Sidley lawyers Kristin Graham Koehler and Josh Fougere have authored an article as a part of the Washington Legal Foundation’s Counsel’s Advisories series, entitled “Appeals Court Holds That First-To-File Violations Require Dismissal Of False Claims Act Suits.” The article examines the Second Circuit’s recent ruling in United States ex rel. Wood v. Allergan, Inc., 899 F.3d 163 (2d Cir. 2018). The Second Circuit joined a growing majority view in holding that a violation of the False Claims Act’s “first-to-file bar cannot be remedied by amending or supplementing the complaint” but, instead, requires dismissal. In reaching that conclusion, the court of appeals made two important points. First, the Second Circuit rejected the relator’s contention that the earlier-filed suits did not trigger the first-to-file bar because they were deficiently pled and were not as detailed as the current complaint. Second, the Second Circuit held that, if a “related action” is “pending” when the relator initially files the complaint, the relator cannot “cure” the violation through amendment after the earlier action is dismissed. The only remedy is dismissal. This emerging consensus has important consequences for statutes of limitations and for how parallel courts handle multiple qui tam suits making similar allegations.
The article is available for download on the Washington Legal Foundation’s website: https://www.wlf.org/2018/10/18/publishing/appeals-court-holds-that-first-to-file-violations-require-dismissal-of-false-claims-act-suits/.
Continuing a trend of recent attention to significant False Claims Act issues that have divided the courts of appeals, the Supreme Court this morning invited the views of the Solicitor General in a case that implicates two such issues—(1) dismissal for violation of the seal requirement and (2) the so-called collective knowledge theory of scienter. The specific Questions Presented in the cert petition are:
I. What standard governs the decision whether to dismiss a relator’s claim for violation of the FCA’s seal requirement, 31 U.S.C. § 3730(b)(2)?
II. Whether and under what standard a corporation or other organization may be deemed to have “knowingly” presented a false claim, or used or made a false record, in violation of section 3729(a) of the FCA based on the purported collective knowledge or imputed ill intent of employees other than the employee who made the decision to present the claim or record found to be false, where (i) the employee submitting the claim or record independently made the decision to present the claim or record in good faith after reviewing the available information and (ii) there was no causal nexus between the submission of the false claim or record and the purported collective knowledge or imputed ill intent of those other employees?
The Solicitor General will likely file a brief in time for the Court to reconsider the petition before the summer recess at the end of June, and the invitation itself means that the Court is already taking a hard look at the petition. This is another case to watch closely.
In a peculiar twist on a familiar issue, the United States recently filed a brief taking a broad view of the so-called “public disclosure” bar to argue that the U.S. District Court for the Central District of California lacked subject matter jurisdiction over a relator’s claims.
By way of background, relator James Swoben filed suit against SCAN Health Plan and, eventually, a number of other defendants. The United States and California settled with SCAN in 2012 and subsequently declined to intervene against the remaining defendants. When Swoben sought a relator’s share of the SCAN settlement, however, the government refused and took the position that the basis for Swoben’s claims against SCAN had been publicly disclosed in a 2008 report by California’s Controller’s Office. Swoben then moved for partial summary judgment, arguing that the report did not trigger the public disclosure bar because his claims were not “based upon the public disclosure of allegations or transactions in” the report, as required under the then-effective FCA provision. See 31 U.S.C. § 3730(e)(4)(A)(2008).
The government filed a motion in opposition. Swoben’s complaint alleged that SCAN had received duplicate payments from Medicare and Medi-Cal for some of the same services, and, according to the government, the Controller’s report also “allege[d] that SCAN appeared to be doing so.” U.S. Br. 3. That high-level assertion set the tone for the remainder of the brief. In it, the government argued in no uncertain terms that the statute’s “based upon” and “allegations or transactions” language must be read liberally: it “did not matter” if the Controller’s report failed to allege fraud, false claims, or “[f]acts [s]howing the [s]ame.” Id. at 12–18. To the government’s eye, the report contained enough to say that Swoben’s claims were “‘based,’ at least in part, ‘upon'” it and “stated the material transactions underlying” the purported fraud that was alleged expressly and in more detail in Swoben’s complaint. Id.
