Earlier this month, in U.S. ex rel. Polukoff v. St. Mark’s Hospital et al., No. 17-4014 (Jul. 9, 2018), the Tenth Circuit reversed a lower court’s dismissal of FCA claims, holding that “[i]t is possible for a medical judgment to be ‘false or fraudulent’” under the FCA. As previously reported here, the relator had alleged that a cardiologist performed and billed Medicare and Medicaid for unnecessary heart surgeries known as PFO closures. The District of Utah, in granting defendants’ motion to dismiss, had concluded that claims associated with those procedures, in which the doctor represented that the procedures were medically necessary, could not be deemed objectively false because “liability may not be premised on subjective interpretations of imprecise statutory language such as ‘medically reasonable and necessary.’”
In a January 19, 2017 decision, a federal judge in Utah considered whether claims submitted by a physician could be deemed “objectively false” based on alleged non-compliance with industry standards. The court concluded that allegations that a doctor failed to comply with an industry standard for medical care do not satisfy the objective falsity standard and do not render false the physician’s certification that he or she believed that the services “were medically indicated and necessary for the health of the patient.” United States ex rel. Polukoff v. St. Mark’s Hospital et al., No. 2:16-cv-00304-JNP-EJF (D. Utah Jan. 19, 2017).
In a victory for government contractors, the U.S. Court of Appeals for the Tenth Circuit held that vendors and their suppliers cannot knowingly submit false claims under the False Claims Act where the knowing falsity is premised on lack of compliance with government regulations that are subject to differing, good-faith interpretations. The case, U.S. ex rel. Smith v. Boeing, No. 14-3247, 2016 WL3244862 (10th Cir. 2016), involved an appeal by relators, three former Boeing employees, of summary judgment for Boeing and Ducommun, Inc.
A district court granted summary judgment to Solvay Pharmaceuticals on claims that it influenced the public body of scientific research in order to manipulate the compendia DrugDex into supporting off-label uses of its products. U.S. ex rel. King v. Solvay S.A., No. H-06-2662 (S.D. Tex. Dec. 14, 2015). The opinion provides helpful guidance on the high bar that relators must satisfy to pursue FCA claims based on alleged manipulation of scientific research so that ordinary disputes about the weight to be given to scientific research are not challenged as “fraud” under the FCA.
The U.S. Supreme Court today granted certiorari in Universal Health Services, Inc. v. Escobar, No. 15-7. The petition presented three questions for review, of which the Court agreed to hear two. Specifically, the Court agreed to review:
2. Whether the “implied certification” theory of legal falsity under the FCA-applied by the First Circuit below but recently rejected by the Seventh Circuit-is viable.
3. If the “implied certification” theory is viable, whether a government contractor’s reimbursement claim can be legally “false” under that theory if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment, as held by the First, Fourth, and D.C. Circuits; or whether liability for a legally “false” reimbursement claim requires that the statute, regulation, or contractual provision expressly state that it is a condition of payment, as held by the Second and Sixth Circuits.
The various federal circuits have staked out divergent standards on these issues, leading to significant disharmony in application of the FCA. With this case the Court has the opportunity to establish uniform, national standards for FCA liability, and potentially to curtail some of the statute’s more abusive applications.
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).
Posted by Jaime Jones and Jessica Rothenberg
On February 21, 2014, the Fourth Circuit upheld the dismissal of a former employee’s False Claims Act suit against Omnicare, Inc. (“Omnicare”), holding that while the relator alleged violations of certain Food and Drug Administration (“FDA”) regulations by Omnicare’s subsidiary, Heartland Repack, his failure “to allege that the defendants made a false statement or that they acted with the necessary scienter” was fatal to his claim. Relator Barry Rostholder alleged that Heartland Repack violated drug GMP regulations that require penicillin and non-penicillin drugs be packaged in isolation from each other so as to avoid cross-contamination, by repackaging penicillin in facilities also used for non-penicillin drug packaging operations. In his suit, which was first filed in 2007, Rostholder alleged that as a result of this violation, the drugs were adulterated and ineligible for Medicare or Medicaid reimbursement, and that any claims presented to the government for reimbursement were false under the FCA. The government declined to intervene in 2009. The district court granted Omnicare’s motion to dismiss and denied relator’s request to file an amended complaint.
The Fourth Circuit held that whatever Rostholder had alleged, he had not identified any false statement or other fraudulent misrepresentation made by Heartland Repack to the government, as required under the FCA. The court first held that a drug must be merely FDA-approved to qualify for reimbursement, and that the Medicare and Medicaid statutes do not prohibit reimbursement for adulterated drugs and do not require compliance with FDA safety regulations as a precondition to reimbursement. Therefore, “the submission of a reimbursement request for [an FDA-approved] drug cannot constitute a ‘false’ claim under the FCA on the sole basis that the drug has been adulterated . . . in violation of FDA safety regulations.” Because Rostholder failed to plead the existence of any false statement or fraudulent course of conduct, his FCA claims failed. The court summarily dismissed Rostholder’s attempt to proceed under implied certification or worthless services theories of FCA liability. Holding that any amendment would be futile in light of its holding, the Fourth Circuit also upheld the lower court’s decision to deny Rostholder leave to file a third amended complaint.
