4th Circuit Affirms Dismissal of FCA Suit Premised on Alleged Violations of FDA GMP Regulations

Posted by Jaime Jones and Jessica Rothenberg

On February 21, 2014, the Fourth Circuit upheld the dismissal of a former employee’s False Claims Act suit against Omnicare, Inc. (“Omnicare”), holding that while the relator alleged violations of certain Food and Drug Administration (“FDA”) regulations by Omnicare’s subsidiary, Heartland Repack, his failure “to allege that the defendants made a false statement or that they acted with the necessary scienter” was fatal to his claim. Relator Barry Rostholder alleged that Heartland Repack violated drug GMP regulations that require penicillin and non-penicillin drugs be packaged in isolation from each other so as to avoid cross-contamination, by repackaging penicillin in facilities also used for non-penicillin drug packaging operations. In his suit, which was first filed in 2007, Rostholder alleged that as a result of this violation, the drugs were adulterated and ineligible for Medicare or Medicaid reimbursement, and that any claims presented to the government for reimbursement were false under the FCA. The government declined to intervene in 2009. The district court granted Omnicare’s motion to dismiss and denied relator’s request to file an amended complaint.

The Fourth Circuit held that whatever Rostholder had alleged, he had not identified any false statement or other fraudulent misrepresentation made by Heartland Repack to the government, as required under the FCA. The court first held that a drug must be merely FDA-approved to qualify for reimbursement, and that the Medicare and Medicaid statutes do not prohibit reimbursement for adulterated drugs and do not require compliance with FDA safety regulations as a precondition to reimbursement. Therefore, “the submission of a reimbursement request for [an FDA-approved] drug cannot constitute a ‘false’ claim under the FCA on the sole basis that the drug has been adulterated . . . in violation of FDA safety regulations.” Because Rostholder failed to plead the existence of any false statement or fraudulent course of conduct, his FCA claims failed. The court summarily dismissed Rostholder’s attempt to proceed under implied certification or worthless services theories of FCA liability. Holding that any amendment would be futile in light of its holding, the Fourth Circuit also upheld the lower court’s decision to deny Rostholder leave to file a third amended complaint.

In arriving at its decision, the Fourth Circuit declined to sanction the use of the False Claims Act as a tool to ensure regulatory compliance, particularly where an agency such as the FDA has the power to enforce its own regulations. As Judge Barbara Milano Keenan, writing for the panel, noted, “[T]he correction of regulatory problems is a worthy goal, but is ‘not actionable under the FCA in the absence of actual fraudulent conduct.'” This case is significant in particular in light of numerous recent statements by various government lawyers signaling DOJ’s intent to pursue FCA actions based on GMP violations, and is sure to be frequently cited in defense of such claims.

Fourth Circuit Avoids Excessive Fines Clause By Allowing Relator To Select An Alternative FCA Penalty

As we previously reported, a federal court in Virginia last year held that the minimum statutory civil FCA penalties were unconstitutionally excessive in light of the facts before it, and refused to impose any penalties. U.S. ex rel. Bunk v. Birkard Globistics GMBH (E.D. Va. Feb. 14, 2012). On December 19, the Fourth Circuit reversed and remanded the district court’s decision to enter no penalties with an instruction to award the plaintiff $24 million – the amount relator Bunk previously had expressed a willingness to accept. United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., No. 12-1369, slip op. 30 (4th Cir. Dec. 19, 2013).

At trial, the jury found defendants liable under the FCA for conspiring with subcontractors to fix prices in advance of a bid for a government contract and submitting a false Certificate of Independent Pricing. The Relator did not seek damages, but only penalties based on the parties’ stipulation that the defendant had filed 9,136 invoices under the fraudulently obtained contract. While Relator proposed a $24 million civil penalty, the court calculated the mandatory minimum penalty as no less than $50,248,000 ($5,500 x 9,136). The court determined that this penalty violated the Excessive Fines Clause of the Eighth Amendment in light of the relator’s failure to establish that the defendant’s fraud caused any economic harm to the government. As such, the district court concluded “that [it] must simply refuse to enforce the mandated penalty . . . and not substitute its own fashioned penalty.”

