How Long Under Seal is Too Long?

On October 16, a Philadelphia federal district court rejected the government’s eleventh request for an extension of the seal so that it could continue to investigate five-year-old allegations brought under the False Claims Act qui tam provisions.  See United States ex rel. Brasher v. Pentec Health, Inc., No. 13-05745, 2018 U.S. Dist. LEXIS 177118 (E.D. Pa. Oct. 16, 2018).  The suit, first filed by relator in 2013, alleges that Pentec Health defrauded Medicare when it submitted fraudulent bills to the government health insurance program.  In denying the request, U.S. Judge Eduardo C. Robreno of the Eastern District of Pennsylvania determined the government had failed to show good cause for an eleventh extension of the seal period and ordered it to decide within 30 days if it will intervene in the suit. (more…)

District Court Invalidates Relators’ Pre-Filing Releases on Public Policy Grounds

We have previously discussed (here and here) the enforceability of a relator’s pre-filing release of FCA claims—an issue on which the FCA is silent. Recently, in United States ex rel. Susan Class et al., v. Bayada Home Health Care Inc., No. 2:16-cv-00680 (E.D. Pa. Sep. 24, 2018), a district judge in the Eastern District of Pennsylvania weighed in on the enforceability of pre-filing releases and held that, as a matter of public policy, these releases are unenforceable where “the Government did not have sufficient knowledge of the Relators’ allegations prior to the signing of Relators’ releases.” (more…)

District Court Refuses to Uphold Release of Liability or Apply Public Disclosure Bar Based on State-Law Employment Suit, Dismisses Off-Label Promotion Claims Under Rule 9(b)

Posted by Jaime L.M. Jones and Brenna Jenny

A court in the Eastern District of Pennsylvania recently ruled that, despite a relator’s publication during an employment retaliation suit of allegations relating to the defendant’s alleged off-label promotion and payment of kickbacks, such allegations were not publicly disclosed, nor was the relator’s execution of a release of liability effective. U.S. ex rel. Gohil v. Sanofi-Aventis U.S. Inc., No. 02-cv-02964 (E.D. Pa. Mar. 30, 2015). This case demonstrates the way policy arguments regarding a perceived congressional intent in favor of private enforcement of the FCA can impact legal arguments in FCA litigation.

The court first considered whether the relator’s claims had previously been publicly disclosed. The relator, a former sales representative employed by the defendant, filed a qui tam suit a month before resigning his position with the defendant in June 2002. Upon resigning, he filed a wrongful termination action pursuant to New Jersey’s Conscientious Employee Protection Act (“CEPA”). While the government weighed whether to intervene, the parties in the CEPA action engaged in discovery. They ultimately settled—with the relator signing a broad release of liability—and the qui tam suit was subsequently unsealed, with the government declining to intervene. The defendant argued that the relator’s Statement of Facts (“SoF”) in the CEPA action constituted disclosure through a “civil hearing,” thereby triggering application of the public disclosure bar. The court ruled that although the SoF “exhaustively details” the alleged off-label promotion of defendant’s cancer drug Taxotere, and corresponding payment of kickbacks, the SoF was not “substantially similar” to the relator’s complaint because the SoF did not state that any provider had submitted a claim to a federal healthcare program (“FHCP”). Accordingly, the court reasoned that the allegedly fraudulent transactions were not previously disclosed, and inferring the allegation of fraud “would impermissibly broaden the scope of the public disclosure bar and restrict private enforcement of the FCA.” The defendant has since filed a motion for reconsideration, arguing that where submission of false claims to the government is a “logical and obvious consequence” of an alleged scheme, all essential elements of the FCA claim are publicly disclosed.

The court next determined whether the relator had nonetheless waived his right to prosecute the qui tam suit through his settlement and release of liability in the CEPA action. Although the Third Circuit Court of Appeals has yet to rule on whether relators can unilaterally settle a qui tam suit post-filing, all of the courts of appeal to consider the issue have held that, based on the statutory language of the FCA, the government’s written consent is a prerequisite. In contrast, several courts of appeal have held that a pre-filing release can wipe out a would-be relator’s attempt to file a later qui tam suit, so long as the release covers the allegations in the suit and there are no countervailing public policy considerations. Consistent with the prevailing approach to post-filing releases, the Gohil court ruled that the relator’s release had no effect on the litigation. The defendant responded by suggesting that the release be effective as to the relator, but that the claims be dismissed without prejudice to the government’s ability to intervene. The court declined to adopt this approach, again invoking the “clear congressional intent of encouraging private enforcement of the FCA.”