In arriving at its decision, the Fourth Circuit declined to sanction the use of the False Claims Act as a tool to ensure regulatory compliance, particularly where an agency such as the FDA has the power to enforce its own regulations. As Judge Barbara Milano Keenan, writing for the panel, noted, “[T]he correction of regulatory problems is a worthy goal, but is ‘not actionable under the FCA in the absence of actual fraudulent conduct.'” This case is significant in particular in light of numerous recent statements by various government lawyers signaling DOJ’s intent to pursue FCA actions based on GMP violations, and is sure to be frequently cited in defense of such claims.
Last week, the Supreme Court of Louisiana reversed a $330 million judgment ($258 million in penalties, $70 million in attorney fees, and $3 million in costs) against Johnson & Johnson and its subsidiary, Janssen Pharmaceutical, because there was no evidence that “any defendant made or attempted to make a fraudulent claim for payment against any Louisiana medical assistance program within the scope of [the Louisiana Medical Assistance Programs Integrity Law (‘MAPIL’)]”—a state statute based on the federal False Claims Act. Caldwell ex rel. State v. Janssen Pharmaceutical, Inc., Nos. 2012-C-2447, 2012-C-2466, 2014 WL 341038, slip op. at 1-2, 19-20 (La. Jan. 28, 2014)
The case centers on a narrow set of facts related to defendants’ antipsychotic drug Risperdal. In September 2003, the FDA told all manufacturers of so-called atypical antipsychotics to amend their labels to warn about potential adverse side effects associated with the drugs, and to issue letters about the change to healthcare providers around the country. Defendants did so, but their letter also reported that Risperdal had been associated with lower risks than other atypical antipsychotics. The FDA took issue with those statements and directed defendants to issue a “corrective” letter, which they did in July 2004. Just a couple of months later, the Louisiana Attorney General brought suit, alleging that the original letter contained off-label statements misrepresenting Risperdal’s safety and efficacy and that defendants were subject to civil penalties under Louisiana law as a result. In 2010, a jury returned a verdict for the state, finding that the defendants had violated Louisiana’s MAPIL 35,146 times (based on the number of letters mailed and sales calls made) and assessed a civil penalty of $7,250 per violation. The verdict was affirmed by the intermediate appellate court.
The Louisiana Supreme Court found no evidence to support that judgment based on its reading of the state’s false-claims act. Proceeding through each of the statute’s three subsections one-by-one, the court explained the law’s scope and why the conduct at issue did not fall within it. First was subsection (A), which provides that “[n]o person shall knowingly present or cause to be presented a false or fraudulent claim.” La. Rev. Stat. § 43:438.3(A). Because the statute elsewhere defined a “false or fraudulent claim” as one that a provider submits “knowing” it to be false or misleading, the court focused the responsibility for policing falsity on the person or entity actually making the claim for payment. The AG was thus required to “show that a Louisiana doctor who prescribed Risperdal for his patient, or a healthcare provider who dispensed the drug to the patient, knew that the defendants had made misleading statements about their product, but nonetheless prescribed or dispensed the drug to the patient knowing that there may be drugs that are equally safe, and less expensive, or safer than Risperdal, and notwithstanding that knowledge, prescribed or dispensed Risperdal.” Put another way, the “doctor or healthcare provider would have had to have knowingly committed malpractice, prescribing or dispensing Risperdal despite knowing there were better, cheaper, or safer, more efficacious drugs available, for the defendants to be liable under this provision.” No evidence supported such a finding.
Next, the court turned to subsection (B), which provides that “[n]o person shall knowingly engage in misrepresentation to obtain, or attempt to obtain, payment from medical assistance programs funds.” Again requiring a tight nexus between the claim for payment and the allegations, the court found “no showing the defendants knowingly attempted to obtain payment from the medical assistance programs pursuant to a claim.” In addition, the court read the “misrepresentation” requirement to “logically place the obligation of truthful and full disclosure on the healthcare provider or any person seeking to obtain payment through a claim made against medical assistance program funds or entering into a provider agreement,” in light of the “absurd consequences” that would arise if “potentially any information required by any federal or state agency or source, which is not fully disclosed by any person who ultimately receives Medicaid funds, directly or indirectly, could, if not truthfully or fully disclosed, subject that person to civil penalties under MAPIL.”
