Jonathan F. Cohn

24 May 2013

Decision Highlights Dangers of Competitor Qui Tam Suits Following Patent Litigation

Posted by Jonathan CohnPaul Ray and Ben Mundel

A recent decision by a federal district court highlights some of the dangers of qui tam suits under the False Claims Act brought by a company against one of its competitors capitalizing on a patent dispute victory.

Needless to say, qui tam suits are typically brought by former officers or employees of a defendant corporation, because these persons are most likely to have access to the type of non-public information generally necessary for a successful qui tam action. See 31 U.S.C. § 3730(e)(4). But, in Amphastar Pharmaceuticals Inc. v. Aventis Pharma SA, EDVC-09-0023 MJG (C.D. Cal.), one pharmaceutical company has brought a qui tam action against one of its competitors. Amphastar, a drug manufacturer, is suing competitor Sanofi (formerly Aventis), alleging that Sanofi fraudulently inflated the price of one of its drugs (Lovenox) over which Sanofi claimed (ultimately unenforceable, as determined in litigation with Amphastar) patent rights and thus overcharged the federal government, as well as several state governments, for the drug. The case is important, because it could mark a new species of False Claims Act case involving corporate qui tam plaintiffs suing their competitors after prevailing in prior patent litigation.

The United States District Court for the Central District of California denied Sanofi’s motion to dismiss Amphastar’s amended complaint on April 19. (Coverage of an earlier order dismissing Amphastar’s original complaint with leave to replead can be found here.) Under Ninth Circuit precedent, the submission of false claims is often pleaded by describing representative examples of particular false claims that have been submitted. Because Amphastar is a competitor of Sanofi rather than a former officer or employee of the company, it did not have ready access to Sanofi’s internal information that might have helped Amphastar detail particular false claims in its complaint. Instead, it pleaded more broadly that Sanofi held the exclusive right to sell Lovenox, that as a result of its fraudulently obtained patent, Sanofi was able to inflate Lovenox’s price, and that the federal government bought certain quantities of Lovenox from Sanofi or its distributors. Sanofi argued that Amphastar’s complaint failed to plead with the particularity required by Federal Rule of Civil Procedure 9(b) that Sanofi had submitted false claims for Lovenox, as necessary for a claim under the False Claims Act. See 31 U.S.C. § 3729(a).

The court disagreed. It acknowledged that “Amphastar has not provided a detailed account of Aventis’s claims submission process, nor specifics regarding how government reimbursement programs work, both of which could be helpful to evaluate the presence of reliable indicia of claims submission.” Nevertheless, it concluded that “[s]uch detail … is not necessary,” because Amphastar “present[ed] a plausible contention that every claim for reimbursement at the inflated price was an actionable false claim.” Accordingly, the court found that Amphastar had pleaded its qui tam claim with adequate particularity under Rule 9(b), and denied Sanofi’s motion to dismiss.

This is an important case that may unfortunately increase the scope of FCA liability. The theory of liability in this case is novel and raises serious risks for pharmaceutical companies. Claims of fraud are a staple in patent litigation. If FCA liability can be predicated on the invalidation of the underlying patents of branded drugs after those patents have been invalidated by competitors on grounds of fraud, then pharmaceutical companies may face new and substantial FCA liability as a consequence of being defeated in patent litigation.

21 May 2013

United States Supreme Court To Take Up Important Case Regarding the Scope of SOX’s Whistleblower Protection Provisions

Posted by Jonathan Cohn and Benjamin Mundel

On Monday, the United States Supreme Court granted certiorari in Lawson v. FMR LLC, No. 12-3 (certiorari granted May 20, 2013). The issue presented is whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A. The statute prohibits retaliation by a public company—or an officer, employee, contractor, subcontractor, or agent of a public company—against “an employee” who reports fraud or a violation of securities regulations. This is an important case that may interpret the scope of Sarbanes-Oxley’s whistleblower protection provisions.

The two plaintiffs, former employees of subsidiaries of publicly traded Fidelity mutual funds, brought suit in federal district court after allegedly suffering adverse employment action as a result of their whistleblowing. The first plaintiff allegedly blew the whistle on the fund for improperly attributing expenses to increase fees. The second plaintiff raised an issue regarding the categorization of a particular fund which he alleged led to the fund improperly charging a management fee. Fidelity filed a motion to dismiss on the grounds that the plaintiffs, who were not employees of a publicly traded company, were not “employees” within the meaning of statute. The district court denied Fidelity’s motion to dismiss. Relying on legislative history, the district court held that the statute protected employees of contractors. Fidelity filed an interlocutory appeal.

