Second Circuit Finds That The Government’s Continued Payment In The Face of Fraud Allegations Undercuts Materiality

The Supreme Court emphasized in Escobar that questions of materiality are not “too fact intensive for courts” to decide through a motion to dismiss.  Nonetheless, what facts a plaintiff must allege adequately to plead materiality consistent with Escobar’s “demanding” standard remains a hotly contested question.  In a recent decision, the Second Circuit held that the relator’s failure to allege that CMS, the agency allegedly defrauded, changed its reimbursement practices after becoming aware of information supposedly withheld by the defendant, doomed the complaint on materiality grounds.  See United States ex rel. Coyne v. Amgen, Inc., No. 17-1522 (2d Cir. Dec. 18, 2017).  The decision underscores the significance of the materiality requirement at the motion to dismiss stage. (more…)

Second Circuit Ruling Permits Refiling of World Trade Center Engineer’s Qui Tam Suit

Posted by Kristin Graham Koehler and Loui Itoh

The Second Circuit recently ruled that the Southern District of New York improperly dismissed without prejudice a False Claims Act lawsuit brought by Magdy M. Youssef, against his former employers Tishman Construction Corporation (“Tishman Corp.”) and Turner Corporation (“Turner Corp.”). The ruling clears the way for Youssef to pursue his claims against his former employers in the Eastern District of New York.

In 2010, Youssef, a structural engineer, brought a qui tam suit against Tishman Corp., and Turner Corp., in the Southern District of New York, alleging that they had perpetrated a “fraudulent billing scheme” on construction projects financed by the government, including construction at One World Trade Center. In December 2011, in light of the fact that both the New York Attorney General and the U.S. Attorney’s Office had decided not to intervene, Youssef sought voluntary dismissal of the lawsuit. Relying in large part on a statement in a letter from Youssef’s counsel that Youssef had “decided not to pursue this matter any further,” the Southern District dismissed the action with prejudice as to the claims brought by Youssef, but without prejudice as to the United States and the State of New York.

In August 2012, Youssef learned that the federal government was investigating similar claims against the defendants, and refiled his claim in the Eastern District of New York. He claimed that it was only after re-filing his lawsuit that he learned that the dismissal in the Southern District was with prejudice. Indeed, the dismissal was not entered on the docket until September 18, 2012. After the Southern District denied his request to modify its earlier order to reflect a dismissal without prejudice, Youssef appealed the dismissal order.

On appeal, the Second Circuit vacated the district court’s judgment and remanded the case with instructions to dismiss the action without prejudice. The panel reasoned that in the absence of any indication by the plaintiff, the Federal Rule governing voluntary dismissals presumes that the dismissal sought is without prejudice. The plain language of Federal Rule of Civil Procedure 41(a)(1) states, “[u]nless the notice [of voluntary dismissal] states otherwise, the dismissal is without prejudice.”

Reviewing the letter sent by Youssef’s counsel to the District Court in December 2011, the Second Circuit determined that there was no reason to conclude Youssef was requesting a dismissal with prejudice. Rather, the Second Circuit reasoned that the statement made by Youssef’s counsel that he had “decided not to pursue this matter any further” may “just as well have been indicating an intention simply to stop pressing the complaint . . . for any number of reasons having nothing to do with the merits of the claim.”

After the government declines to intervene in a qui tam action, relators oftentimes will voluntarily dismiss their complaints for pragmatic reasons, having nothing to do with the merits of their claims. This decision illustrates that those dismissals, indeed, are always going to be without prejudice, leaving open the possibility that the claims may be revived at a later date in the either the same or a different forum.

Second Circuit Affirms Dismissal of False Claims Act Suit Brought by Clinical Laboratory Defendant’s Former General Counsel

Posted by Scott Stein and Allison Reimann

On October 25, 2013, the Second Circuit affirmed the dismissal of United States ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Incorporated (No. 11-1565-cv), in a case that confronts head-on the tension between whistleblower incentives and the professional obligations of lawyers—and concludes that an attorney’s ethical obligations trump. Peter Keisler, Richard Raskin, Scott Stein, and Allison Reimann of Sidley Austin represented the defendants in this victory.

Relator Fair Laboratory Practices Associates (“FLPA”) filed the suit in 2005 in the Southern District of New York against the clinical laboratory company Quest Diagnostics Incorporated and its subsidiary Unilab Corporation. FLPA’s claim related to the defendants’ contracting practices. FLPA is a general partnership formed by three former Unilab executives, including Mark Bibi, who was Unilab’s general counsel from 1993-2000. As general counsel, Bibi advised the company on a variety of matters, including its contracts, and handled all of the company’s litigation.

After the defendants learned that one of FLPA’s members was Unilab’s former general counsel, the district court permitted limited discovery to determine whether Bibi and FLPA had improperly used or disclosed Unilab’s confidences in bringing the lawsuit. Following discovery, the defendants moved to dismiss on grounds that Bibi had breached his ethical obligations to his former client by using and disclosing Unilab’s client confidences for his own financial benefit, thereby tainting the entire proceeding. The district court agreed and dismissed FLPA’s action. A few months later, the United States gave notice that it was declining to intervene.

In the Second Circuit, FLPA contended that the district court erred in dismissing the case, arguing that deference to state ethical rules would undermine federal policy that uses whistleblower rewards as a vehicle for rooting out fraud. FLPA also disputed that Bibi violated New York’s ethical rules, maintaining that Bibi was permitted to disclose Unilab’s confidences because he reasonably believed that the defendants were committing a crime.

A unanimous three-judge panel affirmed the district court’s decision. Writing for the court, Judge Cabranes explained that, first, the FCA does not preempt state ethical rules. He wrote that “[n]othing in the False Claims Act evinces a clear legislative intent to preempt state statutes and rules that regulate an attorney’s disclosure of client confidences.” Slip Op. at 15. Furthermore, although the FCA permits relators to bring qui tam suits, “it does not authorize that person to violate state laws in the process.” Id. (quoting United States ex rel. Doe v. X. Corp., 862 F. Supp. 1502, 1507 (E.D. Va. 1994)).

The court also agreed that Bibi violated New York’s ethical rules by disclosing confidential information beyond what was “necessary,” as required by those rules. While FLPA claimed that the disclosures were necessary because the FCA requires relators to provide a “written disclosure of substantially all material evidence and information the person possesses to the government,” 31 U.S.C. § 3730(b)(2), the court agreed that Bibi had means of exposing the alleged fraud other than using client confidences in an FCA suit against his former client.

The Second Circuit’s decision has significant implications, particularly in the health care industry where companies rely heavily on their counsel—both in-house and external—to navigate increasingly complicated fraud and abuse laws. Had FLPA’s view of the law prevailed, such candor with counsel would come at considerable risk, because counsel would be free to parlay those confidences into a FCA suit against that client, all the while standing to collect up to 30 percent of the proceeds of a successful action. See 31 U.S.C. § 3730(d). In other words, counsel’s duty to maintain client confidences would always be in potential conflict with that lawyer’s personal financial interest. A contrary ruling also would have threatened another means of reducing government losses: encouraging clients to seek legal advice on fraud and abuse requirements and then obey that advice.

The ruling, however, shows that the federal interest in identifying fraud is not limitless, but rather gives way to ethical obligations that otherwise would prevent an attorney’s participation as an FCA relator. The decision also has implications beyond the FCA context, including the Dodd-Frank Act, which provides its own whistleblower incentives for reporting corporate wrongdoing.

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

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.

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.