These arguments may prove useful to FCA defendants down the road: whether or not the government intervenes, defendants should consider ways to invoke the United States’ expansive and firmly articulated view of the applicable public disclosure bar to argue for the dismissal of FCA claims.
Earlier this month, a federal district court in California dismissed relators’ retaliation claims because they rested on an unduly expansive interpretation of 31 U.S.C. § 3730(h). Both the plaintiff bringing the claim (a company) and defendants against whom it was asserted (several individuals) did not fall within the statute’s scope, the court held. United States v. Kiewit Pac. Co., No. 12-CV-02698-JST, 2014 WL 1997151, — F. Supp. 2d — (N.D. Cal. May 14, 2014).
The case arose out of a highway expansion project in Los Angeles jointly funded by the United States and the state of California. Kiewit was the primary contractor on the project. Relators were subcontractors—individuals and their respective companies who supplied materials for mechanically stabilized earth (“MSE”) wall panels. After several wall panels failed, investigations ensued and this case followed. Relators alleged that, among other things, Kiewit falsely certified compliance with MSE project specifications in exchange for government funds, and Kiewit and individual Kiewit employees retaliated against relator SSL, LLC (one of the subcontractors).
The court dismissed the retaliation claims with prejudice. First, the court held that relator SSL, LLC, could not bring a retaliation claim because the statute does not extend protection to non-individuals, or “entity plaintiffs.” 2014 WL 1997151, at *10-11. Relator’s argument was a simple textual one: section 3730(h) allows any “employee, contractor, or agent” to sue, and the ordinary meaning of “contractor” covers SSL. But the court held that the entirety of 3730(h) and its legislative history foreclosed SSL’s broad reading. To begin with, the types of relief available to successful plaintiffs under section 3730(h)(2), like back pay and reinstatement, were all “directed to individual plaintiffs, not entities.” Id. And the legislative history confirmed the point: in adding “contractors” and “agents” to the list of potential plaintiffs, Congress made clear that it merely intended to sweep in persons or individuals who were not technically “employees” but who had a contractual or agent relationship with an employer. Id. “Nothing suggest[ed] it was Congress’ intent also to broaden the retaliation entitlement to entity plaintiffs.” Id.
The court took a comparably narrow view of who may be sued under the statute. Prior to 2009, section 3730(h) allowed any employee subject to retaliatory conduct “by his or her employer” to sue. Id. at *11. When Congress amended the provision to include “contractor[s]” and “agent[s]” alongside “employee[s],” it simultaneously did away with the reference to conduct “by his or her employer.” Id. Relator argued that this change—and the plain meaning of the current provision—expanded the class of potential defendants to anyone engaging in retaliatory conduct and therefore authorized claims against individual Kiewit employees. Id. Again, the court disagreed. Because the predominant view before 2009 limited liability to the whistleblower’s employer, the court held that Congress would not have overruled that long line of cases and expanded the scope of False Claims Act liability without saying so. Instead, the reason for the deletion was most likely that the provision could no longer refer only to the whistleblower’s “employer” because it now applied to entities with a contractual or agency relationship with the whistleblower. Id. at *12. The court thus concluded that “the 2009 amendment did not expand liability to individuals such as the individual Defendants named here, e.g., coworkers, supervisors, or corporate officers who are not employers, or who lack a contractor or agency relationship with the plaintiff.” Id.
This decision imposes important limits on retaliation claims and may be looked to in future cases, particularly since the court found no case law addressing whether non-individuals can sue for retaliation, 2014 WL 1997151, at *10, and recognized express disagreement with its interpretation regarding putative defendants, id. at *12 n.5.
