Posted by Kristin Graham Koehler and Lauren Roth
In the pharmaceutical industry, government investigations initiated by whistleblower qui tam complaints can—and often do—result in both civil and criminal charges against the company. In recent years, such investigations also have increasingly focused on individual corporate executives, either based on the executives’ participation in the misconduct or by virtue of their status as “responsible corporate officers” of the wrongdoing entity. Last week, three executives ensnared in one such investigation scored a key, albeit mixed, victory.
A decision by the D.C. Circuit Court in Friedman v. Sebelius overturned the exclusions of three Purdue Pharma executives from participation in federal healthcare programs, holding that the Department of Health and Human Services (HHS) acted arbitrarily in imposing extraordinarily lengthy exclusions. Notwithstanding this ruling, the court held that HHS has the authority to exclude individuals convicted of a misdemeanor if the conduct underlying the conviction is related to fraud, even if the individual is an executive that had no knowledge of the underlying fraudulent conduct.
Background on the Case
In 2007, Purdue Pharma L.P. and Purdue Frederick Company, Inc. paid $600 million to resolve charges that Purdue Frederick fraudulently misbranded OxyContin as less addictive and less subject to abuse and diversion than other pain medications. As part of the settlement, Purdue Frederick pleaded guilty to a felony misbranding charge. The settlement resolved potential civil liability for allegations that that, based on these misleading claims, Purdue knowingly caused the submission of false claims for OxyContin.
Prosecutors also charged three former senior executives of Purdue— the company’s President and Chief Operating Officer, Executive Vice President/Chief Legal Officer, and Vice President of Worldwide Medical Affairs—with misdemeanor violations of the Food, Drug and Cosmetic Act (FDCA) based on Purdue Frederick’s guilty plea for felony misbranding of OxyContin and the executives’ status as “responsible corporate officers.” HHS’s Office of Inspector General (OIG) subsequently excluded the three executives for 20 years on the ground that their convictions “related to” fraud in the delivery of a healthcare item — a ground for discretionary exclusion.
In an administrative appeal, the HHS Departmental Appeals Board (DAB) upheld the executives’ exclusion. Though the three executives did not admit personal knowledge of this fraud — rather, they admitted only that it had occurred and that they had been “responsible corporate officers” at the time — the DAB determined, nevertheless, that the there was evidence that the executives’ convictions had “related to” fraud. The DAB reduced the length of exclusion to 12 years, however, finding that the OIG had not demonstrated that the underlying conduct harmed any patients. The D.C. Federal District Court affirmed the DAB decision.
D.C. Circuit Opinion
On appeal, a sharply divided panel of the D.C. Circuit affirmed that the executives’ exclusion but remanded the case to the agency, holding that it failed to reconcile the lengthy 12-year term of exclusion with agency precedent.
The D.C. Circuit’s ruling is significant in at least two respects. First, a panel majority (Sentelle, CJ., Ginsburg, J.) held that misdemeanor misbranding, which requires no proof that a corporate officer know of, or have any involvement in, fraudulent misbranding, is nevertheless a conviction for a “misdemeanor relating to fraud” within the meaning of the exclusion statute. HHS may therefore exclude individuals convicted of such misdemeanors from participation in federal healthcare programs. Second, a different majority (Williams, Ginsburg, JJ.) held that the length of any exclusion is subject to review under the arbitrary and capricious standard. The government had argued that, unlike the Administrative Procedure Act, the statute providing for judicial review of DAB decisions (42 U.S.C. 405(g)) did not include the arbitrary-and-capricious standard. For that reason, the government contended, the court could not require the agency to compare the exclusion imposed here to exclusions imposed in other cases. The majority disagreed, holding that the agency had not explained how the 12-year exclusion here for a misdemeanor offense was justified by exclusions involving felonies and incarceration. As the majority noted, “Simply pointing to prior cases with the same bottom line but arising under a different law and involving materially different facts does not provide a reasoned explanation for the agency’s apparent departure from precedent.” The case will be remanded to OIG for further consideration. A copy of the opinion is available here. Sidley represented the former Purdue executives in the DC Circuit.
Posted by Brent Wilner and Ellyce Cooper
On May 15, 2012, the United States Court of Appeals for the District of Columbia Circuit issued an opinion, which dramatically altered the Court’s precedent regarding the original source rule. United States ex rel. Davis v. District of Columbia, No. 11-7039, Slip Op., (D.C. Cir. May 15, 2012), available at http://www.cadc.uscourts.gov/internet/opinions.nsf/C7A5B64099D02F98852579FF004E73DC/$file/11-7039-1373743.pdf (“Davis”).
In Davis, the whistleblower raised allegations that the District of Columbia Public Schools (“DCPS”) improperly obtained Medicaid reimbursement for special education services through claim submissions lacking adequate documentation. At issue before the D.C. Circuit was when the whistleblower made the allegations to the government.
