On May 6, 2019, the U.S. Court of Appeals for the First Circuit overturned its own precedent, holding that the first-to-file rule is not jurisdictional. United States v. Millennium Labs., Inc., No. 17-1106, 2019 WL 1987249, at *1 (1st Cir. May 6, 2019). The First Circuit now joins the D.C. Circuit and the Second Circuit in treating the first-to-file requirement as merely a matter of adequate pleading (see United States ex rel. Hayes v. Allstate Ins. Co., 853 F.3d 80, 86 (2d Cir.) (per curiam), cert. denied, 138 S. Ct. 199 (2017); United States ex rel. Heath v. AT&T, Inc., 791 F.3d 112, 120-21 (D.C. Cir. 2015)), widening an existing circuit split on the issue. See, e.g., United States ex rel. Wilson v. Bristol-Myers Squibb, Inc., 750 F.3d 111, 117 (1st Cir. 2014) (first-to-file rule is jurisdictional).
In U.S. ex rel. Alex Booker and Edmund Hebron v. Pfizer, Inc., the U.S. Court of Appeals for the First Circuit affirmed two district court judgments rejecting allegations of the defendant’s sales and marketing activities related to its drug Geodon, noting that, after 6 years of litigation, the whistleblowers failed to provide sufficient evidence to show that defendant’s alleged conduct resulted in the actual submission of fraudulent claims.
In a recent opinion, the First Circuit significantly constrained the scope of the fraud-on-the-FDA theory of liability, which posits that had the FDA known of the defendant’s alleged violation of the Food, Drug, and Cosmetic Act (“FDCA”), it would not have approved the defendant’s product, such that no claims for that product would have been covered by federal healthcare programs. See United States ex rel. D’Agostino v. ev3, Inc., No. 16-1126 (1st Cir. Dec. 23, 2016). The court imposed a rigorous causation standard on fraud-on-the-FDA claims, requiring relators to show that FDA took “official action” after discovering that a manufacturer had submitted fraudulent information to the agency. This standard mirrors the new materiality standard set forth by the Supreme Court in Escobar, in that both require relators to ground their allegations in how the government reacted to learning of the alleged fraud.
As we reported here, in its ruling in Universal Health Services, Inc. v. United States ex rel. Escobar last June, the Supreme Court affirmed the viability of the implied certification theory of liability under the FCA, but remanded the case to the First Circuit to apply the Court’s newly-articulated framework for analysis of such claims. Last week, the First Circuit ruled that even under the Supreme Court’s demanding test for liability, the relators still stated a cognizable implied certification claim, and therefore reversed the district court’s dismissal of the relators’ complaint. Critical to the First Circuit’s ruling was its view that evidence of the government’s payment practices when faced with similar alleged violations are less important to the analysis than the court’s assessment of the centrality of a regulation to the contractual relationship between the government and the defendant.
The First Circuit, in United States ex rel. Garcia v. Novartis AG, upheld the dismissal of a FCA claim with prejudice against Novartis Pharmaceutical Corporation, Novartis Corporation, Genentech, Inc. and Roche Holdings, Inc. (collectively “Defendants”) on the basis that the complaint did not include sufficient specific allegations regarding the who, what, where, and when of the fraud to satisfy Federal Rule of Civil Procedure 9(b). In so doing, the First Circuit appears to have taken a fact-specific middle-ground approach to the Rule 9(b) particularity standard, rather than wholly following either side of the Circuit split on the particularity standard.
