Applying Escobar, Court Rejects Comparative Effectiveness and “Fraud on the Formulary” Claims

The heightened materiality standard imposed by the Supreme Court last year in Escobar continues to pose a formidable bar to relators pursuing expansive theories of FCA liability.  As we explain below, one court recently rejected a claim against pharmaceutical manufacturers alleging that the defendants had fraudulently induced state formulary committees to cover the defendants’ drug, refusing to take a “step toward bringing all misrepresentations to government bodies within the purview of the FCA.”  See United States ex rel. Dickson v. Bristol-Myers Squibb Co., No. 13-cv-01039 (D.N.J. June 27, 2017).  (more…)

Recent Decisions Highlight Ethical Pitfalls Of Former In-House Counsel’s Involvement In FCA Actions Involving Former Employer

Two recent decisions add to the growing body of case law addressing the tension between attorneys’ ethical obligations to current and former clients and the qui tam provisions of the False Claims Act.


District Court Grants Partial Dismissal in Part D/Medicaid Case Alleging False Comparative Marketing Claims

On August 20, 2015, the District of New Jersey granted in part and denied in part defendants’ motion to dismiss allegations that by making comparative claims regarding an on-label use of a drug, the defendant prevented physicians from making informed decisions about whether resulting prescriptions were eligible for Medicare or Medicaid reimbursement.  See United States ex rel. Dickson v. Bristol-Myers Squibb Co., No. 13-1039 (D.N.J. Aug. 20, 2015).  The case highlights relators’ ever-broader use of the FCA to target sales and marketing activities of pharmaceutical manufacturers.


Court Permits Counterclaim Against Relator for Breach of Employment Agreement

A recent federal court decision from the District of New Jersey confirms that while the FCA protects employees’ right to blow the whistle, it does not give them carte blanche to ignore confidentiality obligations or employment agreements. Two former employees of a medical device manufacturer sued their former employer for allegedly promoting a medical device for off-label and medically unnecessary uses. After its motion to dismiss was denied, the manufacturer answered and filed a counterclaim against the former employees for breach of their employment agreements. The relators then moved to dismiss the counterclaims.

Denying the motion, the court noted that employer had alleged that “[b]oth Relators signed employment agreements, at the beginning of their employment [ ] requiring them to refrain from disclosing or retaining certain [employer] confidential or proprietary information,” and that the relators “‘took, disclosed, and then published’ confidential patient claims data and proprietary business information related to the [device] and customer lists in their First Amended Complaint, thereby breaching their employment contracts.” Notably, the Court rejected the relators’ argument that the claim should be dismissed because “the agreements, essentially restricting the disclosure of documents evidencing false claims against the government, would frustrate the underlying policy considerations of the FCA,” noting that accepting the manufacturer’s allegations as true (as the Court was required to do on defendants’ motion), the counterclaims were not obviously barred.

This is the latest in a series of decisions from various district courts confirming that the ability to file an FCA case is not a license for former employees to violate their confidentiality obligations without consequence. Accordingly, it emphasizes the desirability of requiring employees to sign confidentiality agreements. Although such agreements cannot insulate employers from liability for actual FCA violations, they can discourage employees from filing frivolous qui tam suits, or from making unauthorized disclosures of confidential information that are not reasonably necessary to inform the government of potential fraud.

A copy of the district court’s decision in U.S. ex rel. Bahnsen v. Boston Scientific Neuromodulation Corporation (D.N.J.) can be found here.

Qui Tam Counsel May Recover For Both Contingent and Statutory Fees

Posted by Ellyce Cooper and Brent Wilner

A recent opinion by the United States District Court for the District of New Jersey underscores the significant incentives for attorneys to represent whistleblowers in False Claims Act litigation. In resolving a fee dispute between a relator and his counsel following a settlement of FCA claims, the court found that the fee shifting provisions of the FCA, 31 U.S.C. § 3730(d)(1)-(2), do not preclude the relator’s attorney from receiving contingency fees in addition to the statutorily mandated attorney’s fees. United States ex rel. DePace v. Cooper Health System, __ F. Supp. 2d __, 2013 WL 1707952 (D.N.J. Apr. 22, 2013).