Until 1998, the whistleblower provided accounting services to DCPS including submitting DCPS’s claims for special education services. Davis Slip Op. at 3. While preparing the 1998 claim, DCPS replaced the whistleblower’s firm with another accounting firm. Id. DCPS proceeded to file a claim prepared by the new firm, even though the new firm never obtained proper documentation for the claim. Id.
In 2002, the District of Columbia Auditor released a report to the public finding that “for fiscal years 1996-1998, ‘$15 million of costs incurred for services referred to special education students [by DCPS] were disallowed for Medicaid reimbursement due to the absence or unavailability of supporting documentation.'” Davis Slip Op. at 4. Two years later, the whistleblower informed the Inspector General of the U.S. Department of Health and Human Services that DCPS “d[id] not have in their possession documentation to support a drawdown of federal [M]edicaid funds for [1996-1998].'” Id. at 8. Thereafter, in 2006, the whistleblower filed his qui tam action alleging, inter alia, that the District of Columbia violated the FCA by submitting the 1998 claim in the absence of documentation. Id. at 4.
The District Court granted the District of Columbia’s motion to dismiss the qui tam action for lack of subject matter jurisdiction. Id. at 6. Relying on an earlier D.C. Circuit opinion, United States ex rel. Findley v. FPC-Boron Employees’ Club, 105 F.3d 675 (D.C. Cir. 1997), the district court reasoned that the whistleblower could not have been the “original source” of the information “[b]ecause there was no evidence that Davis notified the federal government before the 2002 Auditor’s report.” Id. That is, the whistleblower’s action was premised on information that had already been publicly disclosed.
The D.C. Circuit rejected the lower court’s interpretation of the public disclosure bar. Instead, the Davis court relied on the Supreme Court’s opinion in Rockwell Int’l Corp. v. United States, 549 U.S. 457 (2007). The D.C. Circuit found that Rockwell stands for the proposition that “[t]he relator can be an ‘original source’ to the government of his information even if the publicly disclosed information came from someone else.” Davis Slip Op. at 10.
Of particular import, Davis rejected the defendant’s (and Findley’s) concern that “‘once the information has been publicly disclosed . . . there is little need for the incentive provided by a qui tam action.'” Ibid. (citing Findley, 105 F.3d at 691). Rather, the court indicated that there is a policy interest to qui tam actions that survives the public disclosure: “[T]he relator’s information can be different and more valuable to the government than the information underlying the public disclosure, which might be nothing more than speculation or rumors.” Id. at 10-11 (citing Rockwell, 549 U.S. at 472). The Davis court stated examples of this would arise where the whistleblower has “an eyewitness account” or “important documents” that might not have been contained in the public disclosure. Id. at 11. Ultimately, the court concluded that “we will no longer require that a relator provide information to the government prior to any public disclosure of allegations substantially similar to the relator’s and will instead enforce only the text’s deadline of ‘before filing an action.'” Id.
It is worth noting that much of the impact of Davis has already been foretold by recent Congressional amendments to the FCA. Davis was decided applying the 1986 version of the FCA, which barred suits “based upon the public disclosure of allegations or transaction . . . unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.” 31 U.S.C. § 3730(e)(4)(A) (2006) (amended 2010). As amended in 2010, the FCA now defines an “original source” as:
[A]n individual who either (i) prior to a public disclosure . . . has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.
31 U.S.C. § 3730(e)(4)(B) (Supp. 2010). As the Davis court noted, Congress mitigated one concern the defense bar might have had after Rockwell, namely, Congress precluded a whistleblower from bringing a qui tam action if he or she added nothing to publicly disclosed information “by amending the statute to provide incentives to only those relators whose information adds value.” Davis Slip Op. at 11 n.4.
The Davis opinion nevertheless provides a reminder to entities operating in the federal reimbursement space that whistleblower suits may remain a viable threat even after alleged misconduct is revealed through public disclosures.
We recently posted here regarding a Tenth Circuit decision affirming the government’s unilateral dismissal of a qui tam complaint – before it was served on the defendant – over the objection of the relators. In that case, the Tenth Circuit noted a circuit split regarding the standards governing dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A), with the D.C. Circuit holding that the government has a virtually unfettered right to dismiss a case pursuant to that statutory provision. On April 20, 2012, the D.C. Circuit issued another decision on the subject, Océ N.V. v. Schweizer, — F.3d –, 2012 WL 1372219 (D.C. Cir. April 20, 2012), this time holding that the court’s expansive view of the government’s power pursuant to § 3730(c)(2)(A) does not extend to § 3730(c)(2)(B), which requires a district court to determine “after a hearing, [whether] the proposed settlement is fair, adequate, and reasonable under all the circumstances.”
In Océ, relator Schweizer sued her former employer for various FCA violations related to GSA contract provisions and regulations governing product pricing and country-of-origin requirements. She also sued Océ based upon the FCA’s retaliation provisions, § 3730(h). The government moved to dismiss the qui tam claims based upon a settlement agreement the government reached with Océ. The district court granted the motion over the relator’s objection.
