The False Claims Act allows relators to share in a recovery even where the United States pursues an “alternative remedy” rather than direct FCA litigation. In a recent decision, the District of Massachusetts determined that where an entity voluntarily repays stolen funds and takes action to do so as soon as the theft was discovered, that repayment does not constitute an “alternative remedy” requiring a relator’s share.
In the wake of Warner Chilcott’s civil settlement and guilty plea last fall, DOJ made headlines with the indictment of former Warner Chilcott executive Carl Reichel for his alleged role in the company’s violations of the Anti-Kickback Statute (“AKS”) (as discussed here). The indictment closely followed the announcement by Deputy Attorney General Sally Yates that the government was implementing a new commitment to prosecute individuals where appropriate (as discussed here). Today the government’s highest-profile test case fell short, with a jury acquitting Reichel after less than one day of deliberations.
If Medicare pays a flat rate for a patient to purchase a medical device regardless of how long the patient uses the item, any false statement to Medicare regarding the length of time the patient needs that device is not an FCA violation because it is not material to Medicare’s payment decision. That was the holding recently by a federal district court in Massachusetts, granting summary judgment to device manufacturer DJO, Inc. and ending its role in a decade-long qui tam litigation against numerous manufacturers of bone-growth stimulators. United States ex rel. Bierman v. Orthofix Int’l, N.V. 05-10557-RWZ (D. Mass. Apr. 11, 2016).
We recently discussed the settlement Warner Chilcott reached with the Department of Justice, which also announced criminal charges against the former president of the company’s pharmaceutical division. This former executive, however, is not the only individual swept into the criminal charges, as three lower level Warner Chilcott sales force members and a physician who served as a speaker for the company have previously been charged or pled guilty. The details in the charging materials may provide insight into the government’s post-Yates memo approach to targeting and using individuals to build a criminal case against corporations.
Yesterday, the DOJ announced a settlement with the U.S. sales subsidiary of Warner Chilcott PLC. The company has agreed to plead guilty to criminal charges and to pay $125 million to resolve both criminal and civil liability. At the same time, the DOJ announced that it had indicted a former president of Warner Chilcott’s pharmaceutical division with conspiracy to violate the Anti-Kickback Statute. As the DOJ emphasized in its press release, the individual criminal charges in this matter represent an effort to hold “responsible individuals accountable” in enforcement actions. The DOJ’s pursuit of individual criminal liability in this case represents a high profile application of the DOJ’s intent to focus on the liability of individual corporate employees, recently set forth in the Yates memo (as further discussed here). The parallel civil settlement also provides insight into potential future enforcement activities around manufacturer support of prior authorization programs.
In United States ex rel. Worsfold v. Pfizer Inc., No. 09-11522-NMG (D. Mass. Nov. 22, 2013), a federal district court in Massachusetts recently dismissed an FCA suit brought against Pfizer based on purported off-label marketing, holding that the relator could not rely simply on allegations of unlawful off-label marketing and purported statistical evidence but instead needed to plead a specific false claim submitted to the government, which he failed to do.
The case was brought by a former District Manager of Western Florida in Pfizer’s Anti-Infectives Division who was responsible for the sale of two anti-fungal drugs, Vfend and Eraxis. The relator alleged that Pfizer promoted Vfend and Eraxis for a number of off-label uses, including use in cancer centers with neutropenic patients and use by children under 12 years old. The relator alleged that by engaging in these off-label promotions, Pfizer violated Section 3729(a)(1) of the FCA both by submitting false claims for reimbursement to the government directly and by causing physicians to submit false claims. He further alleged that Pfizer violated Section 3729(a)(2) by knowingly creating false statements to be submitted to the government.
In dismissing the case, the court confirmed that the heightened pleading standard set forth in Federal Rule of Civil Procedure 9(b) applies to FCA claims and concluded that the standard was not met in the case. The court found the relator’s allegations that Pfizer submitted false claims directly to the government to be “exceedingly vague.” “Nowhere does Relator allege details evidencing how Pfizer itself, rather than intermediary physicians, submitted a false claim to the government.” Accordingly, the court found the relator’s allegations of direct false claims insufficient to withstand dismissal.