The Fourth Circuit reversed, rejecting the district court’s determination that it was unable to craft an alternative penalty. The court held that the government – or a relator standing in the government’s shoes – has “unbounded” discretion to pursue a lesser judgment than that to which it may be entitled and, by exercising that discretion, may avoid the application of the Excessive Fines Clause. In reaching this conclusion, the court noted that the dilemma under the Excessive Fines Clause was the result of the court’s own precedent construing the FCA penalty provisions broadly to impose penalties on each false or fraudulent claim submitted, rather than narrowly to attach only to an underlying fraud. By concluding that a relator may simply select an alternative penalty without regard to the FCA’s requirements, the Fourth Circuit avoided the Constitutional dilemma created by the law’s draconian penalty provisions and the court’s precedent. The court then concluded – without analysis – that the alternative penalty proposed by the relator was not unconstitutionally excessive in light of the “gravity” of defendant’s misconduct and the “necessary and appropriate deterrent effect” served by the FCA’s penalties provision.

Court Enters Judgment Against Healthcare System Following Jury Verdict

In recent decisions, a federal court entered judgment under the FCA against a healthcare system that a jury had found violated the Stark Law and submitted claims for prohibited patient referrals. Among relatively few FCA cases that have proceeded to a jury verdict, this case illustrates the significant penalties defendants face.

As we previously reported, U.S. ex rel. Drakeford v. Tuomey Healthcare System involved claims that the defendant healthcare system entered into compensation arrangements with physicians that violated the Stark Law and resulted in the submission of false claims for patients who were referred in violation of Stark. In 2010, a jury concluded that the defendant violated the Stark Law but not the FCA. The district court subsequently set aside the verdict and ordered a new trial on the FCA claim, but entered a judgment on equitable claims based on the jury’s finding of a Stark Law violation. The Fourth Circuit reversed the judgment and remanded the case for a new trial.

In May 2013, the retrial concluded with the jury finding the defendant violated the Stark Law and caused the submission of 21,730 false claims, in violation of the FCA. The jury calculated the total value of false claims filed by Tuomey as $39,313,065. The court calculated the award under the FCA as including treble damages plus the statutory minimum per-claim penalty of $5,500, for a total judgment under the FCA of $237,454,195. On September 30, the court ordered the defendant to pay $276 million. The government moved to amend the judgment, noting that the court’s award appeared to include $39,313,065 above the treble damages and statutory penalties to which it was entitled under the FCA. The government noted this appeared to be a “clerical error.” The court agreed, entering an amended judgment for $237 million.

In its order entering the amended judgment, the court also disposed of the defendant’s post-trial motions. Among the arguments for setting aside the jury verdict the court rejected, it denied Tuomey’s request for judgment as a matter of law because the government “failed to prove damages.” The Court noted that although the government “received the medical services it paid for, and it paid the same amount it would have paid had the services been performed by another hospital,” the government was entitled to damages under the FCA because the Stark Law prohibits “any payment” for a claim for prohibited referrals. In addition, the court denied Tuomey’s motion to set aside the $237 million award based on the excessive fines provision of the Eighth Amendment, finding the award of treble damages plus statutory per-claim penalties not to be “grossly disproportional to the gravity of Tuomey’s offense.”

Fourth Circuit Clarifies “Protected Activities” Under the First Prong of a FCA Retaliation Claim

Posted by Ellyce Cooper and Maureen Soles

A recent Fourth Circuit decision clarifies what constitutes “protected activity” under the anti-retaliation provision of the FCA (31 U.S.C. § 3730(h)(1)). In Glynn v. Edo Corp., 710 F.3d 209 (4th Cir. 2013), the Fourth Circuit affirmed the District Court’s grant of summary judgment dismissing an employee’s retaliation claim. The court held that because plaintiff’s evidence failed to “raise a distinct possibility of a viable FCA action” or prove that any false certification was material, he failed to establish he engaged in “protected activity,” the first of three elements in a FCA retaliation claim.

Dennis Glynn worked as an engineer for Impact Science & Technology (“IST”). IST designs and manufacturers Mobile Multi-Band Jammer systems (“MMBJs”), which jam the frequencies used to detonate IEDs, for the government. Glynn alleged IST terminated him for reporting to the government alleged fraudulent conduct, specifically that IST was “shipping systems that … were putting our troops in jeopardy” and IST had failed to implement a quality assurance plan (“QAP”) as contractually required.