The First Circuit reversed in a 2-1 decision, holding that the term “employee” in the statute covers only those at publicly traded companies. The panel refused to grant any deference to the Department of Labor and SEC’s position and instead relied on the title of the statute and caption that reads: “employees of publicly traded companies.”

Before granting certiorari, the Supreme Court first called for the views of the Solicitor General. On behalf of the United States, the Solicitor General asked the court to deny certiorari even though he believed that the First Circuit’s interpretation was erroneous. As to the merits, the Solicitor General argued that the plaintiffs were covered under the plain terms of the act and the legislative history supported a broad reading. Furthermore, the Solicitor General argued that, if the statute were vague, the Department of Labor’s decision in Spinner v. David Landau & Assocs., LLC, ARB Case NOS. 10-111; 10-115 was entitled to Chevron deference. Regardless, the Solicitor General concluded that certiorari was not appropriate at this time because there was no disagreement in the circuits on the question, the issue has arisen infrequently, and no circuit had the opportunity to consider the Department of Labor’s recent Spinner decision.

Nevertheless the Supreme Court granted certiorari and will hear the case next term. This case will likely resolve the disagreement between the First Circuit and the Department of Labor regarding the scope of the term “employee” under Section 806 of the Sarbanes-Oxley Act. If the Supreme Court reverses the First Circuit, there may be increased exposure for companies because employees of privately held companies that contract with public companies will be entitled to whistleblower protections under SOX.

26 February 2013

DOJ to Join FCA Qui Tam Suit Against Lance Armstrong

Posted by Michael D. Mann

As widely reported in the media, on February 22, 2013, the U.S. Department of Justice filed a Notice of Election to Intervene In Part in Floyd Landis’ False Claims Act qui tam suit against his former cycling teammate Lance Armstrong. The government alleges Armstrong, Johan Bruyneel and Tailwind Sports “submitted or caused the submission of false claims to the U.S. Postal Service (“USPS”) in connection with its sponsorship of a professional bicycle racing team by regularly employing banned substances and methods to enhance their performance, in violation of the USPS sponsorship agreements.” In its press release, the government contends the USPS sponsorship agreements “required the team to follow the rules of cycling’s governing bodies, which prohibited the use of certain performance enhancing substances and methods.” The USPS paid the Tailwind-owned professional cycling team approximately $31 million in sponsorship fees between 1996 and 2004. Armstrong was the lead rider on the team and Bruyneel was the manager or directeur sportif. Bruyneel is alleged to have known “team members were using performance enhancing substances and facilitated the practice.”

At this time the government has declined to intervene and reserved the right to seek dismissal against others named in Landis’ claim, including defendants William Stapleton, Barton Knaggs, Capitol Sports and Entertainment Holdings, Inc., and Thomas Wiesel. The government has 60 days, or until April 23, 2013, to file its Complaint in Intervention.

The Landis suit raises a number of novel questions, which were discussed in an earlier post by Jonathan F. Cohn and Brian P. Morrissey.

U.S. District Judge Robert L. Wilkins has lifted the seal on all matters going forward in the proceeding, which is captioned United States ex rel. Floyd Landis v. Tailwind Sports Corporation, et al., No. 10-cv-976 (RLW).

An unsealed copy of Landis’ Second Amended Complaint, also filed on February 22, 2013, can be found here.

28 January 2013

UPDATE: Second Circuit Declares That The First Amendment Shields Off-Label Marketing

Posted by Scott SteinJonathan Cohn and Nirav Shah

UPDATE: On Wednesday, the Food and Drug Administration announced that the government has decided not to seek en banc or Supreme Court review of the Second Circuit’s decision. Presumably, the government did not want to risk an adverse decision by the full Second Circuit or from the Supreme Court that could further restrict the FDA’s ability to bring off-label marketing cases. Instead of seeking further review, the FDA has sought to characterize the Caronia holding as a narrow one. In a statement explaining the government’s decision, the FDA said that it does not believe Caronia will “significantly affect the agency’s enforcement of the drug misbranding provisions of the Food, Drug and Cosmetic Act.” According to the FDA, “[t]he decision does not strike down any provision of the . . . act or its implementing regulations, nor does it find a conflict between the act’s misbranding provisions and the First Amendment or call into question the validity of the act’s drug approval framework.”

