Court Order Compelling FCA Defendant to Produce Documents Previously Produced to HHS OIG Warns of Limitations of Confidentiality Agreements

Posted by Kristin Graham Koehler, Monica Groat, and Morgan Branch (Summer Associate)

On May 29, 2014, the United States District Court for the Southern District of Illinois ordered K-Mart Corporation to produce documents to a relator pursuant to a motion to compel in a case brought under the False Claims Act. See United States ex rel. Garbe v. Kmart Corp., 2014 WL 2218758 (S.D. Ill. May 29, 2014). The court found that, despite the existence of a confidentiality agreement between K-Mart and the government, potentially privileged documents produced by K-Mart in cooperation with a separate government investigation were discoverable by the relator by virtue of prior disclosure.

In 2009, the Office of Inspector General (OIG) for the Department of Health and Human Services began an investigation into possible improper Medicare claims submitted by K-Mart. In response to a subpoena, K-Mart and outside counsel produced 8,400 documents to OIG, including a subset of Medicare transactional data. This data was produced in an easier-to-understand format in order to foster cooperation with OIG. Prior to production, K-Mart and OIG agreed that “confidential proprietary” business information – information typically protected pursuant to a protective order under Federal Rule of Civil Procedure 26(c)(G) – would be protected from disclosure.

In a separate False Claims Act case, which was filed under seal during the OIG investigation, Relator Garbe requested all documents that K-Mart had produced to OIG. K-Mart complied, with two exceptions: (1) the transactional data described above, and (2) documents shared with a U.S. Attorney’s Office during settlement negotiations. Garbe moved to compel the production of both the data and the settlement documents. With respect to the data, K-Mart argued that the doctrine of selective waiver should apply and that the data should remain protected as attorney work product.

The court was not convinced and ordered K-Mart to produce the transactional data. Magistrate Judge Frazier found that K-Mart forfeited protection of the data under the attorney work product privilege when it was produced to OIG, reasoning that knowing disclosure to a third party “almost invariably surrenders the privilege.” The court stated that K-Mart should not be permitted to “pick and choose” the circumstances in which it waived work product protection and, despite the confidentiality agreement with OIG, found that K-Mart did not take sufficient steps to preserve the privilege and qualify for selective waiver. Reviewing the agreement, Judge Frazier noted that the confidentiality agreement did not contain the words “attorney,” “work product,” or “privilege,” and was targeted at protecting sensitive business information, not attorney work product. With respect to the settlement documents, the court found that these documents need not be produced in accordance with Federal Rule of Evidence 408.

This decision is a reminder to companies and their outside counsel to proceed with caution when disclosing potentially privileged material in an attempt to cooperate with government entities like HHS OIG. The advantages of cooperation should be weighed against the possibility that any information disclosed may be subsequently disclosed to other enforcement agencies or an FCA relator. When the advantages of cooperation outweigh the potential downsides, counsel should secure a confidentiality agreement with the relevant agencies (to the extent possible), expressly stating that the attorney-client and attorney work product privileges have not been waived with respect to third parties. However, even with such a confidentiality agreement, counsel should recognize that, under the prevailing weight of legal authority regarding selective waiver, subsequent disclosure is likely to be required.

Court Orders Trial on FCA Claims Involving Pharmacy Gift Cards and Loyalty Rewards Program

A federal district court in Illinois has held that a trial is necessary to determine whether a pharmacy took sufficient steps to prevent gift cards and loyalty rewards from being provided to government health plan (GHP) beneficiaries. The suit, filed by a Kmart pharmacist, alleges that Kmart offered coupons redeemable for gift cards for consumers who switched their prescriptions to Kmart pharmacies, and operated a loyalty program whereby customers could earn points for spending money at Kmart which could be redeemed for merchandise. Kmart’s policies expressly prohibited the provision of coupons and gift cards to beneficiaries of government programs and prohibited coupons from being used to pay for any prescriptions covered by government programs. Notwithstanding those policies, Kmart issued over 76,000 gift cards in the same transaction as a purchase of a prescription drug by a GHP beneficiary between November 2007 and May 2013. The relator alleged, and the Court concluded, that the provision of these incentives violated the Anti-Kickback Statute. However, Kmart contended that it did not “knowingly” violate the AKS.

In November 2009, Kmart developed an automatic flag system that allowed pharmacists to identify a GHP beneficiary who was ineligible for a gift card or coupon, providing for the first time an automated way for Kmart to “flag” customers who were GHP beneficiaries and thereby prevent them from being offered or utilizing prohibited incentives. Prior to November 2009, Kmart pharmacists could determine whether a customer was a GHP beneficiary through various manual checks, such as reviewing the customer’s health insurance card. However, the relator submitted declarations and deposition testimony from Kmart pharmacists to argue that, prior to implementation of the automated system, there was no reliable way of identifying GHP beneficiaries. That evidence, the Court held, was sufficient to create a triable issue of fact as to whether Kmart’s alleged violation of the AKS prior to November 2009 was “knowing.” “If it is true that Kmart did have all the information it needed to identify GHP beneficiaries for its pharmacy employees, but failed to have an adequate system in [place that allowed them to identify these beneficiaries,” the court held, “then this may be sufficiently reckless to yield False Claims Act liability.”

The November 20 opinion in U.S. ex rel. Yarberry v. Sears Holdings Corporation, et al., Case No. 09-CV-588-MJR-PMF, can be accessed here.

Illinois District Court Refuses To Dismiss FCA Claim For Improper Marketing of On-Label Use

Posted by Scott Stein and Nirav Shah

On January 30, 2013, a federal court in the Southern District of Illinois denied a motion to dismiss a relator’s complaint accusing defendants Sanofi-Aventis and Bristol Myers Squibb of allegedly making unsubstantiated efficacy claims about on-label use of the blockbuster drug Plavix. According to the complaint, by overstating Plavix’s efficacy, the defendants caused the federal health care programs to pay for unnecessary Plavix prescriptions, rendering claims for the drug false.

In its ruling, the Court focused on the relator’s allegation that Plavix was not “reasonable and necessary” for the patients to whom it was prescribed. The relator argued that the defendants made overstatements regarding Plavix’s efficacy, and that these statements misled physicians into thinking that Plavix was the only viable treatment option. The court concluded that the relator had met the pleading standard for Rule 9(b), notwithstanding the fact that the relator conceded that Plavix was used for FDA-approved purposes.

This case is unique and reflects the fact that after years of substantial settlements based on allegations of off-label promotion, enterprising relators’ counsel are turning their focus to new theories, including improper marketing of on label uses. Indeed, such theories are consistent with comments last year by Assistant U.S. Attorney Sara Bloom (D. Mass.) that unsubstantiated superiority claims by manufacturers are likely to be an area of increased focus by the government.