Last week, the Supreme Court of Louisiana reversed a $330 million judgment ($258 million in penalties, $70 million in attorney fees, and $3 million in costs) against Johnson & Johnson and its subsidiary, Janssen Pharmaceutical, because there was no evidence that “any defendant made or attempted to make a fraudulent claim for payment against any Louisiana medical assistance program within the scope of [the Louisiana Medical Assistance Programs Integrity Law (‘MAPIL’)]”—a state statute based on the federal False Claims Act. Caldwell ex rel. State v. Janssen Pharmaceutical, Inc., Nos. 2012-C-2447, 2012-C-2466, 2014 WL 341038, slip op. at 1-2, 19-20 (La. Jan. 28, 2014)
The case centers on a narrow set of facts related to defendants’ antipsychotic drug Risperdal. In September 2003, the FDA told all manufacturers of so-called atypical antipsychotics to amend their labels to warn about potential adverse side effects associated with the drugs, and to issue letters about the change to healthcare providers around the country. Defendants did so, but their letter also reported that Risperdal had been associated with lower risks than other atypical antipsychotics. The FDA took issue with those statements and directed defendants to issue a “corrective” letter, which they did in July 2004. Just a couple of months later, the Louisiana Attorney General brought suit, alleging that the original letter contained off-label statements misrepresenting Risperdal’s safety and efficacy and that defendants were subject to civil penalties under Louisiana law as a result. In 2010, a jury returned a verdict for the state, finding that the defendants had violated Louisiana’s MAPIL 35,146 times (based on the number of letters mailed and sales calls made) and assessed a civil penalty of $7,250 per violation. The verdict was affirmed by the intermediate appellate court.
The Louisiana Supreme Court found no evidence to support that judgment based on its reading of the state’s false-claims act. Proceeding through each of the statute’s three subsections one-by-one, the court explained the law’s scope and why the conduct at issue did not fall within it. First was subsection (A), which provides that “[n]o person shall knowingly present or cause to be presented a false or fraudulent claim.” La. Rev. Stat. § 43:438.3(A). Because the statute elsewhere defined a “false or fraudulent claim” as one that a provider submits “knowing” it to be false or misleading, the court focused the responsibility for policing falsity on the person or entity actually making the claim for payment. The AG was thus required to “show that a Louisiana doctor who prescribed Risperdal for his patient, or a healthcare provider who dispensed the drug to the patient, knew that the defendants had made misleading statements about their product, but nonetheless prescribed or dispensed the drug to the patient knowing that there may be drugs that are equally safe, and less expensive, or safer than Risperdal, and notwithstanding that knowledge, prescribed or dispensed Risperdal.” Put another way, the “doctor or healthcare provider would have had to have knowingly committed malpractice, prescribing or dispensing Risperdal despite knowing there were better, cheaper, or safer, more efficacious drugs available, for the defendants to be liable under this provision.” No evidence supported such a finding.
Next, the court turned to subsection (B), which provides that “[n]o person shall knowingly engage in misrepresentation to obtain, or attempt to obtain, payment from medical assistance programs funds.” Again requiring a tight nexus between the claim for payment and the allegations, the court found “no showing the defendants knowingly attempted to obtain payment from the medical assistance programs pursuant to a claim.” In addition, the court read the “misrepresentation” requirement to “logically place the obligation of truthful and full disclosure on the healthcare provider or any person seeking to obtain payment through a claim made against medical assistance program funds or entering into a provider agreement,” in light of the “absurd consequences” that would arise if “potentially any information required by any federal or state agency or source, which is not fully disclosed by any person who ultimately receives Medicaid funds, directly or indirectly, could, if not truthfully or fully disclosed, subject that person to civil penalties under MAPIL.”
The third subsection states that “[n]o person shall conspire to defraud, or attempt to defraud, the medical assistance programs through misrepresentation or by obtaining, or attempting to obtain, payment for a false or fraudulent claim.” La. Rev. Stat. § 43:438.3(C). Here, too, the gap between the allegedly misleading statements and the claims for payment doomed the state’s case: “Even if the defendants were attempting to gain a competitive edge over other manufacturers of atypical anti-psychotics through the use of misleading off-label statements,” and “even if the defendants’ conduct was intended to influence the prescribing decisions of doctors treating schizophrenia patients,” there could be no liability because there was “no showing the defendants failed to truthfully or fully disclose or concealed any information required on a claim for payment made against the medical assistance programs” or that any such statements “were made to the department relative to the medical assistance programs,” and there was “no causal connection” between any such conduct and “any false or fraudulent claim for payment to a healthcare provider or other person.”