DOJ recently filed an amicus brief urging the First Circuit to revive a suit premised on the contention that an agency would have acted differently had it known of defendant’s fraud. See Brief for the United States as Amicus Curiae Supporting Neither Party, United States ex rel. D’Agostino v. ev3, Inc., No. 16-1126 (1st Cir. 2016). The government warns the First Circuit that adopting the district court’s reasoning in dismissing a “fraud-on-the-FDA” theory of liability would have wide-ranging consequences and “categorically foreclose claims that involve federal agency oversight of a defendant’s conduct.” Although courts generally agree that mere regulatory violations, standing alone, cannot serve as the predicate for FCA liability, relators often try to leverage so-called “fraud-in-the-inducement” theories (discussed further here) to repackage regulatory violations into ostensibly valid FCA claims. DOJ has so far suffered losses when advocating for a similar theory of liability in the context of FCA claims based on violations of current Good Manufacturing Practices (“cGMP”) (as discussed here and here), and DOJ’s latest effort to protect FCA liability where it touches on FDA’s discretionary decisions could have broad impact on cases alleging fraud within the context of agency enforcement. In addition, the effort by DOJ here to recast off-label promotion as a “fraud-on-the-FDA” also appears part of an evolving effort to maintain the viability of off-label claims in the face of growing judicial refusal to sanction off-label promotion as the predicate for FCA liability.
Posted by Kristin Graham Koehler and Brian P. Morrissey
Earlier this week, the First Circuit held that the FCA’s first-to-file provision barred a qui tam action against a pharmaceutical manufacturer that was premised on the same “essential facts” as an earlier-filed qui tam complaint, even though the second complaint provided “far more detail[ed]” allegations than the first. United States ex rel. Ven-A-Care of the Florida Keys, Inc. v. Baxter Healthcare Corp., Nos. 13-1732, 13-2083, 2014 WL 6737102, *6 (1st Cir. Dec. 1, 2014). This decision, paired with the First Circuit’s recent ruling in United States ex rel. Wilson v. Bristol-Myers Squibb, Inc., 750 F.3d 111, 117 (1st Cir. 2014)—which we previously have discussed—emphasizes that the First Circuit will rigorously enforce the FCA’s first-to-file bar to preclude qui tam complaints that allege the same fraudulent scheme as a previously-filed action, even if the second complaint contains different, and more detailed, supporting allegations.
The case has a long and complex history, aspects of which we have covered before. In brief, Linnette Sun and Greg Hamilton, a former employee and a former customer of Baxter Healthcare, respectively, filed a qui tam suit against the Company, alleging that it had fraudulently inflated the prices of its drugs, including the anti-hemophilic drugs Advate and Recombinate, and secured higher-than-deserved Medicare and Medicaid reimbursements as a result.
Years earlier, a pharmacy, Ven-A-Care of the Florida Keys, Inc., had filed a similar qui tam complaint against a number of pharmaceutical manufacturers, including Baxter, alleging that all of them had fraudulently inflated their drug prices in order to obtain higher reimbursements. Baxter and Ven-A-Care ultimately settled that case, with the Government’s consent.
After the Ven-A-Care settlement, Baxter moved for summary judgment in Sun and Hamilton’s case, arguing that the settlement released Baxter from Sun and Hamilton’s similar claims. In response, Sun and Hamilton argued—and the District Court agreed—that the Ven-A-Care settlement could not release their claims until they were granted a fairness hearing, pursuant to 31 U.S.C. § 3730(c)(2)(B), to test the adequacy of that settlement as applied to their allegations. In a novel ruling, the District Court allowed Sun and Hamilton to file a Rule 60(b) motion to reopen the Ven-A-Care judgment for the purpose of conducting this hearing.
In the reopening proceedings, Baxter argued that the FCA’s first-to-file rule, 31 U.S.C. 3730(b)(5), barred Sun and Hamilton’s complaint because it alleged the same “essential facts” as Ven-A-Care’s prior complaint. Engaging in a side-by-side comparison of the two complaints, the District Court agreed, and denied Sun and Hamilton’s Rule 60(b) motion on this ground. The First Circuit affirmed.
The First Circuit readily acknowledged that Sun and Hamilton’s complaint “included many details about the underlying scheme that the first relator (Ven-A-Care) did not supply.” 2014 WL 673102, *8. Indeed, Sun and Hamilton’s later-filed complaint “offer[ed] far more detail than Ven-A-Care about particular actors within Baxter and the role those actors played” in the alleged fraud, and “showed greater familiarity with how Baxter pulled off the supposed fraud,” which was attributable to the “inside knowledge” that Sun and Hamilton possessed but Ven-A-Care lacked. Id. at *6.