As to the merits of the relator’s claims, the court first ruled that, even under the Third Circuit’s more lenient “reliable indicia” standard to the submission of false claims—in place of pleading the details of particular false claims submitted—the off-label promotion allegations did not meet Rule 9(b)’s requirements. This was so because all of the off-label uses related to medically accepted indications, which would have been eligible for government reimbursement. However, the court denied the defendant’s motion to dismiss the kickback allegations, holding that certifying compliance with the AKS is a precondition to payment by the FHCPs and that the relator had provided sufficient examples of kickbacks allegedly offered to providers. Finally, the court refused to dismiss the relator’s conspiracy count, ruling that a conspiracy between the defendant and providers could easily be inferred from examples of kickbacks supposedly paid by the defendant, followed by the recipient physician’s increase in Taxotere prescriptions.

A copy of the court’s opinion can be found here.

Federal District Court Holds That Former Employee Qualifies As “Original Source” Of Allegations Regarding Company Conduct That Occurred After His Departure

Posted by Kristin Graham Koehler and Brian Morrissey

A federal district court in Pennsylvania recently held that a former employee of Novartis Pharmaceutical Corporation was an original source of allegations regarding company conduct that occurred after his termination, and that he could overcome the FCA’s public disclosure bar on that ground. See United States ex rel. Galmines v. Novartis Pharmaceuticals Corp., No. 06-3213, 2015 WL 851837 (E.D. Pa. Feb. 27, 2015).

Donald Galmines, a Novartis senior sales consultant, filed a qui tam complaint two months after leaving the company in 2006. Galmines alleged that Novartis violated the FCA by promoting the eczema treatment Elidel for various off-label uses. The complaint remained under seal for over four years. Ultimately, the United States did not intervene, and Galmines proceeded with the litigation.

A dispute between the parties emerged as to whether Galmines could obtain discovery regarding conduct that occurred after he filed his complaint. The district court ruled that, to obtain such discovery, Galmines would be required to specifically allege that the fraudulent scheme continued past the date his complaint was filed.

Galmines sought leave to file a fourth amended complaint to add these new allegations. Novartis opposed the amendments on various grounds, including that the new allegations were prohibited by the public disclosure bar. By that time, the district court already had decided that, although Galmines’ allegations regarding conduct that occurred during his employment were based on public disclosures, Galmines overcame the public disclosure bar because he qualified as an “original source” of those allegations. See 31 U.S.C. § 3730(e)(4)(A). Galmines’ motion to amend his complaint required the court to decide whether Galmines could be an original source of allegations regarding conduct that occurred after his departure, and without his independent knowledge. Finding “little law on point” and acknowledging that it was “a close question,” the Court held that Galmines was an original source of the new allegations because they were based on Galmines’ assertion that the same “underlying scheme” he observed during his employment “continu[ed]” after he left. 2015 WL 851837, *3.

Rejecting Novartis’s counterarguments, the district court refused to “read a strict time limitation into the original source exception, such that a relator’s status as an original source begins and ends strictly when her direct and independent knowledge begins and ends.” Id. The district court acknowledged that Third Circuit precedent requires a qui tam relator to have “direct and independent knowledge” of the “most critical elements” of an alleged fraud. United States ex rel. PBT v. Housing Auth., 186 F.3d 376, 388–89 (3d Cir. 1999). But the court ruled that “[t]he precise start and end dates of a fraudulent scheme are not ‘critical elements'” of an FCA claim. 2015 WL 851837, at *3 (emphasis added). Rather, in the court’s view, the “precise duration of a fraudulent scheme goes not to liability but to damages—and not even to the existence of damages, but to the quantum.” Id. The court reasoned further that “[b]arring the relator . . . from bringing a claim for the entire fraudulent scheme would not comport with common sense, the general principles of law, or the . . . False Claims Act,” including the first-to-file requirement, which allows only the first relator to bring a qui tam suit regarding the scheme.

