Second Circuit Finds That The Government’s Continued Payment In The Face of Fraud Allegations Undercuts Materiality
The Supreme Court emphasized in Escobar that questions of materiality are not “too fact intensive for courts” to decide through a motion to dismiss. Nonetheless, what facts a plaintiff must allege adequately to plead materiality consistent with Escobar’s “demanding” standard remains a hotly contested question. In a recent decision, the Second Circuit held that the relator’s failure to allege that CMS, the agency allegedly defrauded, changed its reimbursement practices after becoming aware of information supposedly withheld by the defendant, doomed the complaint on materiality grounds. See United States ex rel. Coyne v. Amgen, Inc., No. 17-1522 (2d Cir. Dec. 18, 2017). The decision underscores the significance of the materiality requirement at the motion to dismiss stage. (more…)
Ninth Circuit Urged to Reverse District Court Dismissal of “Fraud on the FDA” Claims
In a variety of matters, DOJ and relators have attempted to base claims under the FCA on alleged violations of the FDCA or FDA regulations, by arguing that such violations constitute “fraud on the FDA,” and that the resulting claims for payment to other agencies for associated products are false. As we have discussed (here, here, and here), so far plaintiffs have had little success with this theory, including in the First and Fourth Circuit Courts of Appeal. Last week, a panel of the Ninth Circuit heard oral arguments in United States ex rel. Campie v. Gilead Sciences, Inc., and the government and the plaintiff’s bar no doubt have pinned their hopes on that court reversing the trend.
Court Dismisses GMP-based FCA Claims With Prejudice
Posted by Jaime L.M. Jones and Brenna Jenny
On Friday, the Northern District of California dismissed with prejudice claims alleging that a failure to obtain supplemental approval for major changes in manufacturing processes created FCA liability. U.S. ex rel. Campie v. Gilead Sciences, Inc., No. 11-0941 (N.D. Cal. June 12, 2015). The court also adopted a narrow reading of “worthless services” in the context of pharmaceutical products. Together, these holdings deal a significant blow to those seeking to premise FCA suits on violations of current Good Manufacturing Practices (“cGMPs”).
Court Rejects False Statements to FDA Regarding cGMP Compliance as Basis for FCA Liability
Posted by Jaime L.M. Jones and Brenna Jenny
In a remarkable opinion sure to be cited by FCA defendants facing FCA claims premised on alleged regulatory non-compliance, on January 7 the Northern District of California granted defendant Gilead’s motion to dismiss FCA claims premised on alleged violations of current Good Manufacturing Practices regulations (“cGMPs”), holding that fraudulent conduct directed at FDA standing alone cannot render subsequent Medicare or Medicaid reimbursement requests false under the FCA. See U.S. ex rel. Campie v. Gilead Sciences, Inc., No. 11-cv-00941 (N.D. Cal. Jan. 7, 2015). The ruling expands on the reasoning of the Fourth Circuit’s decision last year in Rostholder (as reported here) and reiterates the judiciary’s hesitancy to permit the FCA to displace FDA’s institutional capacity to enforce its own regulatory scheme.
Two former Gilead employees with quality control responsibilities filed a qui tam suit against their previous employer, alleging various violations of cGMP requirements. The relators asserted these regulatory issues gave rise to FCA liability because had FDA been aware of the them it would not have approved the affected drugs or would have withdrawn approval; as a result, relators claimed that all claims for payment submitted to Medicare and Medicaid for these drugs were false under the FCA. The government declined to intervene in the suit but did file a statement of interest on these issues, which the court cites in its opinion.
The court first dispensed with relators’ claim that allegedly false certifications to FDA or other allegedly fraudulent conduct during the drug approval process could give rise to FCA liability. Although FDA’s New Drug Application (“NDA”) form requires manufacturers to certify compliance with cGMP regulations, the court found the fact that manufacturers make this statement to FDA, and not to CMS for the purpose of securing payment, to be critical to the viability of relators’ claims. The court ruled that “FCA liability cannot be based on fraudulent statements made before one regulatory agency and from that implying a certification putatively made to the payor agency where there is neither an express certification nor condition of payment.” As even relators conceded during a hearing, Gilead never made any direct misrepresentations to a payor.