The first element of a retaliation claim under the FCA requires a plaintiff to prove that he “engaged in ‘protected activity’ by acting in furtherance of a qui tam suit.” Glynn, 710 F.3d at 214 (citing Zahodnick v. Int’l Bus. Mach. Corp., 135 F.3d 911, 914 (4th Cir. 1997)). Glynn attempted to satisfy this prong with three theories; the court rejected each theory.

Glynn first argued he engaged in “protected activity” by investigating IST’s alleged fraudulent activity of supplying a substandard product to the government. Although an employee does not need to file an actual qui tam case, the plaintiff must be investigating matters that reasonably could lead to a viable FCA case. Here, the court found that the issue identified by Glynn “was not severe enough in degree to trigger any contractual obligation on IST’s behalf.” The court held that plaintiff failed to offer sufficient evidence that his investigation raised a “distinct possibility of a viable FCA action,” because the product still “met the Government Customer’s standards.” Therefore, Glynn did not engage in protected activity.

Plaintiff next claimed he engaged in “protected activity” when he reported IST’s false certification of compliance with government contracts based on IST’s failure to implement a QAP or to report defects. With regard to the defects, the court applied the same reasoning as to the first theory and found that product improvements did not trigger any reporting requirement. As to the QAP, the court disagreed with the district court’s holding that the “false certification theory was essentially dead on arrival because he never actually received the contracts.” Instead, the court clarified that plaintiff is not required to have “firsthand knowledge of a contract” (i.e. the plaintiff does not have to see the contract itself); circumstantial evidence of a false certification can be sufficient if it raises a distinct possibility of a viable FCA action. But, any false certification must be material. In this case, the failure to implement a QAP was not material because the contractual language relating to the QAP required IST to perform inspections and testing, which the record established IST engaged in at both the modular and systems level. Therefore, any failure to implement a QAP was likely an administrative failure, and not a material false certification.

Finally, the court rejected Glynn’s third theory – that he engaged in “protected activity” by initiating the government investigation – because his complaint failed to “raise a distinct possibility of a viable FCA claim.” Merely “perk[ing] the government’s ears” is not enough to satisfy the “protected activity” prong of the anti-retaliation provision of the FCA.

Fourth Circuit Holds FCA Statute of Limitations Tolled During Wartime Even in Actions Brought by Qui Tam Relators Where the Government Has Not Intervened

Posted by Nicole Ryan and Jennifer Gaspar

United States v. Halliburton, No. 12-1011 (4th Cir. Mar 18, 2013)

Over a vigorous dissent, the United States Court of Appeals for the Fourth Circuit recently held that the Wartime Suspension of Limitations Act (WSLA) tolls the False Claims Act’s (FCA) six-year statute of limitations in a case brought by a qui tam plaintiff involving alleged fraudulent billing for services provided to U.S. military forces in Iraq. United States ex rel. Carter v. Halliburton, No. 12-1011 (4th Cir. Mar. 18, 2013). The court’s decision could have significant implications for future FCA defendants by curtailing the statute of limitations as a defense against claims based on wartime conduct.

Benjamin Carter, a former employee of Kellogg Brown & Root Services (KBR), sued Halliburton and its subsidiaries, including KBR, alleging that the company submitted false claims for services provided to the military in Iraq during his employment at KBR from January through April 2005. The complaint alleged that KBR charged the government for water purification services that it had not actually performed and that it instructed employees to bill twelve hours of work per day regardless of time actually worked.

Carter filed his original complaint in February 2006. After several dismissals, Carter filed his fourth and most recent complaint on June 2, 2011. The district court dismissed that complaint, finding that it was barred by the FCA’s “first to file” requirement and by the six-year statute of limitations. It rejected Carter’s argument that the WSLA tolls the statute of limitations in civil FCA actions where the government has not intervened.

Originally enacted in 1942, the WSLA provides:

When the United States is at war or Congress has enacted specific authorization for the use of Armed Forces, … the running of any statute of limitations applicable to any offense (1) involving fraud or attempted fraud against the United States … shall be suspended until three years after the termination of hostilities as proclaimed by the President or by a concurrent resolution of Congress.