This story is still playing out in other Circuits around the country, and the Supreme Court may review the issue in another case. But the government’s decision allowing this precedent to stand is good news for potential False Claims Act defendants in off-label marketing cases in the Second Circuit and elsewhere.


On December 3, 2012, the Court of Appeals for the Second Circuit issued a landmark ruling in United States v. Caronia, No. 09-5006 (2d Cir. December 3, 2012) declaring that truthful, non-misleading off-label promotion is constitutionally-protected commercial speech. In a 2-1 ruling accompanied by a vigorous dissent, the Court vacated the conviction of former Orphan Medical, Inc., sales representative Alfred Caronia for conspiracy to introduce a misbranded drug into interstate commerce. The government alleged that, while Caronia was an Orphan sales rep, he promoted the drug Xyrem for off-label use. In appealing his misdemeanor conviction, Caronia argued that the First Amendment barred the government from convicting him for disseminating truthful and non-misleading information about an FDA-approved drug “where such use is not itself illegal and others are permitted to engage in such speech.” Op. at 25. The majority agreed, in effect “declin[ing] the government’s invitation to construe the FDCA’s misbranding provisions to criminalize the simple promotion of a drug’s off-label use by pharmaceutical manufacturers and their representatives because such a construction . . . would run afoul of the First Amendment.” Op. at 33.

The majority dissected the often-unchallenged notion that off-label promotion, in and of itself, is illegal or renders a drug misbranded. It observed that neither the FDCA nor its implementing regulations expressly prohibit off-label promotion. Op. at 26. Instead, the regulatory scheme permits promotional speech to be used as evidence of a drug’s intended use. Yet despite the absence of a flat prohibition on off-label communication, Caronia argued on appeal that he was being prosecuted for having engaged in truthful, non-misleading speech. The government, by contrast, contended that his speech served to establish evidence of intent to introduce misbranded Xyrem into interstate commerce. The majority disagreed, finding that “the record makes clear that the government prosecuted Caronia for his off-label promotion.” Op. at 20.

The Court then analyzed the extent to which Caronia’s off-label promotional speech was protected by the First Amendment. In arriving at its conclusion that the speech was in fact protected, the Court relied on last year’s Supreme Court decision in Sorrell v. IMS Health, Inc., 131 S. Ct. 2653 (2011). In Sorrell, which also originated in the Second Circuit, the Supreme Court struck down a Vermont law prohibiting pharmaceutical companies from using prescribed-identifying information in their marketing efforts. The Second Circuit used Sorrell as a backdrop and concluded that the government’s prohibition of off-label communication was both content and speaker-based. It then moved to the next step of the analysis and asked whether the government had shown that the restrictions on speech were consistent with the First Amendment. Relying on the Supreme Court’s decision in Central Hudson Gas & Electric Corp. v. Public Service Commission of N.Y., 447 U.S. 557 (1980), the Second Circuit found that the government had satisfied only two of the four prongs necessary to show that commercial speech is not protected by the First Amendment. As part of that ruling, the majority concluded that there were less restrictive ways for the FDA to regulate the provision of information about off-label usage, citing in support an article by Sidley partner Coleen Klasmeier. Accordingly, the Court concluded that the “government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.” Op. at 51.

A spirited dissent authored by Judge Livingston, who also dissented from the Second Circuit’s majority opinion in Sorrell, challenged the majority at almost every turn. Judge Livingston disagreed with the majority’s interpretation that Caronia was convicted for promoting Xyrem off-label, finding instead that “Caronia’s speech was used simply as evidence of Xyrem’s intended uses. . . .” Dissent at 7. Accordingly, she concluded that his “conviction does not run afoul of the First Amendment.” Id.

For now, the ruling applies only in the Second Circuit, which encompasses New York, Vermont, and Connecticut. It remains to be seen whether the United States will seek rehearing by the full Second Circuit or review by the Supreme Court. Regardless, the ruling has broad implications for pharmaceutical manufacturers at a time when DOJ is extracting record settlements in cases premised on allegations of off-label marketing. As the dissent noted, “the majority calls into question the very foundations of our century-old system of drug regulation.” Dissent at 1. Judge Livingston argued that if drug companies “were allowed to promote FDA-approved drugs for nonapproved uses, they would have little incentive to seek FDA. approval for those uses.” Id. at 21. As a result, Judge Livingston feared a scenario where “a drug manufacturer must be allowed to distribute a drug for any use so long as it is approved for one use.” Id. at 23. Under the majority’s view, it’s not clear how, in the Second Circuit, the government could enforce what has long been considered a bright-line rule against off-label promotion.