The district court’s ruling conflicts with the District of Massachusetts’ decision in United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., No. 03-12189, 2010 WL 3810858 (D. Mass. Sept. 27, 2010), which held that a relator could only serve as an original source for the period of time he was employed by the defendant. Id. at *2–3. The court in Galmines recognized this conflict, but found “the line drawn in Duxbury . . . untenable.” 2015 WL 851837, at *5. According to Galmines, once a relator qualifies as an “original source for a fraudulent scheme,” he or she should be permitted to “pursue the full extent of that fraudulent scheme,” even those portions of the scheme that occurred after his or her direct and independent knowledge ceased. Id.

As the district court’s opinion notes (and as we have discussed previously), the law on this issue is still developing. However, if Galmines’ approach prevails over Duxbury, it could substantially impact qui tam defendants in litigation with former employees. By conferring “original source” status on relators for allegations that continue past their employment, Galmines entitles relators to significantly more discovery—and, potentially, greater damages—than the Duxbury approach would allow.

District Courts Split Over Whether Relators Can be Original Sources of Claims Based on Misconduct Occurring After Employment Termination

Posted by Jaime L.M. Jones and Brenna Jenny

On March 4, 2015, the Central District of Illinois granted a defendant hospital’s motion to dismiss FCA claims based on “upcoding” allegations, holding the relator was not an original source of certain allegations and finding his remaining allegations insufficient to satisfy the requirements of Rule 9(b). U.S. ex rel. Gravett v. The Methodist Med. Ctr of Ill., No. 12-1008 (C.D. Ill. Mar. 4, 2015). In reaching its decision the court rejected relator’s argument that he could be the original source of allegations based on conduct that occurred after he left defendant’s employ, breaking with recent precedent out of the Eastern District of Pennsylvania. See U.S. ex rel Galmines v. Novartis Pharma. Corp., No. 06-cv-03213 (Feb. 27, 2015).

The relator in U.S. ex rel Gravett worked as an emergency room physician at Methodist Medical Center until January 1, 2007. According to his allegations, Methodist Medical Center employed coding software that it knew had a tendency to inflate the otherwise applicable CPT codes for physician and hospital services to codes associated with higher reimbursement. As a result, the relator alleged the submission of false claims for patients treated during the period 2006-2011. The defendant moved to dismiss relator’s claims under the public disclosure bar, arguing that it had disclosed the essential elements of the alleged fraud to the U.S. Attorney’s Office in the course of a government investigation beginning in 2010. Following Seventh Circuit precedent, the court held that relator’s allegations were publicly disclosed before proceeding to assess whether the relator qualified as an original source of those allegations. The court held that relator could not have direct knowledge of any alleged upcoding that occurred after his employment ended. As such, he could not be an original source of those allegations, which were barred.

The Central District of Illinois’ refusal to consider allegations of misconduct occurring after the relator’s employment was terminated stands in contrast to a recent order by the Eastern District of Pennsylvania in U.S. ex rel Galmines v. Novartis Pharma. Corp. Under an earlier ruling, the relator’s allegations—that during the time of his employment at Novartis, the company engaged in off-label marketing and entered into kickback arrangements with respect to the drug Elidel—had been deemed publicly disclosed. Nonetheless, the court concluded that the relator was an original source of those allegations. The relator subsequently moved to amend his complaint to extend the time period of the alleged misconduct past the termination of his employment. The court granted the motion, ruling that relators may “pursue the entire fraudulent scheme for which they have direct and independent knowledge of the operative substantive facts,” without limitation to the “specific time periods for which they have direct and independent knowledge.” The court viewed this conclusion as mandated by how the public disclosure and first-to-file rules have been interpreted. In particular, the court was concerned that constraining a relator to the time period of his direct involvement could create situations in which no relator could bring a lawsuit for a particular time period of a fraud. For example, this could arise where an original source who was the first to file lacked direct knowledge of a later portion of the scheme, but would-be relators with direct knowledge as to this later period would be barred from filing a suit under the first-to-file rule. The Galmines court further ruled that because the relator had sufficiently alleged a course of conduct continuing past his misconduct, he could amend his complaint and obtain discovery for conduct occurring after he filed earlier iterations of his complaint.