Despite Sun and Hamilton’s use of “comparatively greater detail” than Ven-A-Care in describing the alleged fraud, the First Circuit held that this is “not what matters for the first-to-file rule.” Id. at *8. Repeatedly invoking its recent decision in Wilson, the Court declared that “[s]o long as the first complaint sets forth the ‘essential facts’ of the fraud alleged in the second complaint, it does all it needs to do under the first-to-file rule.” Id. at *6 (quoting Wilson, 750 F.3d at 117).
To satisfy this “essential facts” test, the First Circuit explained that the first complaint need not disclose every detail of the alleged fraud. Rather, it must only include information that “‘provide[s] . . . the government sufficient notice to initiate an investigation into [the] allegedly fraudulent practices.'” Id. at *4 (quoting United States ex rel. Heineman–Guta v. Guidant Corp., 718 F.3d 28, 36–37 (1st Cir.2013)). Importantly, the First Circuit held that a first-filed qui tam complaint can satisfy this “essential facts” test even if it does “not contain the kind of detailed and particularized allegations of fraudulent conduct . . . required to fulfill the heightened pleading standard for fraud cases set forth in Federal Rule of Civil Procedure 9(b).” Id. at *6.
Applying this standard, the First Circuit concluded that Ven-A-Care’s complaint provided the Government with sufficient notice of the “essential facts” alleged in Sun and Hamilton’s subsequent complaint to bar Sun and Hamilton’s later-filed action. The Ven-A-Care complaint named Baxter as a defendant, specified a date-range in which Baxter’s alleged misconduct occurred, and a “separate section” of the Complaint “devoted solely to Baxter” (rather than the other named defendants) specifically alleged that Baxter “knowingly made false representations about the price and costs of its drugs” and submitted “false records” to Medicare and Medicaid to further this scheme. Id. at *6, *9. In addition, that section of the complaint specifically referenced Recombinate as one of the drugs for which Baxter inflated its prices, and ‘disclosed a pricing spread for Recombinate'” to support this allegation. Id. at *6.
The First Circuit held that these allegations by Ven-A-Care were sufficient to put the Government on notice of the alleged fraud, even though Sun and Hamilton’s subsequent complaint offered considerably greater detail.
Paired with Wilson, this decision strongly demonstrates that the First Circuit will broadly enforce the first-to-file bar against new FCA actions premised on alleged frauds that already have been adequately disclosed to the Government, even in cases in which the new complaint provides significantly more particularized allegations than the first complaint that was filed.
Last week, in Fresenius Medical Care Holdings, Inc. v. United States, No. 13-2144, __ F. 3d __ (1st Cir. Aug. 13, 2014), the Court of Appeals for the First Circuit affirmed a district court opinion that had allowed a defendant in an FCA action to deduct for federal income tax purposes amounts in excess of both single damages and relator payments. This affirmance is of considerable import because, in a well-reasoned opinion, the First Circuit expressly rejected the government’s “Catch-22” argument that the ability of a taxpayer to deduct at least a portion of this excess was precluded by the absence of an agreement between the parties.
For some time, the law had been relatively clear that, for federal income tax purposes, a taxpayer could deduct amounts in excess of single damages to the extent that the taxpayer could prove the excess represented compensatory rather than punitive damages. See, e.g., Cook County v. United States ex rel. Chandler, 538 U.S. 119, 130-31 (2003). However, the Internal Revenue Service has traditionally taken the position that, at least apart from amounts paid the relator, a taxpayer cannot carry its burden of proof as to the compensatory nature of any part of the excess absent agreement with the government on this point. This was a Catch-22 argument because, in settling FCA cases, the Department of Justice procedures generally proscribe any agreement as to the deductibility of amounts paid.
The First Circuit would have none of the government’s argument. Stating that, in tax matters, “[s]ubstance matters,” the court refused to give the government “a whip hand of unprecedented ferocity” that would enable it to “always defeat deductibility by the simple expedient of refusing to agree . . . to the tax characterization of a payment.” The Court then held that, so long as a taxpayer like the one before it had proven that a portion of the excess was compensatory, that portion was deductible.