18 U.S.C. § 3287 (2006). The tolling period was extended to five years by the 2008 Wartime Enforcement of Fraud Act, which amended the WSLA. Pub. L. No. 110-417 § 855, codified at 18 U.S.C. § 3287 (2011).

The district court held that the WSLA’s tolling provision is limited to war-related suits filed by the government or to qui tam actions in which the government has intervened. The court also found that the complaint was barred by the “first to file” requirement because similar claims, since dismissed, had been pending at the time Carter’s most recent case was filed. The district court dismissed Carter’s complaint with prejudice.

The Fourth Circuit reversed. It held that the WSLA applies to allegations of fraud, including civil fraud, against the United States during wartime regardless of whether the United States filed or intervened in the action and that, as a result, the FCA’s statute of limitations was tolled as applied to Carter’s claim. The Court further held that the FCA does not require a formal declaration of war and that the United States was “at war” in Iraq for purposes of the WSLA from October 11, 2002, when Congress authorized the President to use military force in Iraq. The Court did not directly address whether the WSLA suspends the statute of limitations for FCA claims brought during a time of war where the claims are unrelated to the war.

The Fourth Circuit also held that the district court erred in dismissing Carter’s complaint with prejudice due to the pending, related claims. The Court agreed with other circuit courts that have adopted a “same material elements test” and concluded that Carter’s claim was sufficiently similar to then-existing actions to warrant dismissal. However, Carter was now free to re-file because the other cases had since been dismissed.

In dissent, Judge Agee disagreed with the majority’s application of the WSLA to actions in which the government is not a party. The dissent argues that it constitutes an unprecedented expansion of the WSLA and that the original purpose of the Act was to free the government from engaging in fact-intensive fraud investigations during wartime. He concludes that no such reasoning applied to private actors, expressing serious concern that the court’s interpretation may result in a near-indefinite statute of limitations and create financial incentives for relators to delay filing in order to increase potential recovery.

The case was reversed and remanded to the district court to consider whether plaintiff’s suit was barred by original source provisions of the FCA because the allegations were publicly disclosed. Defendants have since filed a petition seeking rehearing en banc.

Fourth Circuit Establishes Rigorous 9(b) Standard For Conduct That Merely “Could” Have Led To Submission of False Claims

Posted by Douglas Axel and Tom Joksimovic

On January 11, 2013, the Fourth Circuit Court of Appeals, reaffirming its adherence “firmly to the strictures of Rule 9(b) in applying its terms to cases brought under the [False Claims] Act,” upheld the district court’s dismissal with prejudice of a qui tam false claims action against a pharmaceutical company. See U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., No. 11-2077, slip op., (4th Cir. Jan. 11, 2013).

The relator alleged that the company violated the False Claims Act (FCA) by causing the off-label use of its drug by: (1) promoting the drug to rheumatologists, who typically do not treat the conditions for which the drug had been approved; and (2) distributing samples only containing 60 mg of the drug – double the dose for the most common condition for which it had been approved.

These allegations, the Court held, fell short of the pleading standard under Rule (9)(b). The Court rejected the relator’s argument that alleging a fraudulent scheme obviates the need to allege a specific false claim to satisfy Rule (9) (b). Instead, because FCA liability attaches only to a specific claim actually presented to the government for payment, the court held that “Rule 9(b) requires that ‘some indicia of reliability’ must be provided in the complaint to support the allegation that an actual false claim was presented to the government.”

The Court recognized that this requirement may act as a barrier to a relator without independent access to certain medical records, and it held that Rule 9(b) could be satisfied when “specific allegations of the defendant’s fraudulent conduct necessarily [lead] to the plausible inference that false claims were presented to the government.” (Emphasis added). However, “when a defendant’s actions, as alleged and as reasonably inferred from the allegations, could have led, but need not necessarily have led, to the submission of false claims, a relator must allege with particularity that specific false claims actually were presented to the government for payment.” In this case, the Court found that the relator’s fraud allegations did not involve “an integrated scheme in which presentment of a claim for payment was a necessary result.”

Nathan is another in a line of cases strictly applying Rule 9(b)’s heightened pleading requirements in a False Claims Act case.