While the court’s ruling plainly forecloses criminal prosecution under the FDCA for providing truthful, non-misleading promotional information about off-label uses, the impact in civil FCA cases based on off-label promotion is less clear. The opinion appears to undercut any argument that communicating truthful, non-misleading promotional information about off-label uses is sufficient to render a claim “false or fraudulent.” But what if the off-label use is not covered by Medicare or Medicaid because it is not for a “medically accepted indication?” Does Caronia provide a First Amendment shield from FCA liability for engaging in off-label promotion of a drug that is not covered by federal healthcare programs for the off-label use? Can the government or a relator overcome Caronia in a civil FCA case by simply characterizing evidence of off-label promotion as evidence of intent to cause the submission of false claims? These and similar issues will no doubt be hotly contested in future off-label cases, and the impact of the Second Circuit’s ruling will no doubt continue to be explored on this blog and in other forums.

24 January 2013

FCA Suit Against Lance Armstrong Raises Novel Questions about the Act’s Reach

Posted by Jonathan F. Cohn and Brian P. Morrissey

Amidst last week’s coverage of Tour de France-winning cyclist Lance Armstrong’s public acknowledgement that he used banned performance-enhancing substances during all of his Tour victories, numerous news outlets reported that Amstrong’s “doping” had also become the basis of a federal False Claims Act suit. The suit was brought under the FCA’s qui tam provisions by Armstrong’s former teammate, Floyd Landis, and alleges that Armstrong and other defendants defrauded the U.S. Postal Service, which paid millions of dollars to sponsor Amstrong’s team in six of his Tour de France wins. The contract between the Postal Service and the team allegedly prohibited team members from using performance-enhancing drugs. Landis contends that Armstrong’s use of banned substances violated this contractual term and, thus, constituted a false claim against the Postal Service.

Landis’s suit, filed in the U.S. District Court for the District of Columbia, remains under seal. However, the New York Daily News last week obtained and published a copy of the qui tam complaint. (News of this suit had emerged even earlier when a federal magistrate judge issued an order in December 2012 unsealing the record in a subpoena enforcement proceeding initiated by the Postal Service Office against Armstrong. Briefing filed in that case referenced the separate, sealed FCA action.)

Several media outlets reported that the seal on Landis’s qui tam complaint was set to expire on January 17, 2013. That date has come and gone, however, suggesting that the Department of Justice likely requested and received an extension of the seal. The Department may be continuing to consider whether its intervention in the case is appropriate, or it may be engaged in settlement negotiations with Armstrong. (It was reported last week that Armstrong offered the Department $5 million to resolve the case, and that his offer was declined.)

If the case proceeds to litigation, it would raise many novel questions regarding the scope of the Act. For one thing, few—if any—courts have been called upon to assess whether a false statement made to a Government agency to induce its assent to an advertising or sponsorship contract can be considered an actionable false claim. Moreover, there may be interesting arguments as to whether Armstrong’s alleged false statements can be considered material to the Postal Service’s decision to enter into that type of contract.

Separately, the suit raises several fascinating questions regarding Landis’s share of any recovery. Landis’s 2006 Tour de France victory was revoked because of his own use of banned substances. Consequently, because Landis was a member of Armstrong’s teams, a court may conclude that Landis was complicit in any alleged false claims made by the team to the Postal Service. Under the FCA, 31 U.S.C. § 3730(d)(3), a court has discretion to reduce the FCA award to any qui tam relator who “planned or initiated” the FCA violation that forms the basis of his complaint. Moreover, if Landis is convicted of a crime in association with his alleged doping, the Act would preclude him from receiving any proceeds from the qui tam suit entirely. Id.

Finally, several anecdotes appearing in the Complaint had appeared in the press prior to Landis’s filing suit. This could create obstacles to his recovery under the FCA’s original source bar. See § 3730(e)(4)(iii) (authorizing courts to dismiss FCA actions based on allegations “publicly disclosed” in the “news media” unless the qui tam relator is an “original source” of the information). In all events, the case bears watching as it moves forward.