In contrast to the claims arising from conduct after his termination, the Gravett court held the relator was the original source of allegations related to upcoding he observed during his employment. As to that alleged upcoding, the court ruled that despite his direct knowledge relator failed to include any particulars regarding the false claims, such as invoices or requests for payment to a federal healthcare program that resulted from the alleged upcoding. Under well-established precedent, relators advancing upcoding allegations are only entitled to a relaxation of Rule 9(b)’s requirement to plead specific information of at least one submitted false claim if they are “in a special position of personal knowledge or involvement in the billing practices of the defendant that affords some indicia of reliability to the allegations.” The Gravett court determined that as a former emergency room physician, the relator was only involved in the delivery of care, and he lacked “first hand knowledge of Defendants’ actual billing practices, submission of claims for payment, or receipt of payments from the Government payors.” Absent actual involvement in claims or billing practices, the relator was effectively relying on “rumor or innuendo.” Thus, the court dismissed relator’s remaining claims pursuant to Rule 9(b).

A copy of the opinion in U.S. ex rel. Gravett v. The Methodist Med. Ctr of Ill., No. 12-1008 (C.D. Ill. Mar. 4, 2015) can be found here.

A copy of the opinion in U.S. ex rel Galmines v. Novartis Pharma. Corp., No. 06-cv-03213 (Feb. 27, 2015) can be found here.

District Court Blesses Retroactive Application of FCA’s False Statement Provision

Posted by Ellyce R. Cooper and Patrick E. Kennell III

In U.S. ex rel. De’von Cannon v. Rescare, Inc., No. 09-3068 (E.D. Pa. Sept. 16, 2014) (Dkt. No. ___) (“Slip Op.”), Judge Diamond of the Eastern District of Pennsylvania ruled that in its third try the Relator pled facts sufficient to survive a motion to dismiss. This time the Relator argued the applicability of the amended (2009) version of § 3729(a)(1) rather than the pre-2009 version. Judge Diamond’s ruling follows the majority of courts around the country that have found that the 2009 amendment can be applied retroactively because it is civil and not punitive in nature.

In dismissing the first two versions of Relator’s complaint, Judge Diamond applied the pre-2009 version of § 3729(a)(1), and found that the Relator did not meet the intent requirement found in Allison Engine, Co., Inc. v. United States ex rel. Sanders, 553 U.S. 662, 668-69 (2008) (“[A] person must have the purpose of getting a false or fraudulent claim ‘paid or approved by the Government’ in order to be liable under § 3729(a)(2).”). (Slip Op. at 4-5). However, in his Second Amended Complaint, Relator alleged for the first time that he was proceeding under the post-2009 Amendments to § 3729(a)(l) (specifically, Section 3729(a)(l)(B)) (“Any person who…knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim . . . is liable to the United States Government for a civil penalty.).

The amendments to the FCA took effect in May of 2009, and Relator’s allegations dealt with acts that took place “from November 2008 to March 2009.” (Slip Op. at 7). The Court noted that “Congress singled out subsection [3729(a)(1)(B)] to apply retroactively to all ‘claims made under the FCA that are pending on or after’ June 7, 2008.” (Slip Op. at 6). Judge Diamond ruled that the retroactive application of the Amendment would not violate the Ex Post Facto Clause because the FCA is civil in nature, the monetary penalties of the FCA were not punitive in nature, and the “FCA’s penalty provision is . . . not excessive, given its remedial purposes: encouraging would-be qui tam relators and compensating the Government for investigative costs and the fraud itself.” (Slip Op. at 7-9, 12).

Court Allows Defendant to Pursue Counterclaim Against Relator for Violation of Confidentiality Agreement

Posted by Robert J. Conlan and Matt M. Fogelberg

On June 16, a federal district court in Pennsylvania denied a qui tam relator’s motion to dismiss a counterclaim asserted by the defendants that was based on the relator’s alleged breach of a written confidentiality agreement he had executed with defendants as part of his employment. U.S. ex rel. Walsh v. Amerisource Bergen Corp., Case No. 11-7584 (E.D. Pa. June 16, 2014). A copy of the decision can be found here. The court’s decision reinforces a line of federal decisions from other courts that public policy considerations do not require dismissal of a qui tam defendant’s counterclaim so long as the counterclaim’s success is not dependent upon the fact of the defendant’s FCA liability.

