Texas again granted in favor of Shell, dismissing relators’ claims with prejudice. The relators’ subsequent appeal requested to have the case assigned to a new judge. In its de novo review, the Fifth Circuit reiterated its McKesson finding that public disclosure is “necessarily intertwined with the merits and is, therefore, properly treated as a motion for summary judgment” and concluded that had the lower court properly followed its instructions, it would have found no public disclosure and denied the motion.
As to whether a new judge should be assigned, the court recognized a circuit split on the test for this “rarely invoked” and “extraordinary power,” noting that the Fifth Circuit had not yet adopted either test (citing its decision in In re DaimlerChrysler Corp., 294 F.3d 1307, 1333 (5th Cir. 1997)), but concluding that, under either standard, reassignment was appropriate in this case when the lower court disregarded the Fifth Circuit’s “clear mandate” and “failed to apply the legal standards we established in our opinion for public disclosure and to address the specific questions that set out in that opinion.” Moreover, the Fifth Circuit criticized the short length of the opinion in contrast to the extensive summary judgment record, with few references to the record or relevant law. Finally, the court noted that the district court’s conclusion was the same as its prior opinion and followed the same “overly broad reasoning” that the Fifth Circuit already rejected. In its order to reassign the case, the court found that starting with a new judge would not “create waste or duplication” given that the case had been stuck for eight years on the public disclosure issue and that remaining with the same judge would likely result in further appeals.
A copy of the opinion can be found here.
In a February 25, 2015 opinion, the Sixth Circuit became the fifth circuit court effectively to narrow the scope of the FCA’s public disclosure bar by holding that disclosures to the government do not trigger the protections of that provision. The Sixth Circuit also expanded upon prior rulings in this regard, clarifying that even disclosures to government contractors and private consultants during the course of an administrative audit and investigation will not lead to the application of the public disclosure bar to FCA liability.
The relator in Whipple v. Chattanooga-Hamilton County Hospital Authority alleged that the defendant hospital submitted false claims for reimbursement based on a variety of improper billing practices he observed during his employment with the hospital. After the relator left the hospital’s employ, a Medicare contractor acting on behalf of the Department of Health and Human Services Office of Inspector General (“OIG”) audited the hospital in response to an anonymous complaint regarding improper billing practices. OIG subsequently opened an administrative investigation into whether the errors and potential overpayments identified by the contractor’s review violated criminal law and consulted with the United States Attorney’s Office for the Eastern District of Tennessee before declining to pursue the matter further. To conduct its own internal investigation of the allegations, the hospital retained an outside billing consultant.
The district court dismissed relator’s qui tam claims for lack of jurisdiction, holding that the alleged fraud was publicly disclosed “through the investigations, oversights and audits conducted by the government, consultants, attorneys and contractors.” On review, the Sixth Circuit reversed, declining to follow Seventh Circuit precedent that interprets “public disclosure” to include disclosures of an alleged false claim to a “competent public official who has managerial responsibility for that claim.” The Sixth Circuit joined the Fourth Circuit, which recently observed in United States ex rel. Wilson v. Graham Cnty. Soil & Water Conservation Dist. that no other circuit court has followed the Seventh Circuit’s precedent. Instead, the Sixth Circuit held that disclosure outside the government is required to trigger the public disclosure bar. The court then clarified that non-government actors—specifically, the Medicare contractor and the hospital’s third party billing consultant—do not qualify as “outsiders” or “strangers” to the alleged fraud. As such, confidential disclosures to these parties in the context of an administrative audit and investigation are not “public disclosures” under the FCA. This decision thus continues the trend of narrowly interpreting the public disclosure bar, substantially curtailing a previously powerful limit to FCA liability.
A copy of the opinion can be found here.
Posted by Jaime L.M. Jones and Emily Van Wyck
Earlier this week, Senators Chuck Grassley (Iowa) and Ron Wyden (Oregon) hosted a press conference to announce the launch of the Whistleblower Protection Caucus—a bipartisan group of Senators focused on raising awareness of the need for adequate protection from retaliation for whistleblowers.
In his remarks, Grassley stated that “Americans deserve a federal government that is free from fraud, waste, and abuse and whistleblowers play a very important role in keeping government accountable.” He expressed concern that “these patriots” often face retaliation and declared that “[m]uch can be done to improve the environment for whistleblowers and actually encourage more people to step forward when they encounter wrongdoing.” The Caucus will foster bipartisan discussion on the treatment of whistleblowers and will serve as a clearinghouse for the Senate for current information on whistleblower developments.