The court also found the relator’s allegations of indirect false claims insufficient due to his failure to “identify a single false claim for reimbursement actually presented to a federal or state government based upon an identified, purportedly off-label use of Vfend or Eraxis.” The court held that the violation of federal regulations governing off-label promotion is not itself sufficient to support a claim under the FCA. The court rejected the relator’s argument that he satisfied Rule 9(b) by identifying “factual or statistical evidence” to support the inference that Pfizer caused physicians to submit a false claim for reimbursement. The court concluded that, in practice, courts in other cases had only found Rule 9(b) satisfied under such an “extrapolation” approach where the relators actually alleged at least some specific false claims. The court also found the relator’s purported statistical evidence insufficient to create the requisite inference of fraud.
Finally, the court held that the relator failed to state a claim under Section 3729(a)(2) because he failed to allege Pfizer’s intent to defraud the government and because his allegations of off-label marketing did not include any allegations of materially false statements or records by Pfizer.
On these bases, the court dismissed the relator’s fourth amended complaint without leave to amend.
Sidley lawyers Kristin Graham Koehler and Brian Morrissey have authored an article as a part of the Washington Legal Foundation’s Counsel’s Advisory series, entitled “Court Ruling Provides Blueprint for Deducting False Claims Act Damages.” The article examines the recent ruling in Fresenius Medical Care Holdings, Inc. v. United States, No. 08-12118, 2013 WL 1946216 (D. Mass. May 9, 2013), a potentially path-marking decision by the U.S. District Court for the District of Massachusetts. The decision allowed a defendant in an FCA suit to present evidence that damages it paid under the Act were tax-deductible compensatory payments to the Government, despite the fact that the Department of Justice, consistent with its customary practice, refused to agree to the tax characterization of the damages payment. The ruling establishes an important precedent for individual and corporate FCA defendants seeking to determine the likely tax treatment of potential damages awards.
The article is available for download on the Washington Legal Foundation’s website: http://www.wlf.org/publishing/publication_detail.asp?id=2390.
Posted by Gordon Todd and Matthew Krueger
A federal district court opinion issued last week could help defendants oppose attempts by relators in non-intervened qui tam cases to seek early discovery of documents produced to the Government during its investigations. In Laughlin v. Orthofix International, N.V., No. 05-10557-EFH (D. Mass. Apr. 10, 2013), the Court denied the relator’s motion for leave to issue a subpoena to the Government—before the parties had commenced discovery—to obtain documents that the defendant had produced to the Government during its investigation of similar allegations.
In 2005, the relator filed suit against several medical-device companies, alleging False Claims Act violations in their sale and distribution of bone growth stimulators. The Government conducted a lengthy investigation of the relator’s claims as well as other potential healthcare offenses. During its investigation, the Government obtained documents from the defendants concerning both the relator’s claims and also the other potential offenses. The Government ultimately decided not to intervene in the case.
Before the parties had held a Rule 26(f) discovery conference, the relator moved for leave to issue a Rule 45 subpoena to the Government, seeking documents the defendant had produced to the Government. The defendants opposed the motion, arguing that the relator had not shown good cause to avoid Rule 26(d)(1)’s prohibition on any discovery—including discovery of third parties—until after a Rule 26(f) discovery conference.
The district court denied relator’s motion. The court agreed with defendants that allowing the relator to obtain the documents from the Government would “effectively remove their ability to lodge objections to particular documents and would deny them the opportunity to designate documents confidential pursuant to a valid protective order.” Slip op. at 3. On the other hand, denying the discovery would only “subject the relator to the normal discovery process.” Id.
The decision highlights an aggressive move that relators in non-intervened cases may make, seeking early discovery of defendants’ documents directly from the Government, outside the normal course of discovery. The district court’s decision provides a terse, but helpful precedent that rejects this move and vindicates the protections built into Federal Rule 26.
