The Fifth Circuit recently affirmed summary judgment in favor of Omnicare—the nation’s largest provider of pharmacy services to skilling nursing facilities (“SNFs”) and other long-term care institutions—alleging that Omnicare made, or caused SNFs to make, false certifications of compliance with the Anti-Kickback Statute based on Omnicare’s debt collection activities and practice of offering prompt payment discounts (“PPDs”) to SNFs. United States ex rel. Ruscher v. Omnicare, Inc., No. 15-20629 (5th Cir. Oct. 28, 2016).
In another recent False Claims Act (“FCA”) case decided on Rule 9(b) grounds, the Seventh Circuit rejected the contention that allegations regarding specific claims submitted are necessary to survive a motion to dismiss, but set a very high bar for pleading FCA claims premised on a lack of medical necessity.
In its first post-Escobar FCA opinion, the Seventh Circuit affirmed summary judgment in favor of defendants in United States ex rel. Sheet Metal Workers Int’l Assoc. v. Horning Investments, LLC, No. 15-1004 (7th Cir. July 7, 2016), and in doing so suggested that there is a high bar for establishing that defendants acted with the requisite knowledge when the claim is that they falsely certified compliance with an ambiguous underlying law.
In April 2015, we wrote about the Sixth Circuit’s decision to reverse and remand a $664 million judgment in favor of the government against United Technologies Corp., relating in part to claims that United Technologies’ predecessor, Pratt & Whitney (“P&W”), violated the False Claims Act by falsely certifying that it had corrected misstated projected costs in a 1983 bid to supply engines for the Air Force’s F-15 and F-16 fighter jets. See United States v. United Techs. Corp., No. 13-4057 (6th Cir. Apr. 6, 2015). The $664 million award included $7 million in statutory penalties related to the False Claims Act violation, and $657 million in damages for common law claims of payment by mistake and unjust enrichment.
A recent decision out of a California district court rejected an attempt by a former employee of a provider organization with nationwide operations to obtain nationwide discovery based on alleged misconduct occurring at the particular facility where the former employee worked. The court’s thorough analysis is a model for other courts being asked to allow relators to subject defendants to expensive nationwide discovery based on generalized allegations that purported wrongdoing at a particular location was part of a nationwide pattern or practice.
Posted by Scott Stein and Jessica Rothenberg
In the latest decision in litigation that spans 17 years and relates to conduct that occurred 32 years ago, the Sixth Circuit reversed a $664 million judgment in favor of the government against United Technologies Corp. and remanded the case, for a second time, for a recalculation of damages. A copy of the Sixth Circuit’s opinion in United States v. United Techs. Corp., No. 13-4057 (6th Cir. Apr. 6, 2015) can be accessed here.
In 1999, the United States filed a lawsuit against Pratt & Whitney (“P&W”), now owned by United Technologies, alleging that Pratt violated the False Claims Act by falsely certifying that it had corrected previously misstated projected costs in a 1983 bid to supply engines for the Air Force’s F-15 and F-16 fighter jets. The Air Force ultimately chose to divide its engine orders between P&W and another manufacturer, and each year, issued a “call for improvement” that requested more favorable terms than the prior year’s “best and final offer” from P&W and the other manufacturer. The Air Force certified each year that P&W’s prices were “fair and reasonable” based on the “market test between competitors.”
In 1998, the government filed an administrative action against P&W with the Armed Services Board of Contract Appeals alleging that P&W misrepresented that it had corrected problems in its initial bid and used its most accurate cost data to develop its best and final offer prices. However, the Board rejected the government’s claim, holding that P&W alleged misstatements did not cause any damages because the Air Force had relied on competitive forces, rather than the erroneous price and cost data, in awarding its contracts. Therefore, Board concluded, the prices that the Air Force paid for the engines were not inflated by the alleged fraud. The Federal Circuit affirmed the Board’s determination.
In 1999, the government filed a separate lawsuit in federal district court alleging violations of the FCA and for common law restitution. In 2008, the district court held P&W liable under the FCA, but found that the government had suffered no actual damages and awarded the government only $7 million in statutory penalties. The district court also determined that the government’s claims for restitution were barred by claim preclusion because they should have been litigated before the Board. See United States v. United Techs. Corp., No. 3:99-cv-093, 2008 WL 3007997 (S.D. Ohio Aug. 1, 2008). The government appealed, and in 2010, the Sixth Circuit affirmed liability, but found that the government’s restitution claims were not barred by claim preclusion and remanded the case back to the district court. See United States v. United Techs. Corp., 626 F.3d 313 (6th Cir. 2010). On remand, the district court held that the Board and Federal Circuit litigation did not resolve whether P&W misstatements caused the government damages and therefore rejected P&W’s issue preclusion defense. In addition to the $7 million originally awarded, the government was awarded $657 million in treble damages, restitution, and prejudgment interest. See United States v. United Techs. Corp., 950 F. Supp. 2d 949 (S.D. Ohio 2013).