Relator Patrick Walsh, an internal auditor employed at Amerisource, alleged that Amerisource and two of its subsidiaries violated the federal FCA and various state FCAs. After the United States declined to intervene and Walsh served an amended complaint on the defendants, the defendants filed a counterclaim against Walsh, alleging that he had violated a confidentiality agreement by taking confidential, proprietary and privileged information from Amerisource and providing the information to his personal attorney. The defendants further alleged that some of the information Walsh took from defendants became public when the court unsealed his FCA complaint. Walsh moved to dismiss the defendants’ counterclaim on several grounds, including “the strong public policy against counterclaims in qui tam actions,” which Walsh argued was “the most compelling reason for dismissal.”

The court rejected Walsh’s motion in its entirety. It specifically held that Walsh’s public policy argument failed because the defendants’ counterclaim alleged damages that are independent of any potential FCA liability – i.e., “not based upon any potential revenues, earnings, profits, compensation, or benefits awarded to Relator as a result of this qui tam action.” In so ruling, the court distinguished cases dismissing counterclaims in FCA cases where the counterclaims, in effect, sought contribution or indemnity because the relator had participated in the alleged fraud or the defendants had been damaged by the relator disclosing the alleged fraud. Instead, the Walsh court found that the defendants’ counterclaim did not depend on – or require a finding of – FCA liability. The counterclaim did not allege that Walsh participated in the purported fraud, nor did it suggest that the damages the defendants sustained resulted from the relator’s disclosure of the alleged fraud. The court therefore held that the defendants’ counterclaim was not effectively a claim for indemnification, and it refused to bar the counterclaim on public policy grounds.

The court’s decision also highlighted a crucial consideration for FCA defendants when deciding whether to file a counterclaim against a relator. The court recognized that a qui tam defendant’s counterclaim will often be compulsory under Federal Rule of Civil Procedure 13, and a defendant that fails to raise a counterclaim might be permanently precluded from asserting that claim. Reiterating the Ninth Circuit’s reasoning in U.S. ex rel. Madden v. Gen. Dynamics Corp., 4 F.3d 827, 831 (9th Cir. 1993), the Walsh court stated that refusing to permit a qui tam defendant from raising a counterclaim independent of its FCA liability “would be a violation of the defendant’s procedural due process rights.” Given the growing body of case law recognizing the validity of an FCA defendant’s counterclaim under circumstances such as those present in Walsh, and the possibility of losing a claim against a relator if not asserted in response to a qui tam action, any defendant facing a qui tam action should consider carefully whether the facts of its case warrant filing a counterclaim against the relator.

District Court Dismisses Qui Tam Claims Due To Relator’s Failure To Plead Intent In Light Of Regulatory Ambiguity

In a decision released yesterday, Judge Robreno of the Eastern District of Pennsylvania dismissed all FCA claims against nine pharmaceutical manufacturers pursuant to Rule 8(a), finding that relator had failed to plead any evidence they acted knowingly or recklessly in light of regulatory ambiguity. U.S. ex rel. Streck v. Allergan, et al., No. 08-5135 (E.D.P.A. Jul. 3, 2012). Relator’s claims against those defendants were based on allegations that they had improperly calculated Average Manufacturer Price (“AMP”) by including certain price increases that triggered credits owed by wholesalers in the calculation of service fees owed to those wholesalers, which fees were in turn excluded from the manufacturers’ calculation of AMP as “bona fide service fees.” Relying on Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), Robreno held that due to the lack of any statutory or regulatory guidance regarding price appreciation credits and the calculation of AMP, relator was required but had failed to plead facts to show that defendants’ interpretation of those regulations was unreasonable. The court found that the conduct of those manufacturers was “not unreasonable, let alone reckless,” and dismissed all claims against them with prejudice as to the relator.

The court also dismissed in part the claims against another group of four manufacturers. These “discount defendants” were alleged to have included service fees paid to wholesalers as discounts in their calculations of AMP. While the court dismissed all claims against the discount defendants for conduct prior to 2007, it allowed later claims to proceed based on regulatory developments occurring in 2007.

This decision, like the Supreme Court’s decision in Christopher v. SmithKlineBeecham Corp., recently reported on this blog, should give relators’ counsel and the government pause when considering FCA claims based on alleged violations of ambiguous statutes or regulations.

Sidley represented three of the defendants against whom all claims were dismissed in the litigation.