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Rule 9(b)

16 July 2012

Court Dismisses AKS and Stark-Based FCA Claims For Failure To Plead Unlawful Remuneration With Particularity

A recent decision by a federal district court confirms that in FCA cases premised on alleged false certification of compliance with other laws, the allegations that those other laws were violated must be pleaded with the particularity required by Rule 9(b). In United States ex rel. Osheroff v. Tenet Healthcare Corporation, No. 09-22253-CIV (S.D. Fla.), a relator alleged that Tenet Healthcare Corporation and affiliated companies leased offices to physicians at below-market rental rates and included other compensating perks that constituted an improper remuneration under the Stark law (42 U.S.C. sec. 1395nn, 1396b(s)) and the Anti-Kickback Statute (42 U.S.C. sec. 1320a-7b(b)). Relator alleged that these violations led Tenet to falsely certify compliance with those statutes, in violation of the FCA.

On July 12, the Court granted in part Tenet’s motion and dismissed the complaint with leave to re-plead, on the ground that the Relator’s allegations of unlawful remuneration were too conclusory. Specifically, the court held that allegations of unlawful remuneration based on the provision of something offered for below fair market value must be pled with particularity under Rule 9(b). The court offered specific guidance about what Rule 9(b) requires: the relator “must allege a benchmark of fair market value against which Defendants’ rents to physician-tenants can be tested. Without alleging a benchmark of fair market value,” the court concluded, “it is impossible for the Court to infer whether Defendants’ rents to physician-tenants fall sufficiently below the benchmark so as to constitute remuneration. Relator must then allege some particular examples of rent being charged to its physician-tenants in a comparable unit during the same market that can be contrasted against the alleged benchmark.” The court held that such benchmarks had to be provided not only for the allegations concerning below-market rent, but also for any “other allegedly compensating perks, such as tenant improvement allowances.”

The Court held that a similar level of particularity was required to plead with particularity the “inducement” element of an AKS violation. The court rejected as insufficient Relator’s conclusory allegations that the remuneration was “intended to induce or reward referrals.” “In the context of AKS, [the inducement element] functions as a nexus to ensure Relator includes allegations that the use of remuneration influences the direction of referrals.” Relator’s allegations were deficient because there were “no allegations that any particular physicians were induced to alter their referral decisions on account of their financial relationship with the Defendants.” Relator did not allege “factual allegations suggesting any quid pro quo of below-fair-market-values leases in exchange for referrals,” or “that any physician-tenants felt pressure to refer patients to Defendants instead of other medical entities on account of their favorable rent nor allegations that insufficient referral numbers to Defendants would cause or were feared to cause rental rate penalties in future lease renewals.” Because “no facts suggest that any physician-tenants were induced by their rent to make referrals based on continued remuneration rather than concern for the health and well-being of each physician’s patient, the Court has no basis upon which to reasonably infer that any alleged remuneration clouded the independent judgment of any physician-tenant.”

It will be interesting to see whether the Relator is able to submit a pleading that complies with the Court’s guidance. Too often, relators alleging FCA claims premised on Stark and AKS violations are permitted to glide past the pleading stage based on conclusory allegations that seek to characterize ordinary business relationships as unlawful “remuneration.” This opinion properly applies Rule 9(b)’s requirement that the circumstances constituting fraud be pleaded with particularity by requiring a plaintiff in a false certification based on Stark and AKS violations to plead facts demonstrating that inferences of unlawful remuneration are warranted.

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06 June 2012

Massachusetts District Court Guts Relators’ Kickback and Off-Label FCA Claims on Motion to Dismiss

Posted by Jonathan Cohn and Josh Fougere

On June 1, Judge Rya Zobel issued a decision dismissing most of relators’ claims against pharmaceutical manufacturer Organon and two long-term care pharmacies, Pharmerica and Omnicare, concerning the antidepressant drug Remeron. Relators’ complaint was premised on allegations that defendants (1) received and/or paid kickbacks in exchange for switching patients to Organon’s preferred drugs, (2) misreported pricing and rebates associated with Organon drug sales to the federal government, and (3) promoted Organon drugs for off-label use in order to switch more patients to those drugs. The complaint alleged kickback claims against all defendants and pricing and off-label claims against Organon only.