On appeal from the 2013 judgment, the Sixth Circuit affirmed the district court’s holding that issue preclusion did not bar the government’s damages claim under the FCA and common law restitution. However, the Sixth Circuit held that the district court had, mistakenly, exclusively relied on the government’s damages estimate, which failed to take into account the role that competition between P&W and the other manufacturer played in determining reasonable and fair prices, and whether that competition mitigated the damages to the government. Citing the protracted litigation and the decades that had passed since the fraud, the court was “tempted” to end the case with the government receiving the $7 million in statutory penalties under the FCA. Further, the court stated that “the government had every opportunity to put on an expert to show whether affected its damages,” but it had “refused to do so.” However, the Sixth Circuit ultimately decided that the district court, which presided over the remand litigation, was in a better position to decided whether the government should have another chance to prove its damages after taking into account the role of competition. The Sixth Circuit reversed the lower court’s judgment and remanded the case for further proceedings.
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 Scott Stein and Jessica Rothenberg
A recurring problem in qui tam cases, particularly when the relator is or works for a competitor of the defendant, is the issue of relators’ access to confidential and other competitively-sensitive information produced or created during a government investigation preceding unsealing or once a case is being actively litigated. Recently in one such case, a federal district court in the Northern District of Ohio entered an order limiting the relators’ access to the defendant’s competitively-sensitive information. The relators – the former Director of Contract Services and the then-current Director of Business Development and Technology for defendant Cellular Technology, Ltd. (“CTL”), a laboratory services company, allege that CTL defrauded the U.S. government by inflating direct labor costs under its contracts to provide research services to the National Institutes of Health. Specifically, the relators allege that CTL, in its proposals, to NIH over-inflated the total staff hours it would take to complete various projects and identified its highest paid personnel to perform work, as well as additional employees and individuals who were never employed by CTL, without any expectation of those individuals performing the work being represented. According to the relators’ complaint, CTL’s alleged fraud resulted in at least $3.25 million in excess costs being billed to and paid by the U.S. Government. The U.S. Department of Justice intervened in September 2011, also alleging that CTL represented to NIH that certain employees would work on contracts, knowing that some would never perform any work on the projects, over-inflated the total number of hours it would take to complete the projects, and later billed NIH for far more hours than its employees actually spent on NIH projects.
In an effort to resolve the suit, the United States and CTL jointly agreed to engage an auditor to conduct an audit of the work performed by CTL for NIH under the contracts at issue. In connection with the audit, the United States, CTL, and the auditor signed a confidentiality agreement governing the disclosure of documents and information to the auditor necessary to perform the audit and prepare any reports. In addition, on January 23, the court entered an order limiting the circumstances under which the materials provided to and created by the auditor could be shared with the relators. Under the court’s order, prior to the relators gaining access to any of the audit materials, they must disclose to the U.S. Attorney’s Office their current employer. That disclosure will be forwarded immediately to CTL. Additionally, if at any time either of the relators obtains new or additional employment, a supplemental notice must be filed within five days of beginning the new or additional employment. If either of the relators is deemed to be, or is employed by, a CTL competitor (as defined by the order), neither of the relators will be permitted access to the materials provided to and created by the auditor until the employment or activity that renders the relator a competitor ends. Any materials to which the relators already had been permitted access prior to becoming a competitor, including any notes taken by the relators concerning those materials, must be returned immediately. The order also prohibits relators from making copies of any of the materials provided to the auditor and requires that all materials provided to and prepared by the auditor, and any notes taken by relators in their review of those materials, must be returned to the U.S. Attorney’s Office at the conclusion of the litigation.
This order provides a useful model for other cases in which relators seek access to competitively-sensitive information. A copy of the Order Concerning Materials Produced in Connection with Audit in United States v. Cellular Tech., Ltd., No. 1:09CV01008 (N.D. Ohio 2015) can be found here.
Posted by Scott D. Stein and Jessica Rothenberg
On October 20, the Third Circuit affirmed the dismissal of a qui tam suit on the ground that a relator whose knowledge was based on review of documents and discussions with other company employees did not have “direct and independent knowledge” such that he satisfied the original source exception to the pre-PPACA public disclosure bar. The relator, a former employee of Medco (a pharmacy benefit management company), alleged that two pharmaceutical manufacturers violated the FCA by (1) misreporting their average and best prices for drugs sold to government health programs, and (2) improperly inducing health plans managed by Medco to favor their drugs. The relator claimed to have learned of defendants’ alleged fraud while a senior executive at Medco, during which time he met with representatives of the defendant manufacturers to negotiate agreements, and reviewed and discussed with colleagues agreements with defendants and other internal Medco documents.
The Third Circuit agreed with the district court that to qualify as an original source, “a relator must have direct and independent knowledge of either . . . the alleged fraud, or both . . . the false and true set of facts.” The court determined that relator’s knowledge, which allegedly “came from reviewing documents and discussing them with colleagues who participated in the underlying events,” was not “direct and independent,” and did not satisfy the original source exception. And although relator had direct and independent knowledge of defendants’ business strategies and certain payments to Medco and government health plans, he did not have knowledge of kickbacks, inaccurate best-price reports, or any false claims submitted by defendants. The court determined that the relator “substitutes experience-based belief that misconduct was occurring for the requisite direct and independent knowledge,” which “is plainly insufficient to qualify as an original source under the FCA.” Mark Haddad of Sidley Austin argued the appeal in the Third Circuit for AstraZeneca. A copy of the Third Circuit’s precedential opinion in United States ex rel. Schumann v. AstraZeneca Pharmaceuticals L.P., et al., No. 13-1489 (3d Cir. Oct. 20, 2014) can be found here.
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.