While important and helpful, the First Circuit opinion is not a panacea. First, a Ninth Circuit opinion distinguished by the court, Talley Industries Inc. v. Commissioner, 116 F.3d 382 (9th Cir. 1997), arguably is to the contrary – a point the First Circuit expressly conceded. Second, the First Circuit’s opinion reiterates that the burden lies with the taxpayer to establish the compensatory nature of the excess. Third, the First Circuit said that one argument by the government – that reductions to the government’s original compensatory and punitive claims in a settlement should be done proportionally rather than first to punitive claims – had a “patina of plausibility.” (The court did not need to contend with this argument in the case before it because the government had raised it too late in the proceedings.)
Thus, while the First Circuit’s decision in Fresenius is very good news, careful planning and analysis are still necessary to maximize the deductibility of FCA payments for federal income tax purposes.
On April 30, the First Circuit held in a case alleging off-label marketing that the first-to-file bar can apply even where the earlier filed-case was based on different off-label uses. See U.S. ex rel. Wilson v. Bristol-Myers Squibb, Inc., Case No. 13-1948 (1st Cir. April 30, 2014) The basic facts were as follows: Relator Wilson, a former pharmaceutical sales representative, alleged that his former employer engaged in off-label promotion of Plavix and Pravachol. The district court granted a motion to dismiss those claims under the first-to-file bar, based on a case that had been filed by a different relator (Richardson) prior to the filing of Wilson’s initial complaint. The Richardson complaint also alleged that the defendants had engaged in a broad, nationwide scheme to promote and prescribe Pravachol and Plavix for off-label uses. The district court held that both the Richardson and Wilson complaints alleged widespread off-label promotion of the same drugs. The only material difference between the two complaints is that the specific off-label uses alleged in the Richardson complaint were different from the off-label uses (and associated disease states) in the Wilson complaint. The primarily issue raised on appeal was whether the Richardson complaint alleged the “essential facts” on which the Wilson complaint was based such that the first-to-file bar applied, notwithstanding the fact that Wilson’s complaint alleged different off-label uses than the Richardson complaint.
The First Circuit held that the first-to-file bar applied, notwithstanding that the two complaints were based on different off-label uses of the same drugs, because “[t]he overlaps among the two complaints were considerable: the same defendants, the same drugs, the assertion of nationwide scheme, and the allegations of specific mechanisms of promotion common to both and leading to common patterns of submission of false claims under the federal Medicaid program.” Op. at 15. The fact that the two cases were based on different off-label uses, the court held, was “not enough to reasonably conclude the earlier Richardson Complaint was not a related claim to the government based on the facts. Whether the first complaint results in there being an actual government investigation and whether any such investigation extends to off-label uses to treat different diseases is not the point.” Id. at 16.
The First Circuit also affirmed the district court’s denial of Wilson’s motion for leave to file an amended complaint. The proposed amended complaint would have added a new co-relator (Allen, another former sales representative), and expanded the scope of the allegations. The First Circuit agreed that to the extent that the new co-relator’s allegations replicated those of Wilson’s earlier complaint, they were barred by the first-to-file rule. And the First Circuit agreed with the district court’s alternative ruling that to the extent that the proposed new complaint added substantively new allegations not previously disclosed to the government, the proposed complaint violated the FCA’s filing and service requirements, 31 USC 3730(b)(2).
This case suggests that the first-to-file bar may have broad application to pharmaceutical marketing cases where there is a previously-filed case involving the same drug, even where the improper uses alleged are different in the two cases. Pharmaceutical marketing cases typically allege nationwide schemes based on the same type of conduct (e.g., training of sales representatives, speaker bureaus, continuing medical education), so the key types of allegations that the First Circuit found triggered the first-to-file bar in Wilson are likely to be present in other pharmaceutical marketing cases. Wilson supports the argument that the first-to-file bar can be applied even where the indications for which a drug is allegedly being marketed improperly are different from the indications that were the subject of an earlier-filed case.