Judge Zobel’s decision leaves little of the complaint standing. First, the court found that it lacked jurisdiction over all claims against Pharmerica and all kickback and pricing claims against Organon under the FCA’s first-to-file and public disclosure bars. Two aspects of this ruling are particularly noteworthy: (1) Following the D.C. Circuit, the court rejected relators’ contention that a first-filed complaint must satisfy Rule 9(b) because such a requirement would “frustrate the purpose of the first-to-file bar by raising the threshold for it to apply,” Slip Op. 12 n.17, and (2) It was enough for the first-filed complaint to list the Organon drug Remeron, and expressly naming defendant Organon was not necessary, id. at 15. The two complaints alleged the same essential elements of fraud and that was “sufficient to put the government on the trail.” Id. at 16. It did not matter that that these relators provided “additional details and types of kickbacks.” Id.

Second, the court dismissed off-label marketing claims brought under 31 U.S.C. § 3730(a)(1)-(3) because “if a state Medicaid program chooses to reimburse a claim for a drug prescribed for off-label use, then that claim is not ‘false or fraudulent,’ and liability cannot therefore attach for reimbursement.” Id. at 26. Relators alleged only that a state “may” deny coverage for an off-label prescription, not that any states actually did or that states must do so under the Medicaid statute. The allegation that states had a choice whether to cover such prescriptions and did, the court found, could not establish FCA liability for reimbursement claims purportedly filed because of an off-label marketing scheme. Id. at 27-28.

Third, the court dismissed claims against Omnicare premised on so-called “collateral kickbacks”—that is, incentive payments “such as research grants, sponsorship of annual meetings, data purchasing agreements, nominal-price transactions, and participation in corporate partnership programs”—because they failed to satisfy Rule 9(b). Id. at 28-33. The court found, for example, that “budget[ing] for payments to Omnicare does not confirm that such payments were actually made, that Omnicare solicited them, or that the payments were inducements to participate in the conversion or therapeutic interchange scheme alleged,” and the “conclusory allegation that ‘Omnicare actively pursued Organon to participate in corporate partnership programs, which were mainly ways to funnel money to Omnicare in exchange for Remeron prescriptions'” would not do. Id. at 33. (The court did not say whether dismissal was with or without prejudice.)

Although the court did not dismiss relators’ claims entirely, each of these rulings is critically important to limiting the scope of FCA liability that is frequently pursued in analogous cases against pharmacy providers and pharmaceutical manufacturers.

Related post: D.C. Circuit Splits with Sixth Circuit on Scope of FCA’s First-to-File Bar

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16 April 2012

Tenth Circuit Affirms Dismissal of Qui Tam Over Relator’s Objection

In an unpublished opinion, a panel of the Tenth Circuit has affirmed the dismissal of a qui tam before it was served on the defendant, over the objection of the relators. United States ex rel. Wickliffe v. EMC Corp., Case No. 09-4082 and 10-4174 (Order and Judgment, April 4, 2012). Relators’ complaint alleged that EMC Corporation knowingly sold defective computers to government agencies and fraudulently concealed information regarding the defect. Before the case was unsealed, the government moved to dismiss the complaint on the basis of a prior settlement with EMC. The district court dismissed the complaint pursuant to 31 U.S.C. 3730(c)(2)(A), which permits the government to dismiss a relator’s suit “notwithstanding the objections” of the relator if the relator is given notice and opportunity for a hearing. Alternatively, the district court held that the complaint was barred by the first-to-file provision, 31 U.S.C. 3730(b)(5).

On appeal, relators challenged the first-to-file dismissal on the grounds that the previously-filed complaint did not satisfy Rule 9(b)’s particularity requirement, and therefore could not act to operate subsequent complaints. The Tenth Circuit, noting that there is a circuit split on the issue of whether “first-filed” complaints must satisfy Rule 9(b), declined to take a firm position on the issue because it concluded that the case could be resolved on other grounds. However, the Panel “admit[ted] to being uneasy” with the position that Rule 9(b) applies, as that “would create a strange judicial dynamic, potentially requiring one district court to determine the sufficiency of a complaint filed in another district court.”