The third subsection states that “[n]o person shall conspire to defraud, or attempt to defraud, the medical assistance programs through misrepresentation or by obtaining, or attempting to obtain, payment for a false or fraudulent claim.” La. Rev. Stat. § 43:438.3(C). Here, too, the gap between the allegedly misleading statements and the claims for payment doomed the state’s case: “Even if the defendants were attempting to gain a competitive edge over other manufacturers of atypical anti-psychotics through the use of misleading off-label statements,” and “even if the defendants’ conduct was intended to influence the prescribing decisions of doctors treating schizophrenia patients,” there could be no liability because there was “no showing the defendants failed to truthfully or fully disclose or concealed any information required on a claim for payment made against the medical assistance programs” or that any such statements “were made to the department relative to the medical assistance programs,” and there was “no causal connection” between any such conduct and “any false or fraudulent claim for payment to a healthcare provider or other person.”
The thrust of the Louisiana court’s reasoning is straightforward but powerful: a statute designed to prevent false or fraudulent claims requires a close connection between the allegedly fraudulent conduct and the claim for payment from the state, and liability will not necessarily attach to any allegation of wrongdoing that ultimately winds its way to a Medicaid claim. Because the Louisiana statute bears similarities with false claims act statutes in other jurisdictions, this is a significant ruling for manufacturers defending false marketing claims elsewhere.
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.
On June 19, 2013, a district court sitting in the Eastern District of Virginia held in United States ex rel. Badr v. Triple Canopy, Inc., No. 1:11-cv-288, Dkt. #55 (GBL), that “[m]ere failure to comply with all contractual conditions does not necessarily render the billing for those services so deficient or inadequate that the invoice constitutes a false claim under the FCA. Nor does it constitute an incorrect description of services provided to constitute a false statement sufficient to impose FCA liability.” Id. at 1-2. In granting the motion to dismiss of defendant Triple Canopy, Inc. (“TCI”), the court also held that a Relator cannot use allegations of a fraudulent scheme at one location to infer a false claim at another.
TCI was awarded government contracts to provide security services to various military installations overseas, including military bases located in Iraq. Given the nature of the assignment, TCI was required to ensure compliance with U.S. Army standard weapons qualification requirements. The government, as Intervenor, alleged that 332 Ugandan TCI guards arrived for duty, and failed to complete basic skills required before even attempting to qualify on a qualification course. Further, TCI allegedly began to falsify scorecards that were placed in the personnel files of the guards in the event of an inspection. The Relator, a former TCI employee, reported the allegedly fraudulent conduct to TCI’s human resources director, vice president, and general counsel. Later, Relator was allegedly instructed to alter TCI’s scorecards to reflect passing scores for all the guards. Although TCI was not awarded a contract renewal, the government alleged TCI continued to perform other government contracts in Iraq, and the Ugandan unqualified guards were allegedly transferred to other installations in Iraq to perform similar services.
In dismissing the claim, U.S. District Judge Gerald Bruce Lee concluded that because the invoices simply identified the quantity of guards, the price for each, the period of service, and the amount for the services, the invoices, without more, “[did] not contain objectively false statements sufficient to render them false claims for purposes of FCA liability.” Id. at 12. The government sought to analogize under-qualified guards to defective products, but the court dispelled the analogy, noting that “defective goods . . . are materially different from a claim for defective services.” Id. at 15 (emphasis in original). There is still some “inherent value retained in a service that is provided by an unqualified employee compared to a complete inability to use a product that is rendered defective.” Id. (citing U.S. ex rel. Sanchez-Smith v. AHS Tulsa Reg. Med. Ctr., LLC, 754 F. Supp. 2d 1270, 1287 (N.D. Okla. 2010) (rejecting a worthless services theory based upon substandard medical care because some care was provided, even if ultimately below expectations).
The “worthless services” theory did not work here because the government failed to allege “that the TCI guards were entirely deficient so as to render their services worthless.” Id. The Ugandan guards provided a service, although perhaps not fully compliant. The court held that the services must be “entirely devoid of value, or the noncompliance must have caused an injury to the Government such that the guards effectively provided no service at all.” Id. (citing In re Genesis Health Care Ventures, Inc., 112 F. App’x 140, 143 (3d Cir. 2001) (“Case law in the area of ‘worthless services’ under the FCA addresses instances in which either services are literally not provided or the service is so substandard as to be tantamount to no service at all.”). While the failure to receive proper qualification may be a breach of contract action, the government never alleged that TCI presented the qualifications in support of a demand for payment.
Judge Lee also held that a Relator cannot use allegations of a fraudulent scheme at one location involving one contract to create an inference of a false claim at other locations, without personal knowledge, as it would fail Fed. R. Civ. P. 9(b)’s requirement of specificity. The court dismissed all the FCA counts, but granted the government leave to re-plead claims of “breach of contract” and “payment by mistake.”
On July 3, 2013, TCI moved to dismiss the remaining contractual claims pursuant to Fed. R. Civ. P. 12(b)(1), contending that the court lacked subject matter jurisdiction over such disputes pursuant to the Contract Disputes Act, 41 U.S.C. §§ 7101 et seq. See Triple Canopy, Inc., No. 1:11-cv-288 (GBL), Dkt. #57 (E.D. Va. July 3, 2013). A hearing on the motion to dismiss is scheduled for July 26.
— Andrew Soler, a summer associate, provided assistance in the preparation of this post.