The thrust of the Louisiana court’s reasoning is straightforward but powerful: a statute designed to prevent false or fraudulent claims requires a close connection between the allegedly fraudulent conduct and the claim for payment from the state, and liability will not necessarily attach to any allegation of wrongdoing that ultimately winds its way to a Medicaid claim. Because the Louisiana statute bears similarities with false claims act statutes in other jurisdictions, this is a significant ruling for manufacturers defending false marketing claims elsewhere.
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.
Last week, the federal district judge presiding over the AWP litigation invited relators Linnette Sun and Greg Hamilton to move to reopen the judgment in another, related case that had been previously settled and closed. In re Pharm. Indus. Average Wholesale Price Litig., 2012 WL 3263922 (D. Mass. Aug. 7, 2012). The order requires some parsing of procedural history. A few months earlier, the court granted defendant Baxter Healthcare’s motion for partial summary judgment of Sun and Hamilton’s claims based upon a broadly worded settlement agreement in another matter brought by a different relator (Ven-A-Care of the Florida Keys). In re Pharm. Indus. Average Wholesale Price Litig., 2012 WL 366599 (D. Mass. Jan. 26, 2012). Although Ven-A-Care had sued ten years before Sun and Hamilton, the cases concerned similar allegations—that Baxter fraudulently inflated the prices of drugs and caused overpayments—and the court thus read the Ven-A-Care settlement’s release to cover, and bar, Sun and Hamilton’s cause of action. In response to concerns about construing releases too broadly, the court placed the onus on the government to police such risks through its statutory authority to withhold consent on expansive settlements. Id. at *3-4 (citing 31 U.S.C. § 3730(b)(1)).
Fast forward a couple of months and the picture muddies. Sun and Hamilton moved for reconsideration, arguing that they were entitled to a fairness hearing on the Ven-A-Care settlement that apparently covered their claims, and to a share of the proceeds. The government, for its part, maintained that it did not understand or intend the Ven-A-Care release to cover Sun and Hamilton’s suit, into which it had declined to intervene. Caught in this “procedural pretzel,” 2012 WL 3263922 at *5, the court maneuvered as follows. First, it held that, by consenting to the Ven-A-Care settlement, the government had “effectively settled” Sun and Hamilton’s claims against Baxter and thus pursued an “alternate remedy” for those claims despite declining to intervene. Id. at *1-4 (citing 31 U.S.C. § 3730(c)(5)). Relying primarily on authority from the Sixth and Ninth Circuits, the court reasoned that a broad reading of § 3730(c)(5) to include the settlement was consistent with FCA’s goal of encouraging relators and would avoid the potential for government abuse. Id. Next, the court found that, because Sun and Hamilton’s rights do not change when the government pursues an “alternate remedy,” the FCA requires that they receive a hearing to determine the fairness of the Ven-A-Care settlement that had extinguished their claims. Id.; 31 U.S.C. § 3730(c)(2)(B). But, because that settlement had been approved and judgment entered, the court was forced to suggest an atypical path—that relators move to reopen the Ven-A-Care judgment (to which they were not parties) pursuant to Fed. R. Civ. P. 60(b)(6). Id. at *5.
In the end, this decision may prove inconsequential—the first-to-file bar lurks and the court noted that it will ultimately “have to determine whether it has jurisdiction.” Id. at *5. But, especially for now, it signals a serious solicitousness for the relators and a willingness to pack much (perhaps too much) into § 3730(c)(5)’s “alternate remedy” language. That could carry significant implications for FCA defendants around the country, who are routinely subject to overlapping FCA claims, because it gives fodder to relators in other cases to wreak havoc on completed settlements and to disturb what the government and the parties all think has been … well, settled.
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.
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.