With respect to the dismissal under 3730(c)(2)(A), the Tenth Circuit noted that there also is a circuit split on the level of scrutiny that should be applied when the government moves to dismiss a qui tam suit, with the DC Circuit providing the government a virtually unfettered right to dismiss the action, while the Ninth Circuit requires that the government offer reasons for the dismissal that are rationally related to a legitimate government interest. The Tenth Circuit has adopted the latter, more stringent standard in cases in which the defendant has been served, but the panel declined to decide which test should apply when the government seeks dismissal before the defendant has been served because it found dismissal appropriate under either test, given that the government had already settled with the defendant.

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28 March 2012

D. Minn. upholds qui tam complaint against ICD manufacturer Guidant

Posted by Sean Griffin and Kristin Graham Koehler

On March 14, 2012, Judge Donovan W. Frank of the United States District Court for the District of Minnesota upheld a relator’s complaint against Guidant Corporation (“Guidant”) based on its manufacture of certain implantable cardiac devices (“ICDs”), which had been sold to the Department of Veterans Affairs and/or reimbursed by Medicare. The relator, James Allen, alleged that Guidant had made false statements and failed to disclose known safety concerns in its post-approval reports to the Food and Drug Administration. Allen, a patient who had received one of Guidant’s ICDs, claimed that his allegations were based on his personal experience and certain adverse event reports he had reviewed. However, the safety and disclosure allegations in question had also been litigated both in prior, multi-district products liability litigation and in an earlier criminal adulteration proceeding.

After the government moved to intervene, Guidant moved to dismiss the relator’s complaint. The district court first rejected the argument that the government’s complaint in partial intervention was sufficient to supersede Allen’s complaint in its entirety. The district court also rejected the argument that the earlier litigation and related news coverage deprived the court of jurisdiction under the pre-FERA version of the FCA because it found the relator’s personal experience with Guidant’s products qualified him as an original source. Finally, the court found that Rule 9(b) had been satisfied because Relator had provided, inter alia, the names of Guidant employees allegedly involved in the purported false statements as well as the particulars of five allegedly defective devices.

While the court ultimately refused to dismiss this FCA case entirely, it did dismiss the relator’s claims for unjust enrichment and payment by mistake. Citing authority from courts in the First, Second, Eighth and D.C. Circuits, Judge Donovan ruled that qui tam relators lack standing to bring common law claims on behalf of the government.

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19 March 2012

FCA Claims Based on “Fraud on the FDA” Dismissed Under Rule 9(b)

Posted by Jaime L.M. Jones and Nirav Shah

Citing the failure to plead claims with particularity, a federal court in the District of Massachusetts recently dismissed a qui tam action brought against Infomedics, Inc. and GlaxoSmithKline. United States ex rel. Arlene Tessitore v. Infomedics, Inc., GlaxoSmithKline, PLC, and GlaxoSmithKline, LLC., No. 08-11775-NMG (D. Mass. Mar. 12, 2012). The case highlights the difficulty in connecting allegations of “fraud on the FDA” to FCA violations.

Tessitore concerns GSK’s antidepressant drug, Paxil, FDA-approved labeling which includes an indication for the treatment of social anxiety disorder (“SAD”). Among other claims, the relator alleged that GSK and its vendor, Infomedics, concealed from FDA information related to certain adverse events that was received through an informational Paxil hotline operated by Infomedics. Relator alleged violations of the FCA based on two theories: (1) that GSK represented in its application to FDA for Paxil that it would report adverse events to the Agency; and (2) that had GSK reported the adverse events to FDA in a timely fashion, FDA would have ordered the company to issue enhanced warnings sooner. Under both theories, relator claimed that the concealment rendered subsequent claims for reimbursement of Paxil false.