Fourth Circuit Adopts Eleventh Amendment Sovereign Immunity Test To Determine Whether State Agencies Are Subject To Suit Under The FCA

Posted by Kristin Graham Koehler and Brian Morrissey

Allegations of fraud in the student lending industry have led to a wave of False Claims Act litigation in that sector of the economy in recent years. On occasion, state agencies chartered to provide student loan financing and other assistance have been named as defendants in these suits. Last week, in United States ex rel. Oberg v. Kentucky Higher Educ. Student Loan Corp., 681 F.3d 575 (4th Cir. Jul. 18, 2012), the Fourth Circuit was asked to decide whether such agencies are “persons” subject to liability under the FCA. See 31 U.S.C. § 3729(a)(1)(a).

Relator sued four state agencies, including the Kentucky Higher Education Student Loan Corporation, alleging that they had defrauded the U.S. Department of Education by improperly inflating their loan portfolios eligible for federal student loan interest subsidies. The state agencies moved to dismiss, arguing that they are not “persons” subject to liability under the FCA.

The FCA does not define the term “person,” but the Supreme Court has concluded that it does not cover states. In Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), the Court held that the word “‘person’ does not include the sovereign” and, thus, does not “does not subject a State (or a state agency) to liability.” Id. at 787-88, 780. On the other hand, the Supreme Court held that corporations are “presumptively covered by the term ‘person'” and, as a result, municipal corporations—i.e., cities and counties—are “persons” subject to suit under the FCA. Cook County v. United States ex rel. Chandler, 538 U.S. 119 (2003).

In Ogberg, the Fourth Circuit was asked to determine how to categorize state agencies that provide student loan financing. The court refused to adopt a hard and fast rule. Instead, it concluded that the “critical inquiry” is whether a state agency is subject to “sufficient state control” to render it part of the state and, thus, “not a ‘person'” under the FCA. 681 F.3d at 579. To determine the degree of “state control,” the Fourth Circuit adopted the same test courts apply to decide whether state agencies are “arms of the state” that qualify for sovereign immunity under the Eleventh Amendment. Id. That test involves several factors, including whether the state would pay any judgment against the defendant, and whether the state has the power to appoint the defendant’s officers and directors, control its funding, or veto its actions. The Fourth Circuit remanded to allow the district court to apply the test in the first instance.

In the last decade, three other circuits—the Fifth, Ninth, and Tenth—have addressed the question whether a state agency qualifies as a “person” under the FCA and, so far, all have agreed that the Eleventh Amendment “arm of the state” test is the proper route to the answer. As qui tam relators continue to pursue novel theories of liability in the student lending industry and other financial services contexts, additional state agencies are likely to face suits, and the “arm of the state” analysis will be critical in challenging those lawsuits.

Fourth Circuit Vacates and Remands Jury Verdict on Stark Violations in FCA Case

Posted by Matthew Solomson and Donielle McCutcheon

The Federal Physician Self-Referral Law, commonly referred to as the Stark Law, rarely forms the basis of a False Claims Act (“FCA”) action, and FCA actions almost never go to trial. Last week, however, the Fourth Circuit reviewed such a case when the court vacated and remanded a district court judgment, predicated on alleged Stark Law violations, in favor of the government. The Fourth Circuit held that the judgment violated the defendant’s Seventh Amendment right to a jury trial. U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc., No. 10-1819, 2012 U.S. App. LEXIS 6444, at *3 (4th Cir. Mar. 30, 2012).

The qui tam action, in which the government subsequently intervened, was originally filed in September 2007, and alleged that the defendant healthcare system, Tuomey, entered into compensation arrangements with certain physicians that violated the Stark Law because the compensation paid to the physicians “took into account the volume or value of the physicians’ referrals to Tuomey.” The government further alleged that Tuomey knowingly presented false claims for payment to Medicare and Medicaid that arose out of these prohibited referrals, in violation of the FCA. In addition to the FCA claims, the government asserted claims for equitable relief.