02 October 2012

Second Circuit Adopts Special Damages Calculation For False Claims Submitted To Federal Grant Programs

Posted by Jonathan Cohn and Brian Morrissey

Last month, in United States ex rel. Feldman v. van Gorp., __ F.3d __, 2012 WL 3832087 (2d Cir. Sept. 5, 2012), the Second Circuit joined four other circuits in holding that damages arising from a false claim submitted to a federal grant program may equal the full amount of the grant funds paid to the defendant, and that the traditional “benefit of the bargain” test need not be applied in such cases.

Feldman involved a grant application submitted to the National Institutes of Health (“NIH”) by researchers at Cornell University Medical College. The application proposed a two-year research fellowship program entitled “Neuropsychology of HIV/AIDS” that would train post-doctoral fellows in the neuropsychology of child and adult HIV/AIDS patients. The NIH approved the grant application, along with several subsequent renewal applications. A fellow in the program brought a qui tam suit under the FCA, alleging that the actual fellowship was not what had been advertised in the grant applications. According to the relator’s complaint, faculty members identified in the applications as “Key Personnel” did not contribute in any substantive way to the program, lectures promised in the applications were never delivered, and much of the program’s research had no relation to HIV/AIDS patients at all.

The United States did not intervene, and the relator pursued the litigation on its behalf. The district court entered summary judgment in favor of the United States, and entered damages equal to the full amount of the grants awarded to the defendants. The Second Circuit affirmed.

The FCA provides for treble damages and civil penalties, 31 U.S.C. § 3729(a)(1), but does not specify how damages are to be calculated. In most FCA cases, damages are calculated in the same way as a traditional breach of contract case, using a “benefit of the bargain” analysis in which damages equal the difference between the amount the government paid and the amount it received. See, e.g., United States v. Foster Wheeler Corp., 447 F.2d 100, 102 (2d Cir. 1971). When a false claim relates to a federal grant, however, the government often receives no tangible benefit at all. That was the case here—the grant program was designed to benefit third parties, rather than the government itself.

Nonetheless, the defendants argued that the “benefit of the bargain” calculation should control. Since the fellowship program provided many services promised in the applications, the defendants argued that damages should equal the amount paid by the government minus the value of the services that had been promised, but were not provided. The Second Circuit rejected that argument, refused to apply the benefit of the bargain test, and held that damages should equal the full amount of the grant funds paid. Feldman, 2012 WL 3832087, *9-*10. This required the defendants to surrender the full amount of the grant awards—times three—notwithstanding the fact that the fellowship program provided at least some of the services on which the grant awards were based. The Court held that this result was appropriate because, when a defendant “successfully uses a false claim regarding how a grant will be used in order to obtain the grant, the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.” Id. at *9. In reaching this conclusion, the Second Circuit joined the Fifth, Seventh, Ninth, and D.C. Circuits in holding that the traditional benefit of the bargain test should not apply when the false claim relates to a federal grant or other program from which the government derives no tangible benefit. United States ex rel. Longhi v. United States, 575 F.3d 458, 473 (5th Cir. 2009); United States v. Rogan, 517 F.3d 449, 453 (7th Cir. 2008); United States v. Mackby, 339 F.3d 1013, 1018-19 (9th Cir. 2003); United States v. Science Application Int’l Corp., 626 F.3d 1257, 1279 (D.C. Cir. 2010).

The Second Circuit’s decision in Feldman imposes an especially heavy burden on FCA defendants in federal grant cases, and appears to reflect a growing consensus among the federal courts of appeals that a special damages calculation is necessary in such cases.

21 September 2012

District Court Says FCA’s Statute of Limitations Suspended Since 2001 Due to Iraq and Afghanistan Wars

Posted by Jonathan Cohn and Joshua Fougere

Last month, a federal district court in Texas held that the United States’s FCA suit could proceed, even though it was filed outside the six-year statute of limitations, because the Wartime Suspension of Limitations Act (“WSLA”) served to toll the limitations period based upon the ongoing conflicts in Iraq and Afghanistan. United States v. BNP Paribas SA, 2012 WL 3234233 (S.D. Tex. Aug. 6, 2012). The underlying facts have nothing to do with war or military contracting—they concern claims filed by BNP to recover on USDA guarantees that had been issued to commodity exporters sending goods to Mexico. Id. at *1-2. Because the relevant conduct ended in September 2005, more than six years before the complaint was filed in October 2011, BNP moved to dismiss the suit as time-barred. Id. at *5-6.