We previously reported on the district court decision in United States ex rel. GE v. Takeda Pharmaceutical Co. Ltd., Case No. 10-cv-11043 (D. Mass, Nov. 1, 2012), in which a federal district court in Massachusetts dismissed a relator’s complaint on Rule 9(b) and 12(b)(6) grounds for failure to either plead specific false claims with particularity or to plead sufficiently that all claims submitted in violation of FDA requirements could be deemed false under an implied certification theory. On December 6, the First Circuit affirmed that dismissal, emphasizing that in cases in which a defendant is alleged to have caused third parties to submit false claims – for example, when a pharmaceutical manufacturer is alleged to have caused pharmacies to submit false claims – the relator must allege specific facts demonstrating that “false claims” were submitted; allegations of a fraudulent scheme are not sufficient. The Court’s opinion can be found here.
Relator Helen Ge, a former employee of the defendant manufacturer, alleged that her former employer misrepresented and misclassified adverse events for four of its products to avoid reporting them to the FDA. Had the adverse events been reported, Ge alleged, the FDA may have required amendments to the products’ approved labeling or additional entries in FDA databases that may have resulted in physicians disfavoring and decreasing prescription of the products. Furthermore, relator alleged, had the defendant reported the adverse events, the FDA may have withdrawn approval for the products, rendering all claims for reimbursement of the product ineligible for reimbursement under federal healthcare programs. The court dismissed the complaint under Rule 12(b)(6), holding that the relator could not prove that compliance with the FDA’s adverse event reporting requirements is a material precondition of payment under federal healthcare programs. The court explained that the FDA not only has the discretion to determine when to prosecute violations of adverse event reporting requirements, but also has a range of potential civil and criminal fines to impose when it decides to pursue violators, including withdrawal of the product’s approval, injunctive orders, monetary fines and imprisonment for individual defendants, and that not all of these potential remedies would lead to the denial of claims for the manufacturer’s drug. The court also held that the complaint did not satisfy Rule 9(b) because the relator produced only aggregate government expenditure data on the defendant’s drugs, rather than information about any specific false claims.
On appeal, the First Circuit affirmed the dismissal on 9(b) grounds. The Court began by affirming some basic principles: that “[r]elators are required to set forth with particularly the ‘who, what, when, where, and how’ of the alleged fraud,” and that there is no “relaxed” 9(b) pleading standard for FCA cases. The relator is also required to include allegations specific enough to demonstrate the existence of false claims. “In an qui tam action in which the defendant is alleged to have induced third parties to file false claims with the government,” the court explained, “a relator can satisfy this requirement by providing factual or statistical evidence to strengthen the inference of fraud beyond possibility without necessarily providing details as to each false claim.” Even accepting as true the allegations that the manufacturer engaged in “fraud on the FDA,” the court concluded, that was not a sufficient basis on which to infer the false claims were submitted. The court contrasted Ge’s allegations with those in another case in which the relator identified “eight specific medical providers who allegedly submitted false claims, plus rough time periods, locations, and amounts of the claims, and the specific government programs to which the claims were made” – detailed that were “just enough” to constitute a pleading of fraud with particularity.”
Notably, the First Circuit quoted with approval the Fourth Circuit’s January 2013 opinion in U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc. (which we reported about here), in which the Fourth Circuit held that evidence of specific false claims was required to satisfy Rule 9(b). The First Circuit’s citation to Nathan is significant because the relator in the Fourth Circuit case has filed a petition for a writ of certiorari from the Supreme Court, arguing in part that the standard set forth by the Fourth Circuit is more stringent than that required in other circuits – including the First Circuit. (A copy of the petition for writ of certiorari can be found here.) The Ge decision, including in particular the approving citation to the Fourth Circuit’s opinion in Nathan, suggests that the circuit split cited by the petitioners in Nathan is not as wide as suggested, and provides further support for the principle that relators should not be permitted to skirt Rule 9(b)’s stringent pleading requirements by arguing that the submission of false claims was an inevitable consequence of the defendant’s conduct.
Because it found the affirmed the dismissal of the complaint under Rule 9(b), the First Circuit did not rule on the district court’s alternative basis for dismissing the complaint under Rule 12(b)(6). Thus, the Court declined disturb (or affirm) the district court’s ruling that compliance with FDA post-marketing requirements, including timely adverse event reporting, could not support an FCA claim.