With respect to the first theory, Judge Nathaniel Gorton held that relator’s complaint was simply devoid of specifics, including when a misrepresentation to FDA was made, to whom it was made, and why the statements were false. As for the second theory of liability, Judge Gorton found that it failed under Rule 9(b) “because it presumes, without factual support, that submitting the 7,000 adverse reports would have hastened the FDA’s decision to require warnings and that, had such warnings been implemented sooner, physicians would have prescribed Paxil less often between 1999 and 2002.” Id. But, as the government itself pointed out, FDA was aware of the adverse events and did not take any steps to add enhanced warnings. And absent evidence of alternative treatments available at the time, the inference that physicians would have prescribed other treatments is unsupportable. Thus, this decision highlights the difficulty of adequately pleading the causation element of FCA liability when trying to advance qui tam claims based on the theory of “fraud on the FDA.”

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01 March 2012

Eleventh Circuit Reinstates $69 Million FCA Action Based Alleged Violations of Corporate Integrity Agreement

Posted by Jonathan Cohn and Josh Fougere

Last week, the U.S. Court of Appeals for the Eleventh Circuit reinstated two relators’ $69 million claims against Medco Health Solutions, Inc. (“Medco”) and several of its subsidiaries and officers, holding that the claims were alleged with sufficient particularity to satisfy Federal Rule of Civil Procedure 9(b). Among other things, this decision confirms the significant implications of the recent expansion of FCA liability to require that any “overpayments” be returned to the government within 60 days of the date they are “identified.” 42 U.S.C. § 1320a-7k(d).

In United States ex rel. Matheny v. Medco Health Solutions, Inc., No. 10-15406 (11th Cir. Feb. 22, 2012), the relators were former employees of Medco subsidiaries who alleged that Defendants had knowingly concealed overpayments from Medicare, Medicaid, and other federal healthcare programs. The root of the allegations was a 2004 Corporate Integrity Agreement (“CIA”) with HHS’s Office of the Inspector General (“OIG”), pursuant to which Defendants were required to remit any payments from the government that “lacked sufficient documentation or were received in duplicate or in error.” Slip Op. 3-5. The CIA dubbed these “Overpayments” and, critically, required that they be returned within 30 days of their identification. Id. at 4.

Rather than return such funds as was required, the complaint alleged, Defendants engaged in various schemes to conceal and retain them. Id. at 5. Relators claimed, for example, that Defendants transferred the Overpayments to unrelated or fictitious patient accounts or eliminated them altogether through a “datafix” computer program. Id. Count I was premised on the CIA’s certificate of compliance requirement; according to the relators, when Defendants swore to the government that they were in compliance with the agreement, such certification was knowingly false and intended to avoid remitting the Overpayments. Id. at 5-6. Count II was based on a separate obligation under the CIA requiring Defendants to submit to the government so-called Discovery Samples, which were supposed to be random samples of patient accounts that could be checked for compliance with the CIA. If five percent or more of the accounts were in violation, then a full audit was required; otherwise, that was the end of the matter. Id. at 6. The relators alleged that Defendants rigged the deck by removing any accounts containing evidence of Overpayments from the samples in order to generate a perfect error rate of 0%, thereby avoiding an audit that would have uncovered the hidden Overpayments. Id. at 6-7.

Suit was brought under the FCA’s reverse false claim provision, 31 U.S.C. § 3729(a)(7), and the Eleventh Circuit held that both counts were sufficiently pled for purposes of Rule 9(b). Generally speaking, the Court found that the CIA imposed an obligation to pay money to the government and that the relators had sufficiently pled the requisite who, what, when, where, and why of the suspected fraud. In that regard, the relators benefited from their alleged personal awareness because the court is “more tolerant toward complaints that leave out some particulars of the submissions of a false claim if the complaint also alleges personal knowledge or participation in the fraudulent conduct.” Id. at 17, 27.