The district court denied the motion, agreeing, most notably, with the government’s contention that the WSLA suspended the FCA’s statute of limitations. Id. at *5-15. The WSLA is located in Title 18, among the criminal provisions of the United States Code, and postpones the running of statutes of limitations for “any offense … involving fraud or attempted fraud against the United States.” 18 U.S.C. § 3287. It originally applied only to times when the country is “at war,” but was amended in 2008 to apply as well when “Congress has enacted a specific authorization for the use of the Armed Forces.” 2012 WL 3234233 at *8-9. In order to find this statute applicable to an FCA case about USDA commodity guarantees, the court maneuvered as follows. First, it rejected defendant’s argument that the WSLA is applicable only to criminal offenses, finding persuasive two district court cases from the 1950s. Id. at *11-13. Next, the court found that the Iraq and Afghanistan conflicts were sufficient to extend the WSLA’s reach to cover the 2005 conduct at issue. In that regard, the court found that the United States was (and remains) “at war” in both countries despite no formal declaration of war, id. at *13-14, and that, in the alternative, the 2008 WSLA amendments “recogniz[ing] specific authorization for the use of Armed Force … as sufficient to trigger the WSLA” applied retroactively to sweep up defendants’ 2005 conduct, id. at *15.

Although this is just one decision, its potential ramifications are enormous. If the ruling is followed elsewhere—or even if it just emboldens the government to continue to invoke its novel theory in other FCA cases—it would upend settled expectations and signal open season on FCA allegations pertaining to years-old conduct that defendants thought to be time-barred. By the court’s own acknowledgment, the Iraq and Afghanistan conflicts continue to this day; thus, in the court’s view, the FCA’s statute of limitations has been suspended since 2001 and will continue as such until at least five years after those conflicts conclude. With settlement pressure especially high under the FCA, that is surely a startling prospect for industries and companies within the FCA’s purview.

06 June 2012

Massachusetts District Court Guts Relators’ Kickback and Off-Label FCA Claims on Motion to Dismiss

Posted by Jonathan Cohn and Josh Fougere

On June 1, Judge Rya Zobel issued a decision dismissing most of relators’ claims against pharmaceutical manufacturer Organon and two long-term care pharmacies, Pharmerica and Omnicare, concerning the antidepressant drug Remeron. Relators’ complaint was premised on allegations that defendants (1) received and/or paid kickbacks in exchange for switching patients to Organon’s preferred drugs, (2) misreported pricing and rebates associated with Organon drug sales to the federal government, and (3) promoted Organon drugs for off-label use in order to switch more patients to those drugs. The complaint alleged kickback claims against all defendants and pricing and off-label claims against Organon only.

Judge Zobel’s decision leaves little of the complaint standing. First, the court found that it lacked jurisdiction over all claims against Pharmerica and all kickback and pricing claims against Organon under the FCA’s first-to-file and public disclosure bars. Two aspects of this ruling are particularly noteworthy: (1) Following the D.C. Circuit, the court rejected relators’ contention that a first-filed complaint must satisfy Rule 9(b) because such a requirement would “frustrate the purpose of the first-to-file bar by raising the threshold for it to apply,” Slip Op. 12 n.17, and (2) It was enough for the first-filed complaint to list the Organon drug Remeron, and expressly naming defendant Organon was not necessary, id. at 15. The two complaints alleged the same essential elements of fraud and that was “sufficient to put the government on the trail.” Id. at 16. It did not matter that that these relators provided “additional details and types of kickbacks.” Id.

Second, the court dismissed off-label marketing claims brought under 31 U.S.C. § 3730(a)(1)-(3) because “if a state Medicaid program chooses to reimburse a claim for a drug prescribed for off-label use, then that claim is not ‘false or fraudulent,’ and liability cannot therefore attach for reimbursement.” Id. at 26. Relators alleged only that a state “may” deny coverage for an off-label prescription, not that any states actually did or that states must do so under the Medicaid statute. The allegation that states had a choice whether to cover such prescriptions and did, the court found, could not establish FCA liability for reimbursement claims purportedly filed because of an off-label marketing scheme. Id. at 27-28.

Third, the court dismissed claims against Omnicare premised on so-called “collateral kickbacks”—that is, incentive payments “such as research grants, sponsorship of annual meetings, data purchasing agreements, nominal-price transactions, and participation in corporate partnership programs”—because they failed to satisfy Rule 9(b). Id. at 28-33. The court found, for example, that “budget[ing] for payments to Omnicare does not confirm that such payments were actually made, that Omnicare solicited them, or that the payments were inducements to participate in the conversion or therapeutic interchange scheme alleged,” and the “conclusory allegation that ‘Omnicare actively pursued Organon to participate in corporate partnership programs, which were mainly ways to funnel money to Omnicare in exchange for Remeron prescriptions'” would not do. Id. at 33. (The court did not say whether dismissal was with or without prejudice.)