Other founding members of the Caucus include Senators Ron Johnson (Wisconsin), Mark Kirk (Illinois), Deb Fischer (Nebraska), Thom Tillis (North Carolina), Barbara Boxer (California), Claire McCaskill (Missouri), Tammy Baldwin (Wisconsin), and Ed Markey (Massachusetts).
A copy of Senator Grassley’s related press release can be found here.
Posted by Jaime L.M. Jones and Jessica Rothenberg
In a recent decision, the Third Circuit provided additional guidance on the scope of the original source exception to the FCA’s public disclosure bar. In U.S. ex rel. Morgan v. Express Scripts, Inc., the court affirmed the dismissal of a qui tam suit based on allegations – widely covered in numerous lawsuits and media reports – that defendants artificially inflated Average Wholesale Prices (“AWPs”) for brand-name drugs. Relator David Morgan, a pharmacist, was never employed by any of the defendants and learned of the alleged scheme to inflate AWPs only through his review and comparison of two publicly available price listings. The court explained that knowledge gained through reviewing files—which was the full extent of Morgan’s “diligence” that led to his discovery of the price inflation—is not sufficient to demonstrate the “direct and independent knowledge” that is required to qualify as an original source. The court went on to note that Morgan’s general knowledge of the pharmaceutical industry, although it may have informed his review of the publicly available information, also was not enough to rescue his claims under the original source exception. The court then applied the familiar two step analysis under the public disclosure bar and found that Morgan’s allegations of a price inflation scheme were (1) disclosed in the news media, previously filed lawsuits, and a Congressional report, and (2) based on those public disclosures. In this connection, the court noted that the mere fact that Morgan calculated specific “markups” tied to the allegedly inflated AWPs was not sufficient to “remove his allegations from the public disclosure realm.” Thus, and since Morgan was not the original source of the allegations in his complaint, the court affirmed the district court’s dismissal of his claims for lack of subject matter jurisdiction under the pre-FERA version of the public disclosure bar.
A copy of the Third Circuit’s opinion in U.S. ex rel. Morgan v. Express Scripts, Inc., No. 14-1029 (3d Cir. 2015) can be found here.
Posted by Jaime L.M. Jones and Brenna Jenny
The Eastern District of Tennessee recently clarified the discovery implications of its September 2014 ruling (reported here) permitting the government to establish FCA liability based on a sampling of claims. See U.S. ex rel. Martin v. Life Care Centers of America, Inc., No. 08-cv-251 (E.D. Tenn. Feb. 18, 2015). In rejecting the defendant’s motion to compel discovery as to the allegedly false claims outside of the government’s sample, the court underscored the significance of its earlier ruling narrowing the evidence necessary to establish liability, and significantly constrained the government’s discovery obligations.
Well before the court’s September 2014 ruling, the defendant, a chain of skilled nursing facilities, had served on the government an interrogatory requesting that it “[i]dentify each false or fraudulent claim or false record or statement that you contend [defendants] knowingly presented or caused to be presented, or knowingly made, used, or caused to be made or used, in violation of the False Claims Act.” The government only provided claims information as to the ten patients identified in its complaint, and, following the court’s ruling, the government confirmed that it would only provide information relating to its sample of 400 patients. The defendant moved to compel the government to produce the information it had requested, arguing that, regardless of the government’s “trial strategy” to only present evidence as to a sample of patients, it was nonetheless entitled under the Federal Rules of Civil Procedure to “the foundational information on the claims it contends violated the FCA–and not just those that it has self-selected for proof at trial.”
The court denied the motion, ruling that the defendant was attempting to relitigate the same arguments regarding sampling that the court rejected in its September 2014 ruling and subsequent denial of the defendant’s motion to certify the decision for an interlocutory appeal. According to the court, allowing the defendant to conduct discovery as to claims outside of the government’s sample would require the very claim-by-claim review that the court previously determined to be unnecessary for establishing FCA liability. Thus, this court not only has lowered the government’s burden to establish liability for the submission of false claims but also has significantly lessened the government’s discovery obligations, particularly when alleging fraudulent schemes caused the submission of voluminous claims.
A copy of the court’s order can be found here.
Posted by Jaime L.M. Jones and Brenna Jenny
In a remarkable opinion sure to be cited by FCA defendants facing FCA claims premised on alleged regulatory non-compliance, on January 7 the Northern District of California granted defendant Gilead’s motion to dismiss FCA claims premised on alleged violations of current Good Manufacturing Practices regulations (“cGMPs”), holding that fraudulent conduct directed at FDA standing alone cannot render subsequent Medicare or Medicaid reimbursement requests false under the FCA. See U.S. ex rel. Campie v. Gilead Sciences, Inc., No. 11-cv-00941 (N.D. Cal. Jan. 7, 2015). The ruling expands on the reasoning of the Fourth Circuit’s decision last year in Rostholder (as reported here) and reiterates the judiciary’s hesitancy to permit the FCA to displace FDA’s institutional capacity to enforce its own regulatory scheme.