Particularly noteworthy, the court held that it was enough to plead that the CIA required remittance of all Overpayments within 30 days and that Defendants did not do so. Id. at 17-23. The Eleventh Circuit rejected the district court’s ruling that the relators’ failure to demonstrate that the money was not eventually repaid was fatal to their complaint. Id. at 17-18 n.13. Instead, the court held that all that mattered was that the CIA had been violated at the time of the certification: “The failure to [remit Overpayments] within the thirty day deadline is itself a violation of the CIA, regardless of whether the Overpayments were eventually repaid.” Id. Given that recent FCA amendments also require the return of overpayments to the government shortly after their identification at the risk of FCA liability, the Eleventh Circuit’s decision confirms the significant implications of this expansion of liability.

Related Post: CMS Issues Guidance on Reporting and Refunding of Overpayments Actionable Under the FCA

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30 January 2012

D.C. Circuit Splits with Sixth Circuit on Scope of FCA’s First-to-File Bar

Posted by Robert J. Conlan and Brian P. Morrissey

In a recent decision, the U.S. Court of Appeals for the District of Columbia ruled that a first-filed qui tam complaint need not satisfy the heightened pleading requirements for fraud set forth in Federal Rule of Civil Procedure 9(b) in order to bar subsequent qui tam complaints based on the same material allegations. In so holding, the court rejected the contrary argument put forth by the relator and the United States as amicus curiae, and it created a circuit split with the Sixth Circuit.

In United States ex rel. Batiste v. SLM Corp., reported at 659 F.3d 1204 (D.C. Cir. 2011), slip opinion here, the relator, Sheldon Batiste, alleged that SLM Corp. (commonly known as “Sallie Mae”) defrauded the Federal Government in its administration of student loans by unlawfully putting federally-subsidized student loans into forbearance (thereby causing the Government to pay additional interest and special allowances on such loans), and by filing false certifications with the Government in order to maintain its status as an eligible lender.

More than two years before Batiste filed his complaint, however, another relator had filed a qui tam suit against SLM and one if its wholly-owned subsidiaries. Complt., United States ex rel. Zahara v. SLM Corp., No. 2:05-cv-8020 (C.D. Cal. Nov. 9, 2005). That complaint was ultimately dismissed with prejudice after the relator failed to obtain counsel by a set deadline, Entry Dismissing Action, United States ex rel. Zahara v. SLM Corp., No. 1:06-cv-088 (S.D. Ind. Mar. 12, 2009). The district court in Batiste’s case concluded that this prior qui tam suit was based on the “same material elements of fraud” as Batiste’s complaint. Batiste, 659 F.3d at 1208. Accordingly, the district court dismissed Batiste’s complaint for lack of subject matter jurisdiction under the FCA’s first-to-file bar. Id.; see also 31 U.S.C. § 3730(b)(5) (providing that “no person other than the Government may intervene or bring a related action based on the facts underlying [a] pending action”).

Batiste, supported by the United States as amicus curiae, appealed, arguing that the prior complaint in Zahara did not allege fraud with the particularity necessary to meet Federal Rule of Civil Procedure 9(b)’s heightened pleading standard for fraud claims and, thus, should not have triggered the FCA’s first-to-file bar. The D.C. Circuit rejected that contention, holding that “first filed complaints need not meet the heightened standard of Rule 9(b) to bar later complaints; they must provide only sufficient notice for the government to initiate an investigation into the allegedly fraudulent practices, should it choose to do so.” Batiste, 659 F.3d at 1210.

In reaching this conclusion, the D.C. Circuit expressly declined to follow the Sixth Circuit’s decision in Walburn v. Lockheed Martin Corp., 431 F.3d 966 (6th Cir. 2005). Batiste, 659 F.3d at 1210-11. In Walburn, the Sixth Circuit reasoned that a complaint that fails to satisfy Rule 9(b) should not be given preemptive effect under the FCA’s first-to-file bar because such a complaint, by virtue of its failure to meet the 9(b) standard, is insufficiently precise to provide the Government “adequate notice . . . of the fraud it alleges.” Id. at 973.

Other federal courts are likely to grapple with this same question. As the number of qui tam complaints filed in the federal courts rises and qui tam relators focus special attention on certain industries (including the student loan industry), overlap between complaints is all but inevitable. These courts will be forced to choose between the competing approaches taken by the Sixth and D.C. Circuits, and may ultimately help inform Supreme Court resolution of the current circuit split.

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