In an attempt to avoid this result, relators had argued in supplemental briefing that FDA served as a “gatekeeper” for CMS, with both entities standing as “two arms of the same federal department,” and thus fraudulent conduct directed toward one arm and a request for payment directed toward another arm could be synthesized so as to have a sufficiently direct nexus. The court disagreed, distinguishing between “Gilead’s non-disclosure and misrepresentations . . . [made] during the FDA approval process” and the “subsequent reimbursement requests to CMS,” and rejecting relators’ invitation to rule that a false statement to one regulatory agency “can form the basis of FCA liability simply because the fraudulently induced action of that agency was part of a causal chain that ultimately led to eligibility for payment from the payor agency.”
In similarly dismissing relators’ claims that Gilead had also made false implied certifications of compliance to CMS, the court then adopted the reasoning of the Fourth Circuit in Rostholder that the mere assertion of drugs being adulterated or misbranded as a result of a manufacturer violating cGMP requirements falls short of articulating a claim under the FCA, because Medicare and Medicaid do not condition reimbursement on compliance with cGMP regulations. Instead, payment is conditioned on a drug receiving FDA approval, which Gilead’s products had undisputedly obtained. Accordingly, the relators’ claims were held to be fundamentally flawed.
The court’s opinion generally addresses the heightened policy concerns generated by the proposition that regulatory non-compliance, particularly within the complex FDA regime, can trigger a cognizable FCA claim. If false statements made during the FDA approval process could serve as the basis for FCA liability, then courts would have to determine whether, but for the fraudulent conduct, the agency would have denied approval of the drug. Delving into the nuances of the FDA approval process, the court explained, would be a task the courts lack the expertise to execute. The court also echoed Rostholder‘s concern with using the FCA to short-circuit FDA’s own enforcement powers. Notably, however, the language and the logic of the Campie court’s opinion sweeps much broader than allegations focused on compliance with FDA regulations, and bear relevance on all FCA claims premised on alleged fraudulent conduct directed at a regulatory agency other than the one which pays the affected claims.
Finally, the court addressed the relators’ alternative theory of FCA liability, namely that the manufacturing defects were so significant they rendered the resulting product “worthless.” As we previously reported here, and as the Campie court observed, the Seventh Circuit recently constrained the viability of FCA suits premised on a theory of “worthless services,” ruling that a product or service’s diminished value must not be simply “worth less,” but rather must be truly “worthless.” Although the government has argued through statements of interest in both this case and Rostholder that some cGMP violations may so affect a drug “that the drug is essentially ‘worthless’ and not eligible for payment by the government,” the court ruled that the Campie relators had not alleged facts meeting the requirements of “the narrow ‘worthless services’ theory.”
The court granted the relators an opportunity to amend their complaint and either articulate a worthless services theory or a direct misrepresentation made during the payment process. We will continue to monitor any developments in this case, which is sure to be cited by defendants facing a broad range of FCA claims based on alleged regulatory non-compliance, and not just by defendants in FCA cases premised on alleged violations of cGMP and other FDA requirements. A copy of the district court’s opinion can be found here.
DOJ Announces Nearly $6 Billion in Fraud Recoveries During 2014
Posted by Kristin Graham Koehler and Monica Groat
On November 20, Acting Associate Attorney General Stuart F. Delery and Acting Assistant Attorney General Joyce R. Branda announced that the Department of Justice recovered a record $5.69 billion in settlements and judgments from civil cases involving alleged fraud against the Government in fiscal year 2014. This figure represents the highest annual total recovery and an increase of nearly $2 billion over the Government’s recovery in fiscal year 2013.