Although the court did not dismiss relators’ claims entirely, each of these rulings is critically important to limiting the scope of FCA liability that is frequently pursued in analogous cases against pharmacy providers and pharmaceutical manufacturers.

Related post: D.C. Circuit Splits with Sixth Circuit on Scope of FCA’s First-to-File Bar

01 March 2012

Eleventh Circuit Reinstates $69 Million FCA Action Based Alleged Violations of Corporate Integrity Agreement

Posted by Jonathan Cohn and Josh Fougere

Last week, the U.S. Court of Appeals for the Eleventh Circuit reinstated two relators’ $69 million claims against Medco Health Solutions, Inc. (“Medco”) and several of its subsidiaries and officers, holding that the claims were alleged with sufficient particularity to satisfy Federal Rule of Civil Procedure 9(b). Among other things, this decision confirms the significant implications of the recent expansion of FCA liability to require that any “overpayments” be returned to the government within 60 days of the date they are “identified.” 42 U.S.C. § 1320a-7k(d).

In United States ex rel. Matheny v. Medco Health Solutions, Inc., No. 10-15406 (11th Cir. Feb. 22, 2012), the relators were former employees of Medco subsidiaries who alleged that Defendants had knowingly concealed overpayments from Medicare, Medicaid, and other federal healthcare programs. The root of the allegations was a 2004 Corporate Integrity Agreement (“CIA”) with HHS’s Office of the Inspector General (“OIG”), pursuant to which Defendants were required to remit any payments from the government that “lacked sufficient documentation or were received in duplicate or in error.” Slip Op. 3-5. The CIA dubbed these “Overpayments” and, critically, required that they be returned within 30 days of their identification. Id. at 4.

Rather than return such funds as was required, the complaint alleged, Defendants engaged in various schemes to conceal and retain them. Id. at 5. Relators claimed, for example, that Defendants transferred the Overpayments to unrelated or fictitious patient accounts or eliminated them altogether through a “datafix” computer program. Id. Count I was premised on the CIA’s certificate of compliance requirement; according to the relators, when Defendants swore to the government that they were in compliance with the agreement, such certification was knowingly false and intended to avoid remitting the Overpayments. Id. at 5-6. Count II was based on a separate obligation under the CIA requiring Defendants to submit to the government so-called Discovery Samples, which were supposed to be random samples of patient accounts that could be checked for compliance with the CIA. If five percent or more of the accounts were in violation, then a full audit was required; otherwise, that was the end of the matter. Id. at 6. The relators alleged that Defendants rigged the deck by removing any accounts containing evidence of Overpayments from the samples in order to generate a perfect error rate of 0%, thereby avoiding an audit that would have uncovered the hidden Overpayments. Id. at 6-7.

Suit was brought under the FCA’s reverse false claim provision, 31 U.S.C. § 3729(a)(7), and the Eleventh Circuit held that both counts were sufficiently pled for purposes of Rule 9(b). Generally speaking, the Court found that the CIA imposed an obligation to pay money to the government and that the relators had sufficiently pled the requisite who, what, when, where, and why of the suspected fraud. In that regard, the relators benefited from their alleged personal awareness because the court is “more tolerant toward complaints that leave out some particulars of the submissions of a false claim if the complaint also alleges personal knowledge or participation in the fraudulent conduct.” Id. at 17, 27.

Particularly noteworthy, the court held that it was enough to plead that the CIA required remittance of all Overpayments within 30 days and that Defendants did not do so. Id. at 17-23. The Eleventh Circuit rejected the district court’s ruling that the relators’ failure to demonstrate that the money was not eventually repaid was fatal to their complaint. Id. at 17-18 n.13. Instead, the court held that all that mattered was that the CIA had been violated at the time of the certification: “The failure to [remit Overpayments] within the thirty day deadline is itself a violation of the CIA, regardless of whether the Overpayments were eventually repaid.” Id. Given that recent FCA amendments also require the return of overpayments to the government shortly after their identification at the risk of FCA liability, the Eleventh Circuit’s decision confirms the significant implications of this expansion of liability.