In March 2010, a jury returned a verdict finding that Tuomey did not violate the FCA, but responded affirmatively to a special interrogatory asking whether Tuomey violated the Stark Law. Ruling on post-trial motions, the district court judge granted a motion filed by the United States and: (i) set aside the jury verdict; (ii) ordered a new trial on the FCA claim; and (iii) based on the jury’s response to the special interrogatory finding a Stark Law violation, entered a $44.9 million judgment (plus interest) in favor of the government on its equitable claims.

On appeal, the Fourth Circuit held that, because the FCA claim was based on an alleged violation of the Stark Law, the district court’s decision to grant a new trial “on the whole issue of the [FCA],” rendered the jury’s special interrogatory on the Stark Law issue a legal nullity because the court had set aside the original jury verdict, which included the special interrogatory response. As a result, when the district court granted the government equitable relief, the district court impermissibly resolved an issue on which Tuomey was entitled to (another) jury trial, thereby effectively depriving Tuomey of its Seventh Amendment right to a jury trial.

The Court of Appeals further instructed that, if on remand, the jury finds that the contracts at issue violated the Stark Law, the jury must determine the number and value of the claims Tuomey presented to Medicare for payment of the facility fee, or technical component, for the services. Notably, this instruction diverges from the Stark Law guidance which disallows payment for all services furnished pursuant to a prohibited referral.

The Fourth Circuit also addressed several issues regarding the underlying Stark Law allegations that it deemed “legal” and likely to be an issue on remand, while one judge, in a concurring opinion, criticized the court’s decision as advisory in nature. Specifically, the majority concluded that (i) there were “referrals,” as such term is defined under the Stark Law, by the physicians to Tuomey; and (ii) the Stark Law guidance clearly contemplates arrangements such as those at issue in this litigation, and, as a result, the jury must decide whether the contracts, on their face, took into account the value or volume of anticipated referrals in violation of the Stark Law fair market value standard.

From a Stark Law perspective, the “advisory” portions of this opinion provide important insight into the Fourth Circuit’s views on Stark Law violations. More broadly, the ongoing litigation may yet provide further legal developments regarding FCA liability, particularly in the context of the Stark Law.

Fourth Circuit Panel Holds That SEC Filings May Trigger Public Disclosure Bar

On March 14, a three-judge panel of the Fourth Circuit held that a defendant’s SEC filings may trigger the FCA’s public disclosure bar. In U.S. ex rel Jones v. Collegiate Funding Services, Inc., No. 11-1103 (4th Cir. March 14, 2012), 2012 U.S. App. LEXIS 5574 (slip opinion attached), the relators alleged that CFS, a major student loan lender, violated the FCA by falsely certifying compliance with a variety of loan program requirements. The defendants successfully moved to dismiss the relators’ amended complaint on the ground that certain allegations had been publicly disclosed in various places, including the defendant’s SEC filings.

On appeal, the relators argued that SEC filings do not qualify as “administrative reports” for purposes of the FCA’s public disclosure bar. The Fourth Circuit panel affirmed the district court, holding that “the SEC filings by CFS were reasonably determined to be administrative reports because they were submitted under the SEC’s administrative regulatory requirements of the company. Forms 8-K and S-1 are mandatory filings for all publicly traded companies. While these documents were not authored by the SEC or created under their supervision, they were produced at the request of and were made public by the SEC in the course of carrying out its activities as a federal agency.”

While the opinion is unpublished, and therefore of no precedential value, its reasoning has persuasive value. As the Fourth Circuit panel explained, “the Supreme Court has noted that statutory construction of the FCA should be guided by the likelihood that a disclosure will ‘put the Government on notice of a potential fraud . . . . Congress passed the public disclosure bar to bar a subset of those suits that it deemed unmeritorious or downright harmful . . . . The statutory touchstone, once again, is whether the allegations of fraud have been [publicly disclosed].’ [citing Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 130 S. Ct. 1396, 176 L. Ed. 2d 225 (2010)]. Here, the SEC forms in question were requested, received, made public, and presumably included in any corporate profiles compiled by the agency. While such a report does not necessarily alert federal agencies to wrongdoing, it certainly provides easily accessible notice of the transactions between CFS and its customers from which an investigation could have begun or developed.” Therefore, the panel concluded that “the SEC filings in question . . . were properly considered by the court below in the mix of publicly available information on the basis of which, in whole or in part, the Relators’ claims are based.”