Posted by Scott D. Stein and Allison W. Reimann
In a February 25, 2013 opinion, a federal district court in Massachusetts dismissed a complaint against twenty-four drug manufacturers, distributors, and labelers, holding that the court lacked subject matter jurisdiction because the facts on which the relator’s claims were based were “publicly disclosed” in drug reimbursement data files and similar documents.
The case concerned the requirement that drug manufacturers file a list of “covered outpatient drugs” they market with the Centers for Medicare and Medicaid Services (“CMS”) and inform CMS whether any of these drugs (or drugs that are identical, related or similar) were subject to review under the Drug Efficacy Study Implementation (“DESI”) program. The relator alleged that the defendants fraudulently misrepresented that their products were covered outpatient drugs eligible for Medicaid reimbursement by listing with CMS unapproved drugs, false DESI codes, and non-drug products. The relator claimed that the federal government thus had erroneously reimbursed over $500 million for the defendants’ products.
The defendants moved to dismiss on public disclosure grounds because both the “true” facts and the facts that the defendants allegedly misrepresented all were publicly disclosed. First, the defendants argued that the allegedly misrepresented facts were disclosed in two places: (1) lists of covered outpatient drugs and associated DESI codes that are published quarterly by CMS (which would show any false statements that the defendants’ products were covered outpatient drugs); and (2) lists of the products and the amounts that the federal government reimbursed to states, also published by CMS (which would show that state Medicaid programs relied on such misrepresentations). Second, the defendants asserted that the “true” facts would be disclosed by three other sources: (1) FDA’s Orange Book (which lists all FDA-approved drugs, making any unapproved drugs listed by defendants conspicuous by their absence); (2) Federal Register notices (which notify the public of FDA’s DESI determinations); and (3) FDA’s National Drug Code Directory (which provides information necessary to show that two drugs are identical, related, or similar).
The court agreed that, read together, these sources created a plausible inference of fraud sufficient to trigger the public disclosure bar – even if substantial expertise would be required to identify the alleged discrepancies. The court explained that “the only question is whether the material facts exposing the alleged fraud are already in the public domain, not whether they are difficult to recognize.” Slip. Op. at 8. The court also rejected the relator’s contention that CMS data lists could not be considered “administrative reports” for purposes of the public disclosure bar, reasoning that the agency engages in at least minimal preparation and synthesis in compiling the data into a usable format for the public.
This case is significant in that it affirmatively holds that information contained in government data files, such as CMS’s state drug utilization data, can qualify as a public disclosure, even where understanding and interpreting the data requires specialized expertise. This holding could be significant in a number of pricing-related contexts where pricing to federal health care programs and other customers may be in the public domain. The decision confirms that relators cannot bring whistleblower actions where their contribution consists of nothing more than drawing inferences from publicly available information.
According to an article in yesterday’s Bloomberg News, a federal district judge has rejected a proposed guilty plea by Orthofix International NV in connection with a long-standing civil and criminal investigation of alleged false claims relating to the alleged payment of kickbacks to doctors and off-label use of bone-repair products.
Orthofix previously agreed to pay a $34.2 million settlement of civil qui tam claims based on alleged kickbacks to physicians, and five individual Orthofix employees have pleaded guilty to various criminal violations, including violations of the Anti-Kickback Statute. According to the article, Orthofix was prepared to plead guilty to a felony count of obstructing a government audit and to pay a $7.8 million fine. But Judge William Young of the District of Massachusetts rejected the proposed plea on the ground that it unduly restricted his sentencing power, stating that he had “extreme unease of treating corporate criminal conduct like a civil case.”
It remains unclear what impact if any the court’s rejection of the criminal plea will have on the proposed civil settlement, or how the parties plan to address the Court’s concerns. But the development is noteworthy in light of the controversy earlier this year regarding another district court’s rejection of a civil settlement between the SEC and a defendant based on concerns that it was too lenient. It remains to be seen whether Judge Young’s rejection of the proposed Orthofix settlement is an aberration, or evidence that the willingness of judges to take a closer look at settlements of corporate fraud allegations in the securities context may be extending to other courts and contexts.