Recoveries from the financial industry accounted for the most significant proportion of fraud-related recoveries, representing $3.1 billion of the total $5.69 billion. This amount was more than double the previous record for recoveries from banks and other financial institutions, which paid $1.4 billion in fiscal year 2012. Healthcare fraud represented the second largest area of recovery; DOJ recovered $2.3 billion from pharmaceutical and device manufacturers, hospitals, and other healthcare providers. Fiscal year 2014 was the fifth straight year during which the Government has recovered more than $2 billion in cases involving false claims against federal healthcare programs, including Medicare and Medicaid.
Of the $5.69 billion recovered this year, nearly $3 billion related to lawsuits filed under the FCA’s qui tam provisions, and relators recovered $435 million. The number of FCA qui tam suits filed in 2014 decreased slightly: 713 suits were filed in 2014, compared with 754 in 2013. These numbers indicate that both DOJ and private relators are continuing to bring FCA cases; although the volume of cases did not increase, recoveries by both the Government and relators increased. The announcement also confirms that DOJ is continuing to aggressively pursue fraud cases, with a continuing interest in healthcare fraud and an increasing focus on the financial industry.
4th Circuit Affirms Dismissal of FCA Suit Premised on Alleged Violations of FDA GMP Regulations
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.
Sidley lawyers publish article, Circuit Court Affirms High Pleading Standard For “Induced” False Claims Qui Tam Actions, as part of Washington Legal Foundation’s Counsel’s Advisory series
Posted by Kristin Graham Koehler and Brian P. Morrissey
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 “Circuit Court Affirms High Pleading Standard For ‘Induced’ False Claims Qui Tam Actions.” The article examines the First Circuit’s recent ruling in United States ex rel. Ge v. Takeda Pharmaceutical Co., 737 F.3d 116 (1st Cir. 2013), a closely-watched case in which the relator alleged that a pharmaceutical manufacturer violated the FCA by failing adequately to comply with the FDA’s adverse-event reporting rules for pharmaceutical products. The First Circuit punted on the key issue that drew so much attention to the case, declining to decide whether a violation of FDA’s adverse-event reporting rules can be the basis for FCA liability. The Court nonetheless used the case as an opportunity to reemphasize the important principle that a qui tam relator cannot rely on a mere inference that false claims “necessarily follow” from a defendant’s alleged violation of a federal law or regulation; the relator must present specific “factual or statistical evidence” to justify that inference. Holding that the relator failed to carry that burden, the First Circuit affirmed dismissal of the case on Rule 9(b) grounds.
The article is available for download on the Washington Legal Foundation’s website: http://www.wlf.org/publishing/publication_detail.asp?id=2417.
DOJ Announces Increase In Qui Tam Suits Filed In 2013; $3.8 Billion In Fraud Recoveries
Posted by Ellyce Cooper and Brent Nichols
In December, the Department of Justice announced that the number of False Claims Act qui tam suits filed in 2013 grew significantly. 752 were filed in 2013 — over 100 more than the prior record established last year. These numbers indicate that both DOJ and private whistleblowers, whom the statute allows to file suit on behalf of the government, are bringing FCA cases with increasing frequency.
In 2013, the Department of Justice again recovered significant settlements and judgments from civil cases involving alleged fraud against the government. In its December announcement, DOJ stated that it recovered $3.8 billion in such cases in fiscal year 2013. This figure represents the second highest annual total ever, but is lower than the nearly $5 billion recovered in 2012.
Health care fraud accounted for the most significant proportion of recoveries, representing $2.6 billion of the total $3.8 billion. Of that $2.6 billion, about $1.6 billion resulted from alleged false claims submitted by drug and device companies to federal health insurance programs.
Procurement fraud (consisting predominantly of cases brought against defense contractors) represented the second largest area of recovery, accounting for $890 million, the highest ever annual recovery in that area.
DOJ’s announcement suggests that it is continuing to aggressively pursue False Claims Act and fraud cases.
District Court Dismisses Conclusory Allegations in Off-Label Marketing Suit
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.
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.