Two former Gilead employees with quality control responsibilities filed a qui tam suit against their previous employer, alleging various violations of cGMP requirements. The relators asserted these regulatory issues gave rise to FCA liability because had FDA been aware of the them it would not have approved the affected drugs or would have withdrawn approval; as a result, relators claimed that all claims for payment submitted to Medicare and Medicaid for these drugs were false under the FCA. The government declined to intervene in the suit but did file a statement of interest on these issues, which the court cites in its opinion.
The court first dispensed with relators’ claim that allegedly false certifications to FDA or other allegedly fraudulent conduct during the drug approval process could give rise to FCA liability. Although FDA’s New Drug Application (“NDA”) form requires manufacturers to certify compliance with cGMP regulations, the court found the fact that manufacturers make this statement to FDA, and not to CMS for the purpose of securing payment, to be critical to the viability of relators’ claims. The court ruled that “FCA liability cannot be based on fraudulent statements made before one regulatory agency and from that implying a certification putatively made to the payor agency where there is neither an express certification nor condition of payment.” As even relators conceded during a hearing, Gilead never made any direct misrepresentations to a payor.
In an attempt to avoid this result, relators had argued in supplemental briefing that FDA served as a “gatekeeper” for CMS, with both entities standing as “two arms of the same federal department,” and thus fraudulent conduct directed toward one arm and a request for payment directed toward another arm could be synthesized so as to have a sufficiently direct nexus. The court disagreed, distinguishing between “Gilead’s non-disclosure and misrepresentations . . . [made] during the FDA approval process” and the “subsequent reimbursement requests to CMS,” and rejecting relators’ invitation to rule that a false statement to one regulatory agency “can form the basis of FCA liability simply because the fraudulently induced action of that agency was part of a causal chain that ultimately led to eligibility for payment from the payor agency.”
In similarly dismissing relators’ claims that Gilead had also made false implied certifications of compliance to CMS, the court then adopted the reasoning of the Fourth Circuit in Rostholder that the mere assertion of drugs being adulterated or misbranded as a result of a manufacturer violating cGMP requirements falls short of articulating a claim under the FCA, because Medicare and Medicaid do not condition reimbursement on compliance with cGMP regulations. Instead, payment is conditioned on a drug receiving FDA approval, which Gilead’s products had undisputedly obtained. Accordingly, the relators’ claims were held to be fundamentally flawed.
The court’s opinion generally addresses the heightened policy concerns generated by the proposition that regulatory non-compliance, particularly within the complex FDA regime, can trigger a cognizable FCA claim. If false statements made during the FDA approval process could serve as the basis for FCA liability, then courts would have to determine whether, but for the fraudulent conduct, the agency would have denied approval of the drug. Delving into the nuances of the FDA approval process, the court explained, would be a task the courts lack the expertise to execute. The court also echoed Rostholder‘s concern with using the FCA to short-circuit FDA’s own enforcement powers. Notably, however, the language and the logic of the Campie court’s opinion sweeps much broader than allegations focused on compliance with FDA regulations, and bear relevance on all FCA claims premised on alleged fraudulent conduct directed at a regulatory agency other than the one which pays the affected claims.
Finally, the court addressed the relators’ alternative theory of FCA liability, namely that the manufacturing defects were so significant they rendered the resulting product “worthless.” As we previously reported here, and as the Campie court observed, the Seventh Circuit recently constrained the viability of FCA suits premised on a theory of “worthless services,” ruling that a product or service’s diminished value must not be simply “worth less,” but rather must be truly “worthless.” Although the government has argued through statements of interest in both this case and Rostholder that some cGMP violations may so affect a drug “that the drug is essentially ‘worthless’ and not eligible for payment by the government,” the court ruled that the Campie relators had not alleged facts meeting the requirements of “the narrow ‘worthless services’ theory.”
The court granted the relators an opportunity to amend their complaint and either articulate a worthless services theory or a direct misrepresentation made during the payment process. We will continue to monitor any developments in this case, which is sure to be cited by defendants facing a broad range of FCA claims based on alleged regulatory non-compliance, and not just by defendants in FCA cases premised on alleged violations of cGMP and other FDA requirements. A copy of the district court’s opinion can be found here.