On appeal, the relator argued that the government may not invoke § 3730(c)(2)(A) because the government never intervened in the case. The D.C. Circuit rejected that argument because the government’s intervention is necessary only if it wishes to proceed with the action. Here, however, “the government did not seek to proceed with the qui tam portion of the case; it sought to end it.” Nevertheless, the court held that “[t]he settlement agreement here falls squarely within § 3730(c)(2)(B)” because that provision covers dismissals arising from a settlement, whereas § 3730(c)(2)(A) covers unilateral dismissals. The court thus rejected the government’s position that because it may unilaterally dismiss a complaint pursuant to § 3730(c)(2)(A) – i.e., absent a hearing and judicial approval – the government may similarly dismiss a qui tam complaint without judicial approval of the settlement upon which the dismissal is based. The D.C. Circuit explained that “[t]hat the language of § 3730(c)(2)(B) leaves no space for [the government’s] interpretation” and that “allowing dismissal without judicial review of the settlement would render § 3730(c)(2)(B) a nullity and thus contravene” the canon of statutory construction disfavoring any interpretation which renders a provision meaningless or superfluous.
The D.C. Circuit also rejected Océ’s argument that § 3730(c)(2)(B) violated the separation of powers and is therefore unconstitutional, and also reversed the district court’s grant of summary judgment to Océ on the relator’s retaliation claims.
Posted by Robert J. Conlan and Brian P. Morrissey
In a recent decision, the U.S. Court of Appeals for the District of Columbia ruled that a first-filed qui tam complaint need not satisfy the heightened pleading requirements for fraud set forth in Federal Rule of Civil Procedure 9(b) in order to bar subsequent qui tam complaints based on the same material allegations. In so holding, the court rejected the contrary argument put forth by the relator and the United States as amicus curiae, and it created a circuit split with the Sixth Circuit.
In United States ex rel. Batiste v. SLM Corp., reported at 659 F.3d 1204 (D.C. Cir. 2011), slip opinion here, the relator, Sheldon Batiste, alleged that SLM Corp. (commonly known as “Sallie Mae”) defrauded the Federal Government in its administration of student loans by unlawfully putting federally-subsidized student loans into forbearance (thereby causing the Government to pay additional interest and special allowances on such loans), and by filing false certifications with the Government in order to maintain its status as an eligible lender.
More than two years before Batiste filed his complaint, however, another relator had filed a qui tam suit against SLM and one if its wholly-owned subsidiaries. Complt., United States ex rel. Zahara v. SLM Corp., No. 2:05-cv-8020 (C.D. Cal. Nov. 9, 2005). That complaint was ultimately dismissed with prejudice after the relator failed to obtain counsel by a set deadline, Entry Dismissing Action, United States ex rel. Zahara v. SLM Corp., No. 1:06-cv-088 (S.D. Ind. Mar. 12, 2009). The district court in Batiste’s case concluded that this prior qui tam suit was based on the “same material elements of fraud” as Batiste’s complaint. Batiste, 659 F.3d at 1208. Accordingly, the district court dismissed Batiste’s complaint for lack of subject matter jurisdiction under the FCA’s first-to-file bar. Id.; see also 31 U.S.C. § 3730(b)(5) (providing that “no person other than the Government may intervene or bring a related action based on the facts underlying [a] pending action”).
Batiste, supported by the United States as amicus curiae, appealed, arguing that the prior complaint in Zahara did not allege fraud with the particularity necessary to meet Federal Rule of Civil Procedure 9(b)’s heightened pleading standard for fraud claims and, thus, should not have triggered the FCA’s first-to-file bar. The D.C. Circuit rejected that contention, holding that “first filed complaints need not meet the heightened standard of Rule 9(b) to bar later complaints; they must provide only sufficient notice for the government to initiate an investigation into the allegedly fraudulent practices, should it choose to do so.” Batiste, 659 F.3d at 1210.
In reaching this conclusion, the D.C. Circuit expressly declined to follow the Sixth Circuit’s decision in Walburn v. Lockheed Martin Corp., 431 F.3d 966 (6th Cir. 2005). Batiste, 659 F.3d at 1210-11. In Walburn, the Sixth Circuit reasoned that a complaint that fails to satisfy Rule 9(b) should not be given preemptive effect under the FCA’s first-to-file bar because such a complaint, by virtue of its failure to meet the 9(b) standard, is insufficiently precise to provide the Government “adequate notice . . . of the fraud it alleges.” Id. at 973.
Other federal courts are likely to grapple with this same question. As the number of qui tam complaints filed in the federal courts rises and qui tam relators focus special attention on certain industries (including the student loan industry), overlap between complaints is all but inevitable. These courts will be forced to choose between the competing approaches taken by the Sixth and D.C. Circuits, and may ultimately help inform Supreme Court resolution of the current circuit split.