Related Post: CMS Issues Guidance on Reporting and Refunding of Overpayments Actionable Under the FCA

17 February 2012

USDA Withdraws Rule Exposing Contractors to FCA Liability for Failure to Report Violations of Labor Laws

Posted by Jonathan F. Cohn and Brian P. Morrissey

Earlier this month, the U.S. Department of Agriculture (USDA) withdrew a proposed rule that would have imposed liability under the False Claims Act on USDA contractors for failure to report violations or alleged violations of federal labor laws. 77 Fed. Reg. 5714 (Feb. 6, 2012); 77 Fed. Reg. 5750 (Feb. 6, 2012). It appears that the rule, if adopted, would have been the first federal regulation to assert FCA liability on this ground. The USDA withdrew the Rule in response to criticism from industry groups, although it remains uncertain whether the agency will reissue the same or a similar rule in the future.

The rule, issued in December 2011, would have required USDA contractors to certify that they were “in compliance with all applicable labor laws” and that, to the best of their knowledge, “all of [their] subcontractors of any tier, and suppliers” were similarly in compliance. See 76 Fed. Reg. 74722 (Dec. 5, 2011); 76 Fed. Reg. 74755. Separately, the Rule would have required contractors to report violations or alleged violations of labor laws to their contracting officer. (The text of the Rule was ambiguous on the question whether this reporting obligation pertained only to violations by contractors themselves, or whether it required contractors to report conduct by their subcontractors and suppliers.) The Rule further stated that contractors’ certifications, if false, could be penalized under the FCA. 76 Fed. Reg. 74722; 76 Fed. Reg. 74755. The Rule was ground-breaking in this respect—it appears to be the first federal regulation that would have called for FCA liability for federal contractors who fail to report violations or alleged violations of labor laws.

This novel application of the FCA underscores the broad reach of the Act, and highlights yet another sector of the economy that could face increased exposure to FCA suits in the future. Most federal courts agree that a claim for payment is cognizable under the Act if it falsely certifies the submitter’s compliance with a condition of Government payment imposed by statute, regulation, or contract provision. See, e.g., United States ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1217 (10th Cir. 2008). In applying this standard, courts have wrestled with the question whether, and to what extent, a claim submitted by a contractor should be interpreted to certify that other parties in the supply chain have also complied with applicable federal rules. The question typically arises in pharmaceutical cases, where a healthcare provider submits a claim based on the use of a product manufactured and supplied by other entities, all of whom might have violated a federal law—such as the Food, Drug, and Cosmetics Act (“FDCA”), 21 U.S.C. § 301, et seq., and the Federal Anti-Kickback Statute (“AKS”), 42 U.S.C. § 1320a-7b(b)(2)—at some point in the course of producing or marketing the drug for which the provider seeks reimbursement. The answer typically depends on the facts—e.g., the precise certification language on the contractor’s claim form and/or the nature of the law that was violated—and has engendered a great deal of litigation. Expanding this theory of liability to violations of labor laws and to contractors in the agricultural industry could represent a new frontier in FCA exposure.

Multiple industry groups objected to the USDA’s rule, including the National Chicken Counsel, the National Turkey Federation, and the U.S. Poultry and Egg Association. See here.  Their objections were numerous, but high on the list was their concern that the Rule would expose contractors to FCA liability for failing to report labor law violations already known to relevant federal law enforcement agencies, and for failing to report any allegation of labor law violations, even a patently frivolous one. The industry groups also expressed concern that the costs of their compliance with this Rule could materially increase the costs of poultry and other agricultural products provided to schools, hospitals, and the military through federal procurement programs.

The USDA withdrew the rule in response to these concerns, but this action may not end the debate. The USDA issued this proposed rule on December 1, 2011 through a Direct Final Rule, 76 Fed. Reg. 74722, and a substantively identical Proposed Rule, 76 Fed. Reg. 74755. The agency stated that the Direct Final Rule would bypass standard notice-and-comment procedures and take immediate effect on February 29, 2012 if no adverse comments were received. If adverse comments were received, however, the agency would withdraw the Direct Final Rule and proceed with standard notice-and-comment procedures on the Proposed Rule.

The USDA withdrew the Direct Final Rule on February 6, 2012 in response to the adverse comments noted above. It also withdrew the Proposed Rule, without explanation. It thus remains uncertain whether USDA plans to re-issue the same or a similar rule at a later time. But the possibility that the agency may do so warrants continued monitoring, especially for those interested in this potential expansion of the FCA.

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