Relator Dr. Nicholas DePace alleged that Cooper Health System paid illegal kickbacks to physicians to induce referrals for expensive cardiac services causing false claims for reimbursement to be submitted to government payors in violation of the FCA and its New Jersey parallel. Dr. DePace retained Pietragallo, Gordon, Alfano, Bosick, & Raspanti, LLP to represent him in this qui tam matter. He also was represented by his personal counsel, Joseph Milestone. Dr. Depace’s contingency fee agreement provided that the Pietragallo Firm would receive 40 percent of any recovery on his FCA claims prior to trial, and expressly contemplated that these contingency fees would be “in addition to” any attorney’s fees paid under the state or federal FCAs. The contingency fee agreement allocated a portion of that amount to Milestone.

The federal and New Jersey governments ultimately intervened in Dr. DePace’s action for purposes of settling the claims prior to trial. Under the settlement agreement, Cooper agreed to pay the United States and New Jersey a combined $12,600,000, out of which the United States and New Jersey agreed to pay Dr. DePace a total of $2,394,000. Cooper also agreed to pay “as full payment” attorney’s fees of $430,000 “in accordance with subsection 3730(d)(1).”

Thereafter, when allocating the funds, the Pietragallo Firm withheld 40 percent of Dr. DePace’s award to fulfill the contingency fee agreement. (Milestone declined any fees and the Pietragallo Firm withheld 30 percent and provided Dr. DePace with 70 percent). Dr. DePace challenged the allocation of contingency fees beyond the statutory fees, with the dispute ultimately returning to Judge Irenas, the judge who presided over the underlying FCA action.

After finding that the court had jurisdiction to reopen the case, Judge Irenas rejected Dr. DePace’s pleas. In particular, the court rejected Dr. DePace’s argument “that because the Federal False Claims Act states that ‘all’ attorneys’ fees are to be awarded against the defendant, the statute does not allow for attorneys to receive additional fees from clients through contingency agreements.” Judge Irenas relied heavily on the Supreme Court’s policy rationale in Venegas v. Mitchell, 495 U.S. 82, 89-90 (1990) (a case involving 42 U.S.C. § 1988, rather than the FCA) that “‘depriving plaintiffs of the option of promising to pay more than the statutory fee if that is necessary to secure counsel of their choice would not further . . . general purpose of enabling such plaintiffs in civil rights cases to secure competent counsel.'” The court pointed to analogous concerns articulated in the FCA’s legislative history that “‘[u]navailability of attorneys fees inhibits and precludes many individuals, as well as their attorneys, from bringing civil fraud suits.'” See S. Rep. No. 99–345, at 29 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5294.

The court also rejected the relator’s distinction between non-intervention cases and cases like Cooper where the government had intervened, noting that there was “no case law or statistics to support his broad generalizations about the amount of risk and work involved in intervention and non-intervention cases,” particularly given that in the five-year litigation of this qui tam matter, the government in Cooper only intervened “shortly before” settlement. Moreover, the court noted that because the language in § 3730(d)(1) and § 3730(d)(2) (intervention and non-intervention cases) is identical, there is no reason to interpret these subsections differently.

While the issue was one of first impression in the Third Circuit, Judge Irenas noted that several other courts had made similar rulings in FCA cases. See United States ex rel. Lefan v. General Electric Co., 394 Fed. App’x 265, 272 (6th Cir.2010); United States ex rel. Alderson v. Quorum Health Group, Inc., 171 F. Supp. 2d 1323, 1335 n.35 (M.D. Fla. 2001); United States ex rel. Poulton v. Anesthesia Assocs. of Burlington, Inc., 87 F. Supp. 2d 351, 359 (D. Vt. 2000); United States ex rel. John Doe I v. Pennsylvania Blue Shield, 54 F.Supp.2d 410, 413 (E.D. Pa. 1999).

Finally, the opinion also discussed the implications of New Jersey’s ethical rules on the fees, but still did not find the fee arrangement unenforceable. Consistent with the reasoning above, the court concluded “the policy behind the fee shifting provisions of the Federal False Claims Act was to ensure that litigants had access to competent counsel. This policy would not be undermined by allowing a party to choose to pay a contingency fee in addition to a statutory fee in